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SEC may change identity of angels
Illustration by Royce Bair

Potential Changes.

Accredited investors have long been critical participants in private financing transactions, and the success of most private financings is largely determined by the participation of these investors and the availability of their capital. State and Federal securities laws have been written or amended to foster and facilitate investment by these accredited investors. Based on recent developments, the standards for qualification as an accredited investor may be changing, and these changes could pose problems for companies seeking financing.

The current requirements for accredited investor status are contained in Rule 501(a) of the 1933 Act. The most commonly used standards for individual investors are a $200,000 annual income (or $300,000 combined income with a spouse) or a $1,000,000 net worth (excluding the value of the investor’s primary residence). Other than the exclusion of the investor’s primary residence (which became effective in 2012), these standards have been in place since 1982 without any changes to reflect the effects of inflation during that period.  

Based on these current standards, observers estimate that there are approximately 8.5 million accredited investors in the United States. Some critics have asserted that this number is far higher than it should be, and that many of these people only qualify as accredited investors because
Continue Reading Accredited investors – potential changes and some helpful guidance

States creating own exemptions for crowd funding
Photo by Josh Turner

The JOBS Act’s crowdfunding provisions were once one of the most eagerly anticipated items contained in that Act. Many companies and their advisors had high hopes that these crowdfunding provisions would open up new arenas for financing smaller companies while easing the costs and challenges associated with securities regulatory compliance. These hopes and dreams have been substantially curtailed as the SEC’s proposed crowdfunding rules (issued in 2013) did not provide the anticipated relief. The SEC received a significant number of comments on these proposed crowdfunding rules, and these comments were predominantly critical due to the perceived regulatory and cost burdens that the proposed Rules seemed to contain.

Hope springs eternal, however, and many people are still eagerly awaiting the SEC’s final crowdfunding regulations to determine if the SEC will adopt a more reasonable position that may be useful to small companies seeking financing. The Federal crowdfunding exemption from registration will not be effective until the SEC issues these final regulations. Many people just want to know what they are actually dealing with here and whether crowdfunding will offer any viable opportunities for small company financing. Somewhat surprisingly given the significant amount of attention and publicity that crowdfunding has generated, the SEC still has not issued those final regulations despite the JOBS Act’s deadline. This situation has caused a significant amount of frustration in the corporate finance community.

Given the uncertainty regarding the status of Federal crowdfunding regulation, some states have seen an opportunity and have taken somewhat bold steps in establishing crowdfunding exemptions on the state level. The states moving ahead of the SEC is somewhat unusual, but it appears that the initial impact of these state crowdfunding initiatives may be economically beneficial to these states.

The predominant model for these state crowdfunding structures is the creation of an intrastate crowdfunding exemption from registration. The states have been very creative in their efforts, as they appear to have used the strong desire for a useful crowdfunding regulatory structure to create state structures that will help to provide economic growth in the states. This is also very compatible with the nature of crowdfunding – since many crowdfunding projects are smaller and localized, they may not be affected by being required to be contained in any one state.

The participating states have mainly modeled their crowdfunding regulations to be
Continue Reading States take the lead on crowdfunding

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

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

HR 3623 does not provide relief
The Great Flood of 1927 by Gil Cohen

In recent weeks, a bill has been reported out of the House Committee on Financial Services promising relief to companies going public.  While I applaud their intentions, this bill will not have much impact, and if anything, is a solution to problems that…

Last shot for JOBS Act?
Photo by Ksionic

The Jumpstart Our Business Startups (JOBS) Act was enacted on April 5, 2012 with much fanfare and high expectations. The JOBS Act was designed, in part, to help “Emerging Growth Companies” (annual revenues less than $1 billion) gain greater access to growth capital while reducing regulatory restrictions, compliance requirements, and costs. The JOBS Act was welcomed by a business community which was just emerging from a brutal recession and starved for growth capital. The general reaction to the JOBS Act has been disappointment and a feeling that the JOBS Act has failed to live up to its advance billing. With the proposed Regulation A+ still to come, however, the JOBS Act may at last provide some real financing opportunities for private companies seeking growth capital. For background on the JOBS Act see our Emerging Growth Companies Task Force page.

There is no doubt that some good things have come out of the JOBS Act as its various rules have become effective. The elimination of the ban on general solicitation and advertising for some private offerings may prove very helpful to companies trying to find potential investors. The confidential filing of initial public offering documents (which allows a company to file IPO documents and work with the SEC on a confidential basis to resolve problems before the documents become public) has been extremely popular. The maximum number of shareholders that a private company can have before it must register and report as a public company has increased. This allows large private companies to stay private longer, avoiding the dilemma that Facebook and other companies faced. Finally, issuers of securities are now allowed to “test the waters” in some circumstances to determine potential investor interest in an offering before undertaking it. All of these are positive items, but they have not caused a significant increase in successful financing activity.

So what is Regulation A+ and why do we care? This proposed Regulation is one of the last major rulemaking proposals available under the JOBS Act. The SEC voted on December 18, 2013 to propose new rules under the existing Regulation A that would substantially increase the potential for substantial financing transactions conducted under Regulation A. While we haven’t seen the final rules and likely won’t see them for some time, these proposals have been much anticipated in the corporate finance community because of the
Continue Reading Regulation A+: Last gasp of the JOBS Act

SEC gets an A+ for proposed Regulation A+ rulesOne of the most anticipated items from the JOBS Act enacted in April 2012 was the so-called Regulation  A+ –  a new and improved exemption that would allow issuers to raise up to $50 million in a 12-month period through a “mini-registration” process that is similar to that of rarely used Regulation A exemption. On December 18, 2013, the SEC issued its proposed rules which were mandated under Title IV of the JOBS Act.

The proposed rules would amend the current Regulation A to create two tiers of exempt offerings. Tier I would become the current Regulation A exemption, which maintains the $5 million offering limitation. Tier II would implement Regulation A+ and would permit offerings of up $50 million in any 12-month period.

Since its implementation years ago, Regulation A has not received widespread use, primarily because it did not provide for preemption of state securities laws and also had a relatively modest dollar limitation on the amount that could be raised. However, Regulation A+ (i.e., Tier II) promises to be a significant improvement over the old Regulation A because of the increased dollar limitation and the other benefits, including the potential preemption of state securities laws and regulations in certain circumstances.

All 387 pages of the proposed rules can be read on the SEC’s website, but a summary of these proposed rules are provided below for those not inclined read the entire release.

Issuer Eligibility

As proposed, Regulation A+ would be available only to United States and Canadian companies that have their principal place of business in the U.S. or Canada. Like the current Regulation A exemption, the Regulation A+ would not be available to certain types of issuers, such as companies that are already SEC reporting companies, registered investment companies and “blank-check companies.” However, under the currently proposed rules, shell companies may avail themselves of the Regulation A+ exemption so long as they are not blank-check companies.

Eligible Securities

The securities that may be offered under Regulation A are limited to equity securities, debt securities and debt  securities convertible into or exchangeable into equity interests, including any guarantees of such securities, but would exclude asset-backed securities.

Investor Limitations

As proposed, investors in a Tier II offering may acquire no more than
Continue Reading The SEC gets an A+ with the proposed “Regulation A+” rules

What is the right balance between investors and issuers?On the same day that the SEC proposed rules that may make capital raising easier for companies by repealing the ban on general solicitation for private offerings, the SEC also proposed rules that may make it much more difficult to raise capital.  Why would they do this?  The repeal on the ban on general solicitation was required by the JOBS Act, but there is a lot of concern about fraud without the ban in place.  And while the SEC’s mission is to maintain fair, orderly, and efficient markets and facilitate capital formation, the SEC has a third mission: to protect investors.

Here is a highlight (or a lowlight depending on your perspective) of what is being proposed:

  • Require the filing of a Form D at least 15 calendar days in advance of using any general solicitation (rather than the current requirement of 15 calendar days after the first sale of securities);
  • Require the filing of a “closing amendment” to Form D within 30 calendar days after the termination of an offering (there is no current requirement to file a final amendment);
  • Increase the amount of information gathered by Form D such as the number of investors in the offering and the type of general solicitation used in the offering;
  • Automatically disqualify an issuer from using Regulation D for one year if the issuer failed to file a Form D (currently no such harsh consequences);
  • Mandate certain legends on all written general solicitation materials; and
  • Require the filing of general solicitation materials with the SEC (temporary rule for two years)

Now, while these are still only proposed rules and the comment period continues through November 4, 2013, there has been a huge outcry from the startup community.  Critics of these proposed
Continue Reading Proposed changes to Regulation D: Are these really so bad?

The next big tech IPO is in the works. Twitter, the hugely popular short message social media site, announced last week that it has filed a Form S-1 registration statement with the SEC in connection with the company’s proposed initial public offering. This IPO has been rumored and anticipated for some time, and it will generate substantial interest among members of the tech and investment communities. This offering may not have the impact of last year’s Facebook IPO, but it will be close.

Twitter appropriately announced its planned IPO in a tweet on September 12:

Twitter announces IPO in tweet

(followed by a “get back to work” tweet):

Twitter IPO

This offering should proceed more smoothly and productively than the ill-fated Facebook IPO. The various participants in the IPO process learned a lot from the significant problems that the Facebook IPO encountered, and in some cases these lessons were driven home by significant monetary penalties (See my prior blog post regarding the Facebook IPO and its problems). No one wants a repeat of that situation, especially with such a high profile IPO. Twitter has also always impressed me as a more thoughtful and rational company than some in the tech space, and this should carry through in their IPO.

In its IPO filing process Twitter took advantage of one of the key available provisions of the JOBS Act. Section 6(e) of the Securities Act allows an “emerging growth company” to file an IPO registration statement on a confidential basis. This provision is designed to give the company and the SEC time to identify and work through potential problem areas or issues before investors see any information. It also allows companies to keep material nonpublic information confidential until late in the SEC review process. If the company decides not to proceed with its IPO, it has avoided the public disclosure of this information. If the company and the SEC can work out these problems and issues satisfactorily, the registration statement (amended as necessary) eventually becomes available to the public and the IPO process goes forward. This should make the registration process very quick and efficient after it emerges from the initial SEC review.

This confidential filing opportunity has been popular with emerging growth companies. According to an Ernst & Young JOBS Act study, approximately 63% of eligible companies used this process during the first year of its availability under the JOBS Act. The SEC has published a set of helpful FAQ’s which clarify many components of this confidential filing process.

Twitter added one interesting change to this
Continue Reading Twitter announces its IPO in a tweet