April 2011

We have recently experienced some of the worst financial and economic conditions that we (hopefully) will see in our lifetimes. Most of us have been touched personally by these conditions. It appears that economic and financial conditions will continue to get better, but these situations have created some ongoing challenges that will continue to face early stage companies and entrepreneurs even under better conditions. 

The apparent changes in the traditional roles of the venture capital, private equity and angel investing models are some of the changes that will impact early stage companies. This appears to be the “new normal” for the financing of early stage companies.  Financing from venture capital and angel investor sources has historically been a vital source of funding for early stage companies.  Most early stage companies are not able to qualify for bank financing and are too early for private equity financing. Venture capital and angel investor financing traditionally stepped into this gap and gave these companies the critical financing that they needed to survive and expand. Private equity firms tended to remain out of the early stage financing arena until a company had reached a certain level of revenues or profitability.

This traditional financing model has changed.  Many private equity firms have shifted their investment focus to an even more mature class of companies. There has been a concurrent shift in focus by venture capital firms as many of them have also shifted their investment focus to more mature companies and are subjecting target companies to stricter investment criteria.

These shifts in investment focus are understandable, but they have significantly reduced the availability of crucial funding sources for early stage companies. These shifts happened at a very tough time for most small companies as they tried to recover from bad economic conditions.  This reduction in financing opportunities coupled with the overall slow pace of the economic recovery has caused a dire situation for many early stage companies and entrepreneurs.  Fortunately several events have occurred that should help to fill this financing gap. Continue Reading Financing Early Stage Companies–Dealing With the “New Normal”

In a response letter to Representative Darrell Issa (R-CA) dated April 6, 2011, Mary Shapiro, the Chairman of the Securities and Exchange Commission (“SEC”), indicated that the SEC would be reviewing the feasibility of, among other things, a new exemption from registration for micro-financing or “crowdfunding.” Crowdfunding generally refers to the pooling of small contributions from a large number of people to finance some particular purpose or venture. In an example described to the SEC for the possible exemption, a company would be permitted to conduct an offering of up to $100,000, with a cap on individual investments of $100. Proponents of the proposed exemption view this as a viable way for small start-up companies to raise essential early stage capital at a low cost while minimizing investment risk because of the low cap on individual investment. The SEC is currently soliciting comments from the public on this topic. Public comments are available here

To view Chairman Shapiro’s letter click here.

NASDAQ recently filed a proposed rule change with the SEC. Upon taking effect, the rule will change the way total assets and shareholders’ equity are calculated for listing purposes on the NASDAQ Global Select Market. To conform with NYSE’s treatment under their comparable standard, NASDAQ proposes to delete the requirement that total assets be demonstrated as of the close of the most recent fiscal year. Under the proposed Rule, the $80 million total asset threshold for listing on the NASDAQ Global Select Market may be satisfied on the most recent publicly reported financial statements. NASDAQ also proposes to add a definition explaining what adjustments will be made to total assets and shareholders’ equity to reflect the use of proceeds and acquisitions and dispositions. These adjustments are identical to the adjustments specified in the NYSE Listed Company Manual. The proposed rule change was filed on April 1, 2011 and will take effect after the 30-day operative delay period. NASDAQ has asked the SEC to waive the 30-day operative period to allow companies to take advantage of the proposed rule change immediately.

To view the proposed NASDAQ rule amendment, click here.

 Last week, the SEC proposed new rules required by Section 952 of Dodd-Frank Act.  Under the proposal, compensation committees may engage a compensation consultant or other advisor, including legal counsel, only after taking into consideration the following factors, and any other factors determined by the national securities exchanges:

1) provision of other services to the issuer by the person that employs the advisor;

2) amount of fees received from the issuer by the person that employs the advisor, as a percentage of the total revenue of the person that employs the advisor;

3) policies and procedures of the person that employs the advisor that are designed to prevent conflicts of interest;

4) any business or personal relationship of the advisor with a member of the compensation committee; and

5) any stock of the issuer owned by the advisor.

The SEC has not proposed any bright-line tests or numerical thresholds to assist in determining whether a conflict of interest exists.

In addition, each issuer must disclose in any proxy or consent solicitation for an annual meeting at which directors are to be elected, whether (1) the compensation committee has retained or obtained the advice of a compensation consultant or other advisor, including legal counsel, and (2) the work of the advisor has raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed.  These disclosure rules would apply to all Exchange Act registrants subject to the SEC’s proxy rules.

To review the proposed rules, click here.

Assuming that Congress and the President cannot agree on either a continuing resolution to fund the operations of the United States’ government or a budget prior to midnight, the SEC will immediately suspend most of its operations.  According to the SEC’s contingency plan, of its 3,969 employees only 332 will report to work during the government shutdown.  The employees not furloughed will largely consist of those critical for the safety of human life or the protection of property or to carry out emergency enforcement activities.  No one may volunteer to work without pay.  All law enforcement and litigation matters, except emergency matters, all processing and approvals of filings and registration statements, and all non-emergency rule-making will be suspended.  EDGAR will remain operational; however, the Divisions of Corporation Finance, Investment Management, and Trading and Markets, and the Office of Compliance Inspections and Examinations will be unable to process filings, provide interpretive advice, issue no-action letters or conduct any other normal Division and Office activities.

To review the contingency plan, click here.

Recently, the Financial Industry Regulatory Authority, Inc. (“FINRA”) issued a proposed amendment to Rule 5122 to further regulate nonpublic offerings. The proposed amendment would cause significant changes in the nonpublic offering process including the following:

  • Disclosure Requirements – All offerings must have an offering document. The offering document would be required to disclose (i) the intended use of the offering proceeds, (ii) amount and type of compensation to be paid to participating broker-dealers or associated persons thereof, and (iii) if applicable, the nature of any affiliation between the issuer and any participating broker.
  • Filing Requirements – the offering document (and any amendment) would be required to be filed with FINRA. FINRA would review the filed offering document for compliance with Rule 5122.
  • Use of Proceeds – a maximum of 15% of the proceeds may be used to pay for offering costs, discounts, commissions, and any other compensation to participating broker-dealers. At least 85% of the proceeds must be used for the business purposes required to be disclosed in the offering document. Continue Reading FINRA Proposes New Regulation on Nonpublic Offerings

Last Wednesday, the SEC proposed new rules required by Section 952 of Dodd-Frank Act.  Under the proposal, each national securities exchange will be required to adopt new listing standards to prohibit the listing of any issuer that is not in compliance with the exchange’s independence requirements for compensation committees.  While compensation committees will need to be comprised entirely of independent directors, each national securities exchange will need to define independence for itself taking into consideration two factors: (1) the source of compensation of a Board member, including any consulting, advisory, or other compensatory fee paid by the issuer to the Board member, and (2) whether a Board member is affiliated with the issuer.  It is important to note that, in passing the Dodd-Frank Act, Congress did not infringe on the traditional role of states in defining corporate law.  There is neither a requirement to actually have a compensation committee nor a requirement for a compensation committee to approve executive compensation.  Any such requirements would be set forth by the national securities exchanges, such as the New York Stock Exchange currently requires.

The independence requirements, as proposed, would be applicable to any committee of the Board that oversees executive compensation, whether or not the committee is formally designated as a “compensation committee.”  While this particular requirement of the proposed rules is an attempt to prevent issuers from evading the independence requirements by renaming the Continue Reading National Securities Exchanges to Adopt New Listing Standards to Ensure Independence of Compensation Committees