Capital Raising

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The SEC has been busy over the past several weeks rapidly issuing interpretations and procedures to implement the JOBS Act.  Because the JOBS Act is such a fundamental change to securities law, especially for middle market companies, we wanted to spend this blog catching you up to speed on how the JOBS Act looks since we issued our Special Summary White Paper.  While longer than our normal blogs, we think this information is useful and best kept in one place. 

Confidential Submission Process

The SEC has implemented a secure e-mail system that allows a registrant that qualifies as an Emerging Growth Company (as defined in the JOBS Act) to confidentially file draft registration statements with the SEC.  Commencing this past Monday, May 14th, the secure e-mail system will replace the procedures announced on April 5, 2012.  Instructions on how to use the secure e-mail system are fairly easy to follow.

The change to allowing confidential submissions is a fairly radical, and welcome, change to companies filing their initial public offering.  Whether the confidential submission process becomes widely used is still up for debate.  While there are large advantages for keeping initial submissions private (keeping information secret from competitors until you decide to go forward with the IPO, shortening the “in registration” period to better time the markets, and avoiding embarrassing registration statement withdrawals), there are also some potential disadvantages.  For example, often companies filing initial registration statements are simultaneously reviewing other strategic options such as selling the company.  Filing the registration statement publicly effectively alerts the markets that your company is “in play.”  In addition, the initial filing of a registration statement usually prompts potential plaintiffs with claims to file their lawsuits, which gives management time to amend the registration statement to disclose the risks of the lawsuit.  By not filing a publicly available registration statement until 21 days before the road show,
Continue Reading JOBS Act update: Keeping current with the SEC’s interpretations

If the U.S. House of Representatives has its way, big changes are on the horizon for private offerings.  In an effort to enhance the ability of small businesses to raise capital, the House has now passed four bills that reduce some of the restrictions.  The bills are as follows:

1)  Entrepreneurial Access to Capital Act (HR 2930) – This bill would allow businesses to accept and pool donations of up to $1 million (or $2 million in some instances) without requiring SEC registration.  This concept is known as crowdfunding, which involves the pooling of small contributions in an effort to help others attain a specific goal. If this bill were to become law, it would preempt state law, would permit access to capital sources that previously were untapped, and would prevent the new shareholders from being counted toward the SEC’s 500 shareholder limit for non-public companies.

2)  The Access to Capital for Job Creators Act (HR 2940) – This bill would remove the general solicitation and advertising ban from SEC Rule 506 under Regulation D.  This change would permit small businesses to solicit investments from accredited investors throughout the U.S. and globally.  Like the crowd funding bill, HR 2940 would provide greater access to capital sources.  It would also modernize the way Regulation D offerings are conducted by allowing businesses to directly advertise to accredited investors.

3)  HR 1965 – This bill with no name would increase the number of shareholders bank holding companies and banks may have before requiring SEC registration.  Currently, companies are required to go public if they have 500 or more shareholders and have $10 million or more in assets.  The bill would allow community bank holding companies to have up to 2,000 investors before requiring registration.  As such, community banks would have greater access to capital without requiring added SEC regulation.
Continue Reading House Votes to Make Capital Raising Easier

Earlier this month, FINRA proposed new Rule 5123 to regulate private offerings.  Proposed Rule 5123 is a second attempt by FINRA this year to expand the regulatory process  on private offerings.  In January, FINRA had proposed a much more comprehensive set of changes, including proposed regulations affecting private placements not involving a FINRA member firm. …

The economic events of recent years have hit small companies particularly hard. While virtually everyone has suffered, small companies endured a double hit as they experienced substantial challenges to sales and profitability as well as a widespread inability to raise capital. This inability to raise capital was made worse by these economic events, but the current capital raising regulatory structure was also a major contributing factor. Fortunately these negative events appear to have generated some potential changes in the small company capital raising arena that could be very beneficial. These changes still face a number of challenges, but momentum appears to be building in their favor.

Small companies have historically faced a number of significant regulatory challenges and compliance requirements when raising capital. Some of these problems are the result of outdated compliance requirements that do not reflect the current small company situation. Other problems have resulted from “one size fits all” compliance requirements that do not contemplate the special needs of small companies and the economic restrictions under which many of them operate. The net result has been that small companies have been restricted in many situations in their ability to raise capital. This has been a particular problem in connection with public securities offerings by small companies.

In response to these concerns, several legislators in both the House and the Senate have submitted legislative proposals that are designed to ease the regulatory burdens on small companies in the capital raising process and to ensure that such regulatory burdens correctly reflect small companies’ situations. One significant proposal would increase the offering limits for Regulation A offerings from the current $5 million level to $50 million. Regulation A has been available as an exemption from registration under the Securities Act of 1933 for a long time, but historically it has not been used very often. This is probably primarily due to the relatively low offering limit. Regulation A contains some fairly substantial benefits for issuers, including the ability to solicit indications of potential interest from investors before an offering by use of several forms of media (although state laws may have an impact here). A substantially increased upper limit on Regulation A offerings could be a significant advantage to small companies’ capital raising efforts.
Continue Reading Positive Events in Small Company Capital Raising Arena

On July 26, 2011, the SEC approved amendments to eligibility criteria for use of the short form registration statement on Form S-3.

To use the short form registration statement, a proposed offering must meet both the issuer eligibility requirements and a transaction eligibility requirement.  While there are several available transaction eligibility standards, a frequently relied…

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…

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