In late July, S&P Dow Jones and FTSE Russell announced that they were changing or proposing to change the standards that govern whether a company is included in their indices.  Although their approaches differ, the changes would effectively bar most companies with differential voting rights from their indices, as follows:

  • In its July 31 announcement, S&P Dow Jones said that companies with multiple share classes will no longer be included in the indices comprising the S&P Composite 1500 – which includes the S&P 500, S&P MidCap 400 and S&P SmallCap 600. There are some exceptions; companies currently in these indices will be grandfathered, as will any newly public company spun off from a company currently included in any of the indices.
  • Five days earlier, FTSE Russell proposed to require more than 5% of a company’s voting rights – across all equity securities, whether or not listed or traded – to be held by “free float” holders to be eligible for inclusion in the FTSE Russell indices.

Continue Reading Class Acts: Stock Indices Bar Differential Voting Rights

waldryano
waldryano

I don’t know when Congress decided that every piece of legislation had to have a nifty acronym, but the House Financial Services Committee recently passed (on a partisan basis) what old-fashioned TV ads might have called the new, improved version of the “Financial CHOICE Act”.  The word “choice” is in solid caps because it stands for “Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs”.

Whether and for whom it creates hope, opportunity or something else entirely may depend upon your perspective, but whatever else can be said of the Act, it is long (though at 589 pages, it is slightly more than half as long as Dodd-Frank), and it addresses a very broad swath of issues.  Here’s what it has to say about some key issues in disclosure, governance and capital formation, along with some commentary. Continue Reading The Financial CHOICE Act – everything you’ve ever wanted, and more?

SMU Central
SMU Central

Things are looking pretty good for the venture capital industry. Potential VC investors have a lot of money available, and industry and geographical trends show a positive outlook for VC investing in the near term. There are numerous factors that could negatively affect the outlook for VC investments, but it certainly appears that substantial VC investment activity could occur over the next twelve months.

The most significant positive factor for VC activity in the near term is the supply of available cash. According to a recent report, VC funds currently have approximately $120 billion available for investment. Even though this is a composite number that is applied across the whole VC industry, it is a huge amount of available investment funds.

Another positive factor is the increase in corporate VC investment. In a relatively short time (aided by large amounts of cash on corporate balance sheets), corporate investors have begun to play a key role in the VC industry, especially in larger deals. Last year corporate VC deals comprised 25% of total VC deals, and this percentage will continue to increase. See my prior blog post on the rise of corporate VC investors (Corporate Venture Capital Investments – Good for Startups?).

Continue Reading It’s a good time to be a VC fund

Photo by Chad Cooper
Photo by Chad Cooper

Good, but not surprising, news for issuers considering a Regulation A+ offering. Back in May 2015, Massachusetts and Montana sued the SEC in an attempt to invalidate the Regulation A+ rules.  Montana had attempted to obtain an injunction to prevent the Regulation A+ rules from going into effect last June, but was denied.  Now, the DC Circuit has officially rejected the lawsuit brought by the two states.

As we have discussed, Regulation A+ is a vast improvement over the previous version of Regulation A.  The biggest improvement, state pre-emption, was the most controversial (from the states’ perspectives).  Because Regulation A is already a more burdensome exemption than Regulation D (private offerings) due to the need for SEC review and qualification, pre-empting state securities laws for Tier II offerings was a welcome improvement.  The North American Securities Administrators Association (NASAA), which represents the state securities regulators, was strongly against pre-emption.  NASAA is largely seen as the force behind the lawsuits by Montana and Massachusetts.

I will boil down the details of the lawsuit into a sound bite. The states argued that the SEC acted beyond its authority in enacting rules that pre-empted state securities laws.  The court disagreed and said that Congress, in passing the JOBS Act, pre-empted the state laws.

Massachusetts and Montana could appeal, but I doubt that they will. The validity of the states’ argument was not well grounded because the JOBS Act clearly states that the new Regulation A+ exemption would be a “covered security” – which means state law is pre-empted by federal law.

In any event, the conclusion of the lawsuit provides additional clarity for Regulation A+ offerings. We expect that Regulation A+ will become more widely used as bankers and issuers become more comfortable with the exemption.

Photo by Michael Tipton
Photo by Michael Tipton

The SEC’s crowdfunding rules (under Regulation Crowdfunding) became effective earlier this week. From the legal and legislative perspectives this was a big day since it marked the effective date of

one of the most heavily anticipated and promoted components of the JOBS Act. It is also the last provision of the JOBS Act to be put into practice. Reward-based crowdfunding has been operational for a long time and has had some pretty positive results, but the SEC’s equity crowdfunding rules were going to be a way for small investors to make equity investments in small companies and help foster the growth of the tech and innovation economies.

Unfortunately, as reported in my prior blog post and just about everywhere else, the execution of the final crowdfunding rules has resulted in a system that is probably not viable for most situations. While the new rules may work in some cases, they create barriers that I believe will prevent widespread use of equity crowdfunding as a financing vehicle. One of the best summaries of Regulation Crowdfunding problems and deficiencies can be found in this post which quotes Jeff Lynn, the CEO of Seedrs (a prominent crowdfunding platform). He is certainly a guy who believes in the crowdfunding concept, but he says that the crowdfunding regulations in their current form are not workable. Lynn also advises US regulatory authorities to study the UK crowdfunding model, which he believes allows companies to raise funds while still providing investor protection.

The main problems with the new crowdfunding regulations are practical ones. First, the funding limit of $1 million each year is just too low for most companies. This is similar to the problem that we saw with Regulation A for a long time – essentially no one used it because the limit was too low in relation to the costs (although the old Regulation A limit was $5 million, substantially higher than the current crowdfunding limit). Regulation A+ has fixed this problem for Regulation A offerings, but the low limit remains a huge challenge for crowdfunding offerings. This low limit problem is made worse by the costs associated with a crowdfunding offering, which will be substantial for a small company. Legal and accounting work will be required. Companies must also use a registered funding portal in connection with the offering, and this will add to the cost burden. Finally, companies cannot “test the waters” before beginning an offering to see if the offering is even viable for them. The combination of all of these factors creates significant practical roadblocks for crowdfunding that cannot be overcome without some adjustments (as discussed below).  Continue Reading What’s up with Crowdfunding? So far, not much (but a fix may be coming)

Corporate Venture Capital
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 Corporate venture capital investments – Good for startups?

Photo by Dieter Drescher
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 SEC adopts final crowdfunding rules – Last gasp of the JOBS Act (plus some bonus proposed new rule amendments)

Photo by Patricia J. Lovelace © All rights reserved
Photo by Patricia J. Lovelace © All rights reserved

This week, the SEC published a series of new Compliance and Disclosure Interpretations (“CDIs”) related to the newly revised Regulation A, which became effective on June 19, 2015. While many of the new CDIs addressed procedural and interpretational issues under the new rules, there was an important development that could make Regulation A that much more useful for companies.

The positive news comes in the form of the SEC staff’s response to Question 182.07 which asks whether issuers would be able to use Regulation A in connection with merger or acquisition transactions that meet the criteria for Regulation A in lieu of registering the offering on an S-4 registration statement. Based on the SEC’s final adopting release, it did not appear that Regulation A would be available for use in these types of business combination transactions. However, the interpretation published yesterday clarifies that issuers may, in fact, use Regulation A in connection with mergers and acquisitions. The one exception is that Regulation A would not be available for business acquisition shelf transactions that are conducted on a delayed basis.

This is a very positive development for issuers that want to issue equity in connection with acquisitions of other companies, but do not wish to become a public reporting company under the Exchange Act. Previously, these issuers had very few Continue Reading More Positive Regulation A News

Reg A+ is now effective!
Photo by Lisandro M. Enrique © 2015 All rights reserved

Today is June 19th.  It is an exciting day for companies that need to raise capital because Reg A+ finally goes into effect.

As a reminder, Reg A+ is a nickname for SEC Regulation A, as amended by the SEC.  Reg A has been around for many years but was rarely used because it was available only to very small financings, had too many limitations, and was costly.  As part of the JOBS (Jumpstart Our Business Startups) Act enacted in 2012, the SEC was instructed to update Reg A to make it more useful as a capital-raising tool.  Reg A+ is the result.

The main benefits of Reg A+ include the following:

  • Companies can raise up to $50 million every 12 months.
  • Insiders can sell their shares in a Reg A+ offering.
  • Investors in a Reg A+ offering have immediate liquidity – they can sell their shares once the offering is completed and don’t have to hold them for a period of time.
  • Some Reg A+ offerings are exempt from state securities or “blue sky” laws.
  • Some Reg A+ offerings are easier to list on an exchange.

We think Reg A+ provides a great opportunity to raise capital and can be looked at as an alternative to either a private placement or an IPO.  But, don’t take our word for it.  Here is what others are saying about Reg A+.  If you have any questions about Reg A+, please feel free to reach out to any of the Gunster attorneys in the Securities and Corporate Governance Practice.

Doom over crowdfunding?The first enforcement action involving a crowdfunding project was recently brought by the Federal Trade Commission. It involved the development of a board game which did not go well despite a successful crowdfunding campaign. This matter is interesting and instructive not only because it is the first such case, but also because it highlights some of the significant risks inherent in the crowdfunding process. The FTC’s official press release on this matter contains a good summary of the relevant events.

According to the FTC complaint, Erik Chevalier discovered an idea for a board game called The Doom that Came to Atlantic City! This game was designed to be a dark fantasy take on the traditional Monopoly board game. The game had originally been developed by two designers, but Chevalier planned to take their concept and produce and distribute a finished game. To raise money for this venture, Chevalier turned to Kickstarter, probably the best known crowdfunding platform. According to the FTC complaint, Chevalier represented to investors that the funds raised would primarily be used for the development, production, completion, and distribution of this game, and that participants would receive certain rewards, such as copies of the final game and action figures, in return for their participation in this campaign.

This crowdfunding campaign was very successful. Chevalier’s original goal was to raise $35,000, but this campaign raised more than $122,000 for the development of this game. Unfortunately, things went bad as the game development process encountered delays.

According to the FTC complaint, Continue Reading First crowdfunding fraud enforcement action