Photo of Robert C. White Jr.

Bob White is a business, corporate and technology lawyer. He is a member of Gunster’s Corporate and Securities and Corporate Governance Practice Groups, and he is the Co-Chair of the Technology and Emerging Companies Practice Group. He works with innovative companies, entrepreneurs and in-house lawyers on a wide variety of topics including mergers and acquisitions, venture capital and private equity investments, corporate structuring, corporate contracts and technology matters.

Image by Sergei Tokmakov, Esq. from Pixabay

Popular cryptocurrency exchange Coinbase went public on Nasdaq on April 14 using a direct listing. The company achieved a huge valuation (more than $100 billion) in this offering. While it’s too early to tell whether Coinbase’s stock price will hold up over time, the initial success of this offering is impressive. This continues a string of successful direct listing offerings by large technology companies such as Slack, Spotify, Palantir and Asana, all of which utilized this process to become public companies. What is a direct listing and how is it better (or worse) than a traditional IPO? More importantly, should you use a direct listing to take your company public? (Spoiler alert:  maybe not).

Direct listing is a somewhat rare process in which a company achieves public company status without using traditional underwritten IPO sales efforts. Historically, only the company’s existing shareholders were allowed to sell shares in a direct listing. The company would not receive any of the proceeds of the offering as it would not be allowed to issue new shares, and accordingly all funds would go directly to the selling shareholders. On December 22, 2020, however, the SEC approved a rule change proposed by the NYSE that allows a company to conduct a primary offering through a direct listing under certain circumstances. Nasdaq later submitted a similar proposal which is currently under SEC review but which should be approved, as it is substantially similar to the NYSE proposal. This should fuel even more interest in direct listings going forward.
Continue Reading Direct Listings – A viable IPO alternative?

Image by PublicDomainPictures from Pixabay

The SEC recently increased the funding limits for several types of exempt offerings. The increases were fairly substantial, and we believe they may create increased opportunities to raise external financing. Smaller companies in particular should be aware of these increases, as they may provide increased access to capital.

The new funding limits were included in a Final Rule entitled “Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets,” issued by the SEC on November 2, 2020. The SEC also issued an explanatory Press Release which contains a helpful Fact Sheet regarding the Final Rule and the new funding limits. The purpose of the Final Rule was to harmonize and bring some consistency to the somewhat complex system of securities offerings that are exempt from registration with the SEC. This system is a critical component of the capital raising process, and for many smaller companies these exempt offerings are the only methods available for external capital raising. This Final Rule became effective on March 15, 2021.

This Final Rule impacted three exemptions from registration that are widely used, especially by smaller companies:  Regulation Crowdfunding, Regulation A (commonly known as “Regulation A+”) and Rule 504 of Regulation D.  The major changes are as follows:
Continue Reading Show me the money: Increased funding limits for exempt offerings may increase access to capital

Image by Steve Buissinne from Pixabay

On October 7, 2020, the SEC proposed the creation of “limited, conditional” exemptions from broker-dealer registration for certain “finders” in private company capital raising transactions. This has long been a problem area for private companies, as current regulations impose restrictions that may prevent them from using unregistered finders to raise capital, or impose draconian penalties on them if they do. Since these companies are often unable to raise capital on their own and normally do not have access to the efforts of established, registered broker dealers, the already difficult challenge of raising early stage capital is made even more difficult. The SEC’s October 7, 2020 Press Release and Fact Sheet lay out these proposed exemptions in detail, and the Fact Sheet contains links to a chart and a video that may be helpful.

It’s too early to tell if these proposed exemptions will be beneficial to small companies. Will they actually facilitate small companies’ ability to raise early stage capital? That remains to be seen, but it’s a positive sign that the SEC is expending at least some efforts to help small companies in their capital raising efforts.

Here are the high points of the proposed exemptions:
Continue Reading Will Finders Find Relief from SEC Restrictions?

Image by Krithika Parthasarathy from Pixabay

On August 26, 2020, the SEC adopted changes to its definition of “accredited investor.” The SEC Release can be found here. The new rules will become effective 60 days after their publication in the Federal Register (around the end of October 2020). These changes are definitely a move in the right direction, and they indicate that the SEC may be willing to further expand and modernize the accredited investor qualification requirements, but I don’t believe they will have a significant impact on the private securities offering process. .

The accredited investor requirements largely determine eligibility to participate in private securities offerings. The current requirements are primarily based on financial status. For most individual investors to qualify as accredited investors, they need an annual income of $200,000 (or $300,000 combined with their spouse) or a net worth (including their spouse’s net worth but excluding the value of their primary residence) of $1 million.

These quantitative requirements have been subject to criticism. They have been in effect since 1982, with the only change being the exclusion (in early 2012) of the value of the investor’s primary residence in the net worth test. Some commentators say that these requirements are too restrictive and exclude too many investors from participation in private offerings, thus stifling the capital available to smaller companies. That criticism may have become less valid over time; when the $200,000 annual income test was first implemented in 1982, less than 1%  of potential investors qualified. Due to inflation and the lack of an increase in the income requirement, approximately 9% of potential investors currently qualify. . Conversely, however, this standard has been criticized by other commentators on the basis that it allows more investors to participate in risky and dangerous private investments because the qualification standards have not changed over time. This has led to some calls for indexing the income standard to inflation. The SEC did review these quantitative standards but declined to make any changes at this time.
Continue Reading SEC changes “accredited investor” definition – good, but not enough

The SEC recently settled charges against two prominent celebrities in connection with the promotion of initial coin offerings. Boxer Floyd Mayweather Jr. and music producer and social media star DJ Khaled were charged in separate incidents with failing to disclose that they had received payments for promoting ICOs. While the SEC has provided prior guidance

On February 21 the SEC issued a  “Commission Statement and Guidance on Public Company Cybersecurity Disclosures”. The Release contains new guidelines and requirements regarding public companies’ disclosure responsibilities for cybersecurity situations. No new rules or regulations have been issued at this point, but the Release contains some valuable guidance. It is also clear that cybersecurity is a hot button for the SEC and for Chair Clayton, and I believe that cybersecurity disclosure issues will be subject to more rigorous scrutiny going forward. All public companies should carefully review the Release and evaluate their disclosure obligations in connection with cybersecurity.

The Release updates the SEC’s position on cybersecurity. The SEC’s previous guidance in this area was primarily a Corporation Finance Division Release issued in 2011 that did not contain specific disclosure requirements. The cybersecurity landscape has changed radically since then. The substantial increases in the number and severity of cybersecurity incidents, coupled with the growing dependence of businesses on cyber systems and the associated problems that arise in a cybersecurity incident, have clearly convinced the SEC that additional disclosure is required.
Continue Reading SEC issues guidance on cybersecurity disclosure obligations (and more)

Initial coin offerings have taken off in 2017.

The SEC took two strong steps this week toward increased regulation of the cryptocurrency markets and specifically regulation of Initial Coin Offerings (“ICOs”). These steps included the halting of an ongoing ICO and a strong statement by the SEC’s chairman regarding ICOs and their status under the Federal securities laws. These steps were the SEC’s strongest actions to date regarding ICOs, but what is the probable long-term result here? This is getting very interesting as you pit the regulators and their application of traditional securities law concepts against an increasing strong demand in the investment community to invest in these cryptocurrency vehicles.

An ICO involves the offering of a token, “coin” or other digital product. In exchange for their investment, investors receive these tokens or coins. The company then uses the proceeds of the ICO for various corporate purposes similar to a regular offering of securities. ICOs have generally not been registered with the SEC.

On December 11, 2017, the SEC halted the ICO that was being conducted by Munchee Inc., a company that developed a restaurant review app. This action was based on the fact that the company had not registered this offering with the SEC. This ICO involved the issuance of MUN Tokens by Munchee, which the company said might increase in value. Munchee planned to raise about $15 million in this ICO. The SEC said that an investor could reasonably expect to earn a return on these Tokens, and accordingly the Tokens issued in the ICO were “securities” and should have been registered under the Federal securities laws. Munchee accepted the SEC’s findings without admitting or denying anything. The company agreed to halt the offering and to return all proceeds that it had received from investors in the offering.

The investigation of this matter was conducted in part by the SEC’s new Cyber Unit (a division of its Enforcement Section). The SEC had also issued other materials regarding concerns with cryptocurrencies and ICOs, including an Investor Bulletin issued on July 25, 2017 and a Report of Investigation issued on the same date.
Continue Reading Cryptocurrency crackdown

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 Carlo De Pieri
Photo by Carlo De Pieri

President Barack Obama signed into law Wednesday, May 11th, a bill that will provide protection for trade secrets on the federal level.

This new legislation, called the Defend Trade Secrets Act of 2016, or DTSA, has been hailed by commentators as an extremely significant addition to federal intellectual property law. The DTSA was created as an amendment to the Economic Espionage Act of 1996 to provide civil remedies for trade secret violations under federal law. While some potential issues exist, I believe that this new law should be beneficial to many companies because of the possible increased trade secret protection and aggressive potential remedies that it will provide.

Trade secret protection in the U.S. has primarily been available under applicable state law. The Uniform Trade Secrets Act provides some consistency, and it has been adopted by 48 states. The trade secret laws of the various states are not totally uniform, however, and this has sometimes made it difficult for companies to protect their trade secrets under the various state laws. Legal actions involving trade secret protection have generally been brought in state courts. Since the DTSA is a federal law, more trade secret actions will now be able to be brought in federal court, providing an additional potential venue for these actions.

The DTSA does not replace or preempt existing state laws. As a result, this could be an advantage to companies as it may provide a separate method of protecting their trade secrets. The DTSA also defines trade secrets a little more broadly, using “public economic value” as the heart of the trade secret definition. This broader definition of what constitutes a trade secret may expand the range of information that a company can claim as a trade secret.

That said, there is a potential problem here: the DTSA does not provide a uniform system of trade secret law and instead establishes a federal level of trade secret law on top of the existing states’ trade secret laws. This could increase the number and the complexity of legal actions involving trade secrets. Therefore, a company that wishes to assert a trade secrets action will need to analyze which court — state or federal — will be more advantageous, and this will likely vary with the different circumstances of each situation.

One-sided seizures

The DTSA contains fairly aggressive potential remedies that may be advantageous to companies which believe that a trade secret violation has occurred. The provision that has drawn the most interest is the ability of a court to issue an ex parte seizure order in certain extraordinary circumstances.
Continue Reading New federal law provides additional protection for trade secrets

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)