JOBS Act

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FDIC Statement of Policy on Bank Stock OfferingsWith the costs of compliance on the rise, we are seeing some significant consolidation in the banking industry, particularly among community banks. In a recent article on www.bankdirector.com, Rick Maroney writes that although bank M&A has been tepid thus far in 2013, some key drivers of M&A activity are starting to emerge and he predicts that we are likely to see increased merger and consolidation activity in the industry as smaller banks need to grow to remain viable. Additionally, the heightened regulatory capital requirements that are expected to be adopted as a result the Basel III accord may be an additional driver of consolidation in the banking sector.

In these merger transactions, it is fairly common for acquiring institutions to offer its common stock to target shareholders as part of the consideration to be paid. Depending on the organizational structure of the acquiring institution, there are a few options for offering stock to target shareholders as merger consideration. If the acquiror is a bank with a holding company structure, the stock portion of the merger consideration is almost always common stock of the holding company. The most significant issue when offering bank holding company stock is that the transaction must either (i) be registered on an S-4 registration statement, which involves substantial time and cost for the acquiror and would subject the acquiror to periodic reporting requirements under the Securities Exchange Act of 1934 or (ii) alternatively, the holding company stock must be issued pursuant to an exemption from registration (typically the Rule 506 safe-harbor for the Section 4(a)(2) private offering exemption). Many smaller banks, to the extent possible, will attempt to avoid registering the transaction due to the high costs and rely on an exemption to registration. If an acquiror considers privately placing holding company securities in a merger transaction, there are a number of considerations to address, some of which may be slightly alleviated by the recent changes under the JOBS Act as described in Kobi Kasitel’s recent blog post regarding stock issuances in M&A transactions after the JOBS Act.

For state-chartered banks regulated by the FDIC that do not have a holding company, the issuance of bank stock in connection with an acquisition may, at first glance, appear simpler. Under section 3(a)(2) of the Securities Act of 1933, securities issued or guaranteed by a bank are exempt securities and may be issued
Continue Reading The FDIC should consider updating its outdated statement of policy on bank stock offerings

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

Avoid 506 Offering TrapsAs we previously blogged about, the SEC finally adopted final rules to remove the ban on general solicitation and advertising in Rule 506 offerings.  The removal of the ban is a huge change in the way private offerings may be conducted and welcome relief to the thousands of issuers each year who have tapped out their “friends and family,” but yet are too small to attract private equity funds.  With these new changes, however, bring challenges in making sure you conduct a “new” Rule 506 offering (a/k/a Rule 506(c) offering) correctly.

So, with the caveat that best practices are still being developed for Rule 506(c) offerings and issuers and attorneys are still parsing through the new rules, here are five potential pitfalls to avoid:

1.         Being too lenient as to reasonable steps.  Beginning in mid-September, Rule 506(c) offerings will allow general solicitation and advertising as long as you sell securities only to accredited investors and take reasonable steps to verify that the purchasers are accredited.  Issuers are faced with the prospect of defining for themselves what “reasonable steps” are.  That is good and bad.  What issuers can’t do is simply take the easy way out – issuers bear the burden of proving that its offering qualifies for a registration exemption.  The final rules release from the SEC gives a lot of suggestions about what reasonable steps could entail, but each case is fact and circumstance based.  You should also note that the traditional method of self-certification won’t cut it for purposes of Rule 506(c).  Fortunately, the SEC also provided four specific “safe harbors” that are each deemed to be reasonable steps:
Continue Reading Avoiding five potential traps in “new” Rule 506 offerings

Advertising rules may still limit selling securitiesAlthough the SEC recently finalized rules that will remove the ban on general solicitation and advertising for certain private offerings under Rule 506 of Regulation D, it does not mean that issuers will have free reign and complete discretion over their use of advertisements. That is, issuers looking to locate potential investors through advertising after the new rules become effective in September may still be subject to other laws that will restrict the manner in which they advertise or solicit investments.

For example as Keith Bishop over at the California Corporate & Securities Law Blog points out in a recent post that certain other state laws may be implicated with these types of advertisements. According to the post, in California, Rule 260.302 of the California Code of Regulations states, in part, that:

 An advertisement should not contain any statement or inference that an investment in the security is safe, or that continuation of earnings or dividends is assured, or that failure, loss, or default is impossible or unlikely.”

Thus, it is possible that states could use advertising laws and regulations to regulate, to some extent, private offerings under the new Rule 506. However, the question remains, as to how far these types of state laws and regulations can go? The answer to this question is
Continue Reading Removal of ban on general solicitation and advertising won’t be a license for issuers to say anything they want

506 offerings to raise moneyThe SEC issued Final Rules last week that effectively eliminate the ban on the use of general solicitation and general advertising in connection with certain securities offerings performed under Rule 506 of Regulation D. This is a major shift that will allow issuers to use general solicitation and advertising to promote certain private securities offerings. Rule 506 is widely used by many startup and early stage companies to provide a safe harbor from registration under the 1933 Act. The elimination of this ban should have very positive effects for startup and early stage companies. Hopefully it will facilitate capital raising for these companies and thus begin to allow some of the long-awaited positive impacts that we all expected from the JOBS Act. These Final Rules will become effective in mid-September of this year.

The SEC also issued a Press Release and a Fact Sheet that contain helpful information on the Final Rules.

These Final Rules provide amendments to Rule 506 and Rule 144A under the 1933 Act. I will focus on the Rule 506 amendments since they are most relevant to startup and early stage company financing situations. These Rule 506 amendments allow an issuer to engage in general solicitation and advertising in connection with the offering and sale of securities under Rule 506 provided that all purchasers of the securities are accredited investors under the Rule 501 standards and that the issuer takes “reasonable steps” to verify each investor’s accredited investor status. The Rule 506 amendments provide a non-exclusive list of methods that issuers can use to verify the accredited investor status of natural persons. These amendments also amend Form D to require issuers to tell the SEC whether they are relying on the provision that permits general solicitation and advertising in a Rule 506 offering. The Final Rules also contain some very interesting economic and statistical data on Rule 506 offerings and participation by accredited investors.

In a related development, the SEC issued a Final Rule on July 10, 2013 that amended
Continue Reading By removing ban on general solicitation SEC finally moves the JOBS Act forward

SEC Chair Mary Jo WhiteThe mission of the U.S. Securities and Exchange Commission (“SEC”) is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. This sounds great, but how does the SEC actually carry out its mission? The answer lies in the SEC’s oversight and regulation function of the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. A key player in how the SEC exercises this function is the SEC Chair, essentially, the SEC’s chief executive.

On April 10, 2013, the SEC announced the swearing in of Mary Jo White as the 31st Chair of the SEC. So who is Mary Jo White? White is a former federal prosecutor, specializing in complex securities and financial institution frauds and international terrorism cases from 1993-2002. After working as a prosecutor, White became a partner at Debevoise & Plimpton where she represented high-profile clients, including JPMorgan Chase & Co, former Bank of America Corp. CEO, Ken Lewis, UBS AG and accounting giant, Deloitte & Touche LLP.

So what’s not to like? The confirmation from the Senate came with little dissent: it voted unanimously in her favor, and its Banking Committee voted 21-1 in her favor. The one nagging criticism of White stems from her ability to effectively navigate conflicting interests. Essentially, some critics fear that her ties to Wall Street will cloud the SEC’s decision-making with respect to these institutions’ behavior during the 2007-09 financial crisis.

Importantly, because of White’s vast experience as both a federal prosecutor and Wall Street defense lawyer, she must, as SEC Chair, recuse herself from investigating former clients for at least a year. Notably, after defending JPMorgan Chase for its role in the financial crisis, for example, White could have to sit out an SEC investigation into the bank’s recent $6 billion trading loss.

Even without consideration of White’s association with Wall Street, she takes over at the SEC at a time of transition, and is faced with grave challenges. According to many, the SEC has been “stuck in a rut” since former SEC Chair, Mary Schapiro, resigned in December of 2012, leaving the SEC’s five-member panel divided between two Democrats and two Republicans.  But White is starting to make changes.  Recently, she appointed Keith Higgins as the new Director of Corporation Finance and appointed acting director, Lona Nallengara, as SEC chief of staff.  Also, President Obama nominated two U.S. Senate aides to replace
Continue Reading New SEC Chair: Mary Jo White

Regulations continue to be burden on public companiesAlthough you may have missed the fireworks and the parade, we celebrated the one year anniversary of the JOBS Act on April 5th.  Of course you wouldn’t have been alone if you missed the big celebration because, unfortunately, despite the initial hype surrounding the JOBS Act, not much has happened.  The media has chastised the JOBS Act for not fulfilling its early promise.  Most of the innovative provisions of the JOBS Act remain unimplemented by the SEC such as the relaxation of the ban on general solicitation on private offerings, crowd funding, and the improvement to Regulation A.  But even Title I (generally referred to as the “IPO on Ramp”), which was effective over a year ago, hasn’t had much effect.  In fact, IPOs, according to Jay Ritter at the University of Florida, have actually decreased for the so-called emerging growth companies.

How can this be?  While there can be numerous factors for why IPOs continue to remain elusive (costs of regulation and a poor economy are the top factors), other factors such as a rising stock market and pent up demand for IPOs should be compelling companies to go public.  Or is it possible that the cost of regulation that has been piled on since the fall of Enron trump everything else?

When Congress passed Title I of the JOBS Act, Congress recognized that public companies have been facing increased burdens for being public.  Although the causal relationship was suspect at best, Congress determined that over regulation was responsible for the severe drop off in IPOs from the 1990s through the 2000s.  While I might suggest that the dotcom bubble bursting may have played a part in the decrease in IPOs, I would agree that the unrelenting regulation that has come out of Congress over the past decade (Sarbanes-Oxley, Dodd-Frank) as well as rulemaking from the SEC itself (executive compensation disclosures) must have had some effect.

As a reminder, Title I of the JOBS Act, among other things, reduces executive compensation disclosures.  Specifically, emerging growth companies (companies with less than $1 billion in revenues) are exempt from holding “Say-on-Pay” and “Say-on-Golden Parachutes” votes, disclosing the two controversial executive compensation pay ratios required under Dodd-Frank, and providing a Compensation Discussion and Analysis (CD&A). Other executive compensation disclosure is also shortened by reducing the number of named executive officers, reducing disclosure from three to two years, and eliminating certain compensation tables.  In other words, Title I of the JOBS Act was designed to address over regulation of executive compensation for public companies.

While this was a great start by Congress, companies haven’t taken advantage of Title I because
Continue Reading Executive compensation disclosure is too great a burden for issuers

New platform for private companiesNasdaq OMX Group, Inc. announced today that it will enter into a joint venture with SharesPost, Inc. to form a marketplace for the trading of shares of unlisted companies. This is an interesting and cutting edge move that solves some problems for both Nasdaq and SharesPost. This new marketplace should be very positive for rapidly growing and large private companies which want to allow some trading in their shares but which are not ready to become publicly traded companies. It will also give investors opportunities to buy the shares of large private companies before the shares of these companies become publicly traded. According to a Nasdaq press release issued today this new marketplace, which will be called The Nasdaq Private Market, will “provide improved access to liquidity for early investors, founders and employees while enabling the efficient buying and selling of private company shares”. 

Nasdaq will own the majority of and will control this joint venture, but the joint venture will use SharesPost’s existing trading platforms and infrastructure. The joint venture will be run by SharesPost founder Greg Brogger. Depending on the speed of regulatory approval, this new market for unlisted shares could be operational later this year. 

This move makes good sense for Nasdaq because it should help them to begin to rebuild their credibility with up and coming companies and the technology industry. These market segments have traditionally been Nasdaq’s strength, but Nasdaq has been losing company listings (even from technology companies) to the NYSE and other exchanges. Nasdaq’s problems in attracting new technology company listings may be due to the significant negative issues that occurred in the initial public offering of Facebook’s shares last year. Nasdaq took a huge hit to its credibility as it was roundly blamed and criticized for the technical glitches that occurred with the Facebook offering. Some estimates say that major market makers and broker dealers lost more than $500 million in the Facebook IPO because of Nasdaq’s technical glitches. Nasdaq will also soon feel the economic effects of this matter as it reportedly offered as much as $62 million to settle associated claims and it now faces a possible $5 million fine from the SEC. For a good discussion of the current status of Nasdaq’s Facebook offering woes, see Charlie Osborne’s post on ZDNet. 

This new relationship should also be very beneficial to SharesPost. SharesPost, which began operations in 2009, experienced substantial success in facilitating trading of shares of unlisted companies. The company provided the platform for trading in unlisted securities of high visibility technology companies such as LinkedIn and Facebook before these companies’ securities became publicly traded. SharesPost eventually encountered regulatory scrutiny, however, and the SEC brought an action against the company for failure
Continue Reading Potential good news for growth companies: Nasdaq to set up new private market for unlisted stocks

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