Photo by Saulo Cruz
Corporate venture capital has quickly developed into a major funding source for startup companies. This type of startup funding is available to some innovative startups and early stage companies, and the dollars involved are significant. This all sounds great, but is this type of funding right for your startup?
According to the National Venture Capital Association and PWC’s Money Tree survey, 905 corporate venture capital deals were closed during 2015 with $7.5 billion invested (primarily in high growth startup companies). These transactions comprised 21% of the total number of venture capital deals closed in 2015 and represented 13% of the total venture capital funds invested in that year. Not surprisingly, the biggest chunk of these investments went to software companies ($2.5 billion in 389 deals, which represented 33% of all corporate venture deals in 2015), while biotech deals were second ($1.2 billion in 133 deals, which represented 16% of all corporate venture deals that year).
Many large and familiar companies have implemented venture capital programs. Some of the most well-known corporate venture funds are Alphabet’s GV (formerly Google Ventures), Microsoft Ventures, and Salesforce Ventures. Most of these corporate venture funds are sponsored by large technology companies, but Airbus Group Ventures is an example of a fund established by a non-technology company in a specific industry space. While each of these programs has some independent characteristics, the commonalities are a strong desire to foster innovation (either generally or in specific industry segments) and an ability to step out of the normal corporate mold and commit funds to situations with higher risk profiles when compared to normal corporate investments like real estate and straightforward corporate industry acquisitions.
There are a number of significant potential advantages associated with corporate venture capital. For me, two of the biggest potential advantages are the broader investment scope and the more long-range expectations which may result in a corporate venture investment as compared to a normal external venture investment. A corporate venture capital investor can Continue Reading
This time I’m not writing about disclosure or governance. Rather, I’m posting my annual list of my 10 favorite books. For those of you who haven’t seen these lists before, (1) I apologize if this seems hubristic (or “braggadocious”, if you will) – I do it because some folks have told me they like it; and (2) the list involves books that I happened to read (or re-read) in 2015, not necessarily books that were published in 2015.
I didn’t encounter lots of great fiction last year; for me, the great books were non-fiction. Let’s see if the trend continues in the New Year.
So here goes (in order of preference):
Those of you who’ve been following my postings know that I’m not a fan of Congressional interference in the workings of the SEC. Well, those same wonderful folks who’ve garnered the lowest opinion ratings in history are at it again.
First, you may recall that Congress acted a few weeks ago to avoid another federal government shutdown. Well, a few interesting provisions were added to that legislation and – you guessed it – one of them was precisely the kind of thing that sets me off; in this case, it was a prohibition against any SEC rulemaking requiring disclosure of political contributions.
A week or two ago I was asked to speak at a meeting of the Small- and Mid-Cap Companies Committee of the Society of Corporate Secretaries and Governance Professionals. That’s not unusual or even noteworthy, as I’m a long-time, active member of the Society and often speak at Society functions.
What was unusual and perhaps noteworthy is the topic on which I was asked to speak and the reason I was asked to speak on it. Specifically, one of the Committee members had asked the Chair if someone could give a general primer on shareholder proposals, because his/her company had received its first shareholder proposal ever.
Photo by Dieter Drescher
After much anticipation, the SEC adopted final crowdfunding rules on October 30, 2015. These rules (called Regulation Crowdfunding) will become effective 180 days after they are published in the Federal Register. Here are links to the SEC’s press release and a helpful summary of these new rules as well as some good background commentary from Chair White. Click here for the final rules. VentureBeat also recently posted a helpful and practical summary of Regulation Crowdfunding.
There is a lot of optimism regarding these crowdfunding rules and their potential positive impact on capital raising, and there is certainly a high degree of good intent behind these rules. I continue to doubt, however, that crowdfunding will have a major impact on capital raising for many companies because of the associated regulatory requirements and high costs (particularly the costs associated with audited financial statements and the use of an intermediary).
The most important components of these crowdfunding rules are:
- Issuers can raise up to $1 million during each 12 month period in crowdfunding offerings.
- There are substantial limits on the amounts that an investor can invest. If an investor has less than $100,000 in either annual income or net worth, that investor can only invest the greater of $2,000 or 5% of their annual income or net worth in all crowdfunding transactions over a 12 month period. Investors whose annual income and net worth are both at least $100,000 can invest up to 10% of their annual income or net worth in all crowdfunding transactions over a 12 month period. It is important to note that during this 12 month period the aggregate amount of securities sold to an investor in all crowdfunding transactions cannot exceed $100,000.
- Certain entities, such as Exchange Act reporting companies, non-U.S. companies, “blank check” companies and certain disqualified companies, are not eligible to use Regulation Crowdfunding.
- Issuers must submit detailed reports to the SEC and to investors in connection with each crowdfunding transaction and also annually. These reports must contain, among other things, information about the issuer’s officers, directors and principal shareholders, related party transactions and the use of proceeds. Audited financial statements (prepared by an independent accounting firm) are generally required, although there is some relief from the audit requirement for certain issuers who are utilizing Regulation Crowdfunding for the first time. In these cases the financial statements must be reviewed. The issuer’s principals may be required to disclose certain personal financial information.
- Securities purchased in a crowdfunding transaction can generally not be resold for one year.
- Holders of securities obtained in a crowdfunding transaction will generally not be counted in the determination of whether an issuer must register under Section 12(g) of the Exchange Act.
- An intermediary (called a funding portal) must be used. The requirements for an intermediary under Regulation Crowdfunding are complex and contain numerous important provisions and restrictions that are specific to crowdfunding transactions.
The SEC’s press release also described some interesting proposed Continue Reading
The SEC has issued its much-anticipated Staff Legal Bulletin on two rules impacting shareholder proposals. You can find the SLB here. The SLB looks a bit more benign than some had feared; in other words, it’s got some bad news, but the good news is that it’s not as bad as some feared.
Rule 14a-8(i)(9) – Conflicting Proposals
The SLB deals with two areas of SEC Rule 14a-8 – the Rule governing shareholder proposals. The first area relates to Rule 14a-8(i)(9), which addresses what happens when a shareholder proposal “directly conflicts” with a company proposal. This issue reared its head during the 2015 proxy season, when the SEC withdrew a no-action letter it had granted to Whole Foods permitting it to exclude a shareholder proposal on proxy access and, at the direction of SEC Chair White, declared a moratorium on issuing no-action letters under Rule 14a-8(i)(9).
My favorite quote of the week seems to have gone largely unnoticed, despite the fact that I tweeted about it and told several people about it. The quote, attributed to former Congressman Barney Frank, was “people expect too much from boards”. If you don’t believe me, you can find it here – in the venerable New York Times, no less.
Am I the only one who thinks that the statement, particularly considering the source, is offensive? Am I the only one who thinks that the co-sponsor of the legislation that bears his name, and the author and/or instigator of many of its provisions that imposed extensive obligations on boards, saying that we expect too much from boards is similar to the child who kills his parents throwing himself on the mercy of the court because he is an orphan?
In fairness to Mr. (no longer Congressman) Frank (not that I feel compelled to be fair to him), he is also quoted to have said that the most important oversight of financial companies comes not from its directors but from regulators. If that’s the case, however, why does the eponymous legislation bother to impose so many burdens on boards? Why not leave it all to the regulators (or would that leave the plaintiffs’ bar in the lurch)? Alternatively, why not expand the concept of mandatory say on pay votes (which the Dodd-Frank Act imposes upon most publicly held companies) to everything a board does and do away with the board entirely? Need a new plant? Put it to a shareholder vote! Want to think about entering new line of business? How about a say on that?
Those of us who have been around long enough to remember paper SEC filings may recall the requirement to file one manually signed copy of Exchange Act filings and, if memory serves me correctly, three manually signed copies of Securities Act registration statements. When EDGAR was implemented, we hoped to be spared the often last-minute scramble to find an authorized officer to sign a filing, but our hopes were not rewarded; not only were we required to obtain manually signed copies, but we were admonished to retain them for five years.
Lest you think that the SEC doesn’t care about these requirements, a recent enforcement action clarifies that it does. In the action, the SEC cited MusclePharm Corporation for a variety of serious disclosure and books and records violations. However, one paragraph of the SEC Order notes that “MSLP failed to maintain signed signature pages for most of its filings with the Commission from 2010 through 2013 as required under Rule 302 of Regulation S-T. MSLP failed to receive or maintain any manually signed signature pages prior to December 2012. After December 2012, while MSLP had made over 23 Commission filings, MSLP only received or maintained original signature pages for all signatories on eight filings.”
So be sure to get those signature pages signed and make sure they are retained in your files for the required five-year period.
Photo by Brian Talbot
After much foot dragging, I have finished reading the adopting release for the new pay ratio disclosure rules. Yes, the release is long (300 pages or so), but adopting releases are always long. The real reason why it took so long is that the whole concept of pay ratio disclosure just seems silly to me (and apparently to Bob Lamm as well) so I just hoped it would go away.
I am not against finding ways to strengthen the middle class. Just like I am not against ending the sale of certain minerals in Central Africa that end up funding deadly conflict. The problem I have is that public companies should not have to bear the complete burden of fixing social ills. Less than 1% of the 27 million companies in the United States are publicly traded. And there are plenty of private companies that are larger than most publicly traded companies. Thus, while we may not agree whether the social goals are worth achieving, I think we can all agree that there are better ways to achieve them than selective enforcement (particularly since the SEC itself has said that the pay ratio will not be comparable from one company to another). The Securities Edge has been criticizing the social disclosure movement for some time, but we haven’t yet seemed to have stopped Congress from continuing to go down that path.
So, unless Congress acts to reverse its mandate for public companies to disclose their pay ratios before 2018 (the first year of required disclosure), I suppose we should all start learning how to comply. Leading practices for calculating the ratio and providing narrative disclosure will develop over the next couple of years, but I have summarized the important parts of the rules in this post:
What is the required disclosure?
Registrants must disclose:
- The median of the annual total compensation of all employees of the registrant (excluding the CEO)
- The annual total compensation of the CEO; and
- The ratio of the median to the CEO’s compensation.
The ratio needs to be expressed as X:1 or X to 1 where “X” represents the CEO’s total compensation and “1” represents the median employee’s salary. The ratio can also be expressed in narrative form such as: “The CEO’s annual total compensation is X times the median employee’s annual total compensation.” You can’t Continue Reading
Photo by Nancy Kamergorodsky
Earlier this week, the Financial Crimes Enforcement Network (“FinCEN”) proposed a rule that would require investment advisers registered with the Securities Exchange Commission (“SEC”) to establish anti-money laundering (“AML”) programs and report suspicious activity to FinCEN pursuant to the Bank Secrecy Act (“BSA”). FinCEN’s proposed rule would also add “investment advisers” to the general definition of “financial institution,” which, among other things, would require such advisers to file reports and keep records relating to certain transfers of funds. The public comment period for the proposed rule will commence once the proposed rule is published in the Federal Register and will continue for a period of 60 days. In the spirit of public debate, here are a few of our initial thoughts regarding the proposed rule:
- The rule would require those investment advisers registered with the SEC to comply with its obligations. Generally speaking, only those investment advisers who manage $100 million or more in client assets must register with the SEC. This, in addition to the laundry list of exemptions from the SEC’s registration requirements, appears to leave a gaping whole through which potential money launderers may nonetheless access the United States financial system through an investment adviser, i.e., through small, midsize, or other unregistered advisers.
- Most, if not all, investment advisers regularly work with financial institutions already subject to BSA requirements, such as when executing trades through broker-dealers to purchase or sell client securities, or when directing custodial banks to transfer assets. And if FinCEN’s August 2014 proposed rule requiring financial institutions to identify and verify the beneficial owners of legal entity customers comes to fruition, it may, in many cases, expand the scope of customer due diligence for banks and broker dealers with respect to their investment adviser customers and, in turn, the customers of their investment adviser customers. Thus, in many ways, imposing BSA compliance obligations on registered investment advisers might be unnecessarily duplicative.
- FinCEN’s proposed rule would not require registered advisers to develop and maintain a customer identification program (“CIP”) or comply with certain other AML requirements applicable to financial institutions. While FinCEN has, in other cases, omitted CIP requirements for certain financial institutions, it did not do so with respect to broker dealers and, given FinCEN’s emphasis on investment advisers’ ability to appreciate a broader understanding of their clients’ movement of funds through the financial system, a CIP might actually be a key to accurately capturing and utilizing that broad understanding.
- FinCEN is proposing to delegate its authority to examine investment advisers for compliance with these requirements to the SEC. Even assuming the SEC isn’t busy enough already, given the issues discussed above, the increase in supervisory and enforcement burden on the SEC may not be justified.
Feel free to join the debate, and please contact us if you have any questions regarding the proposed rule, the BSA or AML compliance generally. After the close of the public comment period, the proposed rule will be subject to additional review and revision based on public comments before it is finalized by FinCEN.