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Intrastate offering exemption
Photo by Jimmy Emerson

Last week, the SEC issued three new interpretations related to the so-called “intrastate offering exemption,” which is a registration exemption that facilitates the financing of local business operations.  An intrastate offering is exempt because it does not involve interstate commerce, and is therefore, outside the scope of the Securities Act.

We have received a few calls this week from startup companies who mistakenly believed that these new interpretations were creating a new registration exemption.  Largely, the mistaken belief is caused by the confusion stemming from some recent state law changes that allow for intrastate crowd funding.  While the new SEC interpretations were prompted by the recent state law changes, the intrastate offering exemption has been around since 1933, but for many reasons, it is not heavily relied upon.  And, despite the three new interpretations, we still advise against using the intrastate offering exemption.

What is this intrastate offering exemption?

The intrastate offering exemption is actually two separate exemptions, Section 3(a)(11) and a safe harbor Rule 147.  Although the two exemptions differ slightly, generally, if the (i) issuer is incorporated or organized in the same state in which it is offering securities; (2) a substantial portion of the issuer’s business occurs within that state; (3) each offeree and purchaser is a resident of the state; (4) the offering proceeds are used primarily within that state; and (5) the securities come to rest within that state, then your offering would be exempt from federal registration requirements.  The investors do not need to be accredited (unlike Regulation D offerings), there is no limitation on the manner of offering, there are no prescribed disclosures, there is no maximum amount that can be raised (unlike Rule 504, Rule 505, or Regulation A), and the shares are freely transferable to other residents of the state.  In other words, it is a fairly broad exemption that allows a lot of flexibility to issuers, especially to startup companies who need as much flexibility as possible when raising capital.

Ok, so what is such a problem with the intrastate offering exemption?

While there is lots of flexibility with the exemption, the intrastate offering exemption…
Continue Reading Don’t cross the border!: Intrastate offering exemption still not useful despite new interpretations

Intrastate offering exemption
Photo by Jimmy Emerson

Last week, the SEC issued three new interpretations related to the so-called “intrastate offering exemption,” which is a registration exemption that facilitates the financing of local business operations.  An intrastate offering is exempt because it does not involve interstate commerce, and is therefore, outside the scope of the Securities Act.

We have received a few calls this week from startup companies who mistakenly believed that these new interpretations were creating a new registration exemption.  Largely, the mistaken belief is caused by the confusion stemming from some recent state law changes that allow for intrastate crowd funding.  While the new SEC interpretations were prompted by the recent state law changes, the intrastate offering exemption has been around since 1933, but for many reasons, it is not heavily relied upon.  And, despite the three new interpretations, we still advise against using the intrastate offering exemption.

What is this intrastate offering exemption?

The intrastate offering exemption is actually two separate exemptions, Section 3(a)(11) and a safe harbor Rule 147.  Although the two exemptions differ slightly, generally, if the (i) issuer is incorporated or organized in the same state in which it is offering securities; (2) a substantial portion of the issuer’s business occurs within that state; (3) each offeree and purchaser is a resident of the state; (4) the offering proceeds are used primarily within that state; and (5) the securities come to rest within that state, then your offering would be exempt from federal registration requirements.  The investors do not need to be accredited (unlike Regulation D offerings), there is no limitation on the manner of offering, there are no prescribed disclosures, there is no maximum amount that can be raised (unlike Rule 504, Rule 505, or Regulation A), and the shares are freely transferable to other residents of the state.  In other words, it is a fairly broad exemption that allows a lot of flexibility to issuers, especially to startup companies who need as much flexibility as possible when raising capital.

Ok, so what is such a problem with the intrastate offering exemption?

While there is lots of flexibility with the exemption, the intrastate offering exemption…
Continue Reading Don't cross the border!: Intrastate offering exemption still not useful despite new interpretations

Businessman weary of overregulation by SECI understand that the SEC needs to balance having efficient markets and facilitating capital formation with the protection of investors, but sometimes erecting roadblocks with the intent of protecting investors is merely regulation for regulation’s sake.  On February 5, 2013, the Staff of the Division of Trading and Markets of the SEC provided guidance on Title II of the JOBS Act, specifically to help interpret the limited broker registration exemption.  While at first glance, these FAQs are not controversial, a broad interpretation by the Staff nearly eviscerates certain avenues for capital raises for small and emerging companies under Title II.  

To step back a minute, Title II of the JOBS Act exempts certain persons from having to register as a broker if that person merely “maintains a platform or mechanism” that brings together investors and issuers in a Rule 506 offering as long as the person “receives no compensation in connection with the purchase or sale of such security” and doesn’t have possession of customer funds.  Seemed simple enough.  The start-up community was excited about this exemption.  While many start-up companies struggle to raise capital after exhausting their friends and family, many people in the start-up community envisioned this to be a way for for-profit internet portals to develop where issuers could list their offering materials for a monthly subscription fee rather than a transaction-type fee. 

Unfortunately, the Staff has taken a very broad view (and in my opinion an unwarranted view) of the definition of “compensation.”  Question 6 in the FAQ states that in the Staff’s opinion, Congress did not limit the condition to transaction-based compensation (i.e., any compensation based on the actual sale of securities), but to any direct or indirect economic benefit.  Although I don’t think it is possible for anyone to ascertain what Congress’ intent is because the members all vote for different reasons, William Carlton in his Counselor@Law blog provides a nice synopsis of …
Continue Reading SEC curtails JOBS Act broker registration exemption in recent FAQs

What has changed with JOBS ActAfter a flurry of news articles when the JOBS Act became law in April, the news cycle has been non-stop election coverage.  While we all look forward to the end of the political advertisements (especially us Floridians), I wanted to take a moment to bring you up to date on the JOBS Act.  So, where are we now?  What has been enacted and what issues have been identified with the JOBS Act?  I look at each of the provisions of the JOBS Act below:

Title I – Reopening American Capital Markets to Emerging Growth Companies (IPO On-Ramp)

Title I eases the path for companies going public by greatly reducing the regulatory burden for companies with less than $1 billion in revenue.  While I believe that regulatory relief is a great first step, Congress should have made much of the relief permanent for small- and mid-cap public companies.  But, I suppose we should take what we can get. 

One of the most used (maybe universally used) provision of Title I is the ability of an Emerging Growth Company (EGC) to submit its initial registration statement confidentially.  This allows a company that begins the IPO process to stop the process without having released its financial and other confidential information to the public or its competitors.  Beginning in October, the SEC streamlined the confidential submission process by moving from an email submission process to an Edgar submission process. 

One of the biggest complaints with the capital raising process for newly public companies and small- to mid-cap public companies in general is their inability to attract investors and establish a market for their securities.  Several provisions in the JOBS Act enhance the EGC’s ability to market its registered offerings.  For example, investment banks are now expressly permitted to publish or otherwise distribute research reports on an EGC at any time before, during, or after any offering, including an IPO.  Previously, research reports, particularly those by investment banks participating in the offering, had to wait at least 25 days after the offering (40 days if the underwriter served as a manager or co-manager).  Unfortunately, because of the risk of lawsuits, investment banks have not fully embraced this change.  The industry standard that has developed is to wait 25 days after the offering to publish reports.  Despite recent rule changes from FINRA, the investment banks’ regulator, the 25-day waiting period will likely persist for now.

And it was just a matter of time, but …
Continue Reading Update on the JOBS Act: Where are we now?

seed moneyThis is the second part of our Securities Law 101 series.  Because capital raising is such a critical function for emerging start-up companies, we designed this series to introduce their management teams to some of the fundamental concepts in securities law.  We hope that this series will prevent some of the most common mistakes management teams of start-up companies make.  We will periodically publish posts examining different aspects of securities law. 

So your company would like to raise money?  These days it seems like every company is in need of more capital, even banks that are in the business of lending their funds out to others.  Whether your business needs new funding for growth, or more funding to meet regulatory capital requirements, or your company has not been able to secure that loan the business needs, there are a lot of reasons to consider a private placement.  Here, we will explore the use of the private placement to raise funds and the recent changes in securities laws that make this a better alternative than it was before.

We all know that there are many ways to raise money out there (and sales of stock through crowdfunding isn’t one of them yet), but one typical way would be to sell equity in your company to private investors.  All securities offerings must be registered unless an exemption exists.  Therefore, these deals are generally set up as private placements exempt from registration under SEC Rule 506, which allows an unlimited amount of money to be raised from an unlimited number of accredited investors (and up to 35 non-accredited investors).  Accredited investors are those individuals whose joint net worth with their spouse is at least $1 million, excluding the value of any equity in personal residences but including any mortgage debt to the extent it exceeds the fair market value of the residences.  The term also includes individuals with income exceeding $200,000 in each of the two most recent years, or joint income with their spouse exceeding $300,000 in each of those years, plus a reasonable expectation of reaching these income levels in the current year.  There are also other types of accredited investors such as companies with total assets in excess of $5 million.  Consequently, there are several categories of accredited investors out there that can potentially help with funding.

We recommend limiting the offer of securities in a private offering to only accredited investors.  The reason for this is that …
Continue Reading Securities Law 101 (Part II): Avoiding the pitfalls in a private placement

 Social media is all the rage and seems to be rearing its head in just about every aspect of daily life. Turn on any television news program, whether CNN, ESPN, or any other, and you’ll be sure to be brought up to date with who has “tweeted” what to whom or what someone’s latest facebook status update means to the future of the world as we know it. However, there is more to social media than providing additional outlets to those persons and businesses already in the limelight. The fact of the matter is that these new social media tools allow just about anyone to widely disseminate information across the world at little to no cost. Naturally, organizations have realized the power of social media for promoting their cause and for fundraising purposes, particularly charitable organizations and political campaigns, many of which have raised significant amounts through a crowd-sourced approach.

Entrepreneurs have also recognized this potential and have sought to utilize social media for their own capital raising purposes. Unfortunately, many of the entrepreneurs may not realize that raising capital in this manner has securities laws implications which, if not sufficiently addressed at the outset, could be extremely detrimental to their business. Accordingly, these social media-based capital offerings are required to be registered with the SEC or offered pursuant to an exemption from registration. Until recently, there did not exist a specific exemption for crowdfunded offerings. However, the recently enacted Jumpstart Our Business Start-ups Act, or “JOBS Act”, created a crowdfunding exemption as the result of a successful campaign by small business advocates who saw crowdfunding as a useful tool to help small businesses in need of capital while at the same time minimizing investor protection concerns by imposing a small per capita investment limit. Many blogs and business-oriented publications have been creating a buzz about the new crowdfunding exemption and have been touting it as a boon for small businesses in need of capital. But as the title, of this post implies, we feel that this excitement is generally misplaced.
Continue Reading The new crowdfunding exemption: much ado about nothing

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

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…