JOBS Act

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General Solicitation and Stock SalesFor securities issuers, the most widely used exemption from registration is the private offering exemption in Section 4 of the Securities Act. Formerly referred to as the “Section 4(2)” exemption, the enactment of the JOBS Act in April of this year fixed the section numbering in Section 4 of the Securities Act which, until now, had not conformed to the alternating number-letter-number format contained in the other sections of that Act. Thus, the old 4(2) private offering exemption is now the Section 4(a)(2) exemption, although many issuers and practitioners have failed to realize this administrative change as evidenced by recent Form 8-K filings pursuant to Item 3.02 which still make reference to the “Section 4(2)” private offering exemption as the applicable exemption relied upon for their respective unregistered securities offerings.

But aside from this administrative fix, has the JOBS Act actually changed the exemption requirements itself? Arguably it has as I will hypothesize in this post.

Most securities professionals are aware that the JOBS Act requires the SEC to amend Rule 506 to permit general solicitation and advertising in connection with a private offering in which all purchasers are “accredited investors.” Many people mistakenly refer to Rule 506 as an “exemption” but it is not actually an exemption per se. Rather, the SEC adopted Rule 506 to provide a safe harbor to give definitive guidance to issuers who undertook private placements of their securities under then-Section 4(2) (now Section 4(a)(2)) as to what criteria must be satisfied to provide certainty to the issuer that their offering complied with the private offering exemption. Simply put, if you meet the requirements of Rule 506, then the offering is exempt pursuant to Section 4(a)(2).

Prior to the adoption of Rule 506 which established definitive criteria for compliance with the private offering exemption, the 4(a)(2) exemption standards were developed through case law over the years. The famous Ralston Purina case and its progeny focused on three primary factors to consider in determining whether the private offering exemption applied based on
Continue Reading Did the JOBS Act unintentionally change the statutory private offering exemption?

Small tick sizes are hurting the markets
Photo by Luigi Rosa

Mr. Steiner is the Chief Operating Officer and Managing Director – Investment Banking at Ladenburg Thalmann & Co. Inc.  The views expressed in this posting are Mr. Steiner’s personal views and should not be attributed to Ladenburg Thalmann & Co. Inc., its employees, affiliates or subsidiaries or to Gunster.   

While the Jumpstart Our Business Startups Act (the “JOBS Act”) is a well-intentioned effort to assist smaller companies in their ability to raise capital (and ultimately increase hiring), it falls short with respect to one of the most pressing problems facing capital formation. One can not argue with relaxed rules in several areas such as (i) permitting solicitation for certain private placements; (ii) reducing the reporting requirements for Emerging Growth Companies (generally, newly public companies with less than $1 billion in annual revenue); and (iii) improving the largely unused Regulation A; however, while the burdens of becoming publicly traded have been eased for some smaller companies under the JOBS Act legislation, a major issue that was not addressed is the inability of small and micro-capitalization public companies to fully gain the benefits of their publicly traded status. Or more to the point – it might be easier to go public via the IPO process, but why be public in the first place? 

Regardless of size, a company’s status as being publicly traded is an asset. The manner in which a company maximizes the value of its public status is by maximizing the liquidity in its traded securities in the public markets. This results in easier, more predictable capital raising, the ability to use its stock as currency for acquisitions and hiring of key personnel, and less opportunity for “game-playing” by the unsavory
Continue Reading GUEST BLOGGER: Tick size remains large obstacle for middle market public companies

Business CombinationsCash may be king, but the use of stock to buy a target company can be very advantageous.  The practice of using stock to purchase a target company never really went away, but it did become less desirable to target company shareholders during the recent economic downturn.  With stock values dropping and access to credit diminishing, mergers and acquisitions that did close were often done in cash.  However, as markets have become more stable and many stocks have risen to higher valuations, purchasers are looking more and more to again use their stock to buy companies.

In a typical merger, the question of whether to use cash, stock, a combination of the two or some other form of consideration is a business decision to be negotiated by the purchaser and target companies, with the consultation of professionals. Despite the recent economic downturn and its effect on market volatility, reduced market volatility over the last three years, combined with a legislative push to assist small businesses in raising capital, has made stock a more attractive form of consideration for buyers and sellers alike.

There are many benefits to using stock in a deal.  Perhaps the most important benefit stems from qualifying the transaction as a tax-free “reorganization,” provided that the transaction is structured properly. As a tax-free reorganization, the target shareholders would generally not have to realize gains on the exchange of their stock for the purchasers stock.  In contrast, target shareholders would normally have to realize gains to the extent they receive cash for their shares in a merger.  So the use of stock in a deal can be very advantageous to seller shareholders for tax reasons.

The use of stock consideration can also assist in addressing possible absolute and relative valuation issues by allowing the parties to negotiate with an eye toward the market. Further, stock consideration can help to minimize deal risks that arise in transactions where
Continue Reading Has stock returned as the currency of choice in mergers and acquisitions?

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?

Regulation A+, one of the most overlooked provisions of the JOBS Act, promises to be the best new way for private companies to raise money without the headaches of going public or the restrictions of private offerings.  As part of the JOBS Act, the SEC was tasked with creating a new offering exemption that has been dubbed “Regulation A+” due to its improvement upon the current Regulation A exemption.  The upgrades should take little-used Regulation A and transform it into the primary way for private companies to raise capital in the U.S.  In fact, I believe that Regulation A+ will end up having the opposite effect of the stated intent of the JOBS Act, which is to have more companies go public.  In contrast, Regulation A+ will allow smaller and mid-cap public companies to more easily raise capital without having to going public.  As noted in the recent GAO review of current Regulation A, investment banks that had stayed away from Regulation A offerings in the past because of the small offering maximum will now be attracted to the new exemption.

In the past, Regulation A has suffered from some serious limitations.  Particularly, the exemption only allows for $5 million to be raised in any 12-month period.  This amount is too small for many companies, given the offering costs.  In addition, the securities in Regulation A offerings do not qualify as “covered securities” under the National Securities Markets Improvement Act of 1996, which would have exempted them from state securities laws.  Thus, a Regulation A offering still has to comply with time consuming and expensive state “Blue Sky” law requirements.  Regulation A also requires SEC review of an issuer’s offering materials (generally, a scaled-down version of a full registration statement).  This offering statement, which includes a notification and a fairly extensive offering circular and exhibits, still requires a substantial outlay, despite being less expensive than a full registration statement.

So companies ultimately turn to other exemptions to raise capital.  The main exemption used is SEC Rule 506, which allows an unlimited amount to be raised, but places limits on solicitation, sales to non-accredited investors and resale (elimination of these solicitation limits are subject to current proposed rules).  With the creation of new Regulation A+, however, we should see the SEC throwing out the bad, and keeping the good, parts of Regulation A.  As a result, I believe Regulation A+ will overtake Rule 506
Continue Reading Regulation A+: Raise the capital you need without the hassle or expense

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

JOBS Act

Depending on your perspective, lifting the ban on general solicitation and advertising for private offerings is one of the most anticipated or feared provisions in the JOBS Act.  Consumer protection groups are aghast at the potential of fraud stemming from startup companies hawking their stock to unsophisticated investors.  Pro-business groups are ecstatic that someone finally had listened to their complaints about the trouble entrepreneurs have raising capital once they have exhausted their family and friends.  Well, after today’s Securities and Exchange Commission meeting, it looks like the pro-business groups got a further victory.  Or did they?

This morning, the Commission proposed rules to implement Section 201 of the JOBS Act to remove the prohibition on general solicitation and advertising in private offerings when all purchasers are accredited investors.  While removing a ban seems relatively simple, Congress instructed the Commission to write rules to “require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.”

What constitutes “reasonable steps” is the only difficult interpretation that the SEC had to make. There was some concern that the “reasonable steps” could be as harsh as requiring investors to prove their net worth through bank statements; however, the proposed rulemaking takes a much more flexible approach.  The proposed rules require issuers to make an objective determination based on certain factors:

  • The type of purchaser and the type of accredited investor that the purchaser claims to be;
  • The amount and type of information that the issuer has about the purchaser; and
  • The nature of the offering, including the manner in which the purchaser was solicited to participate in the offering and the terms of the offering such as the minimum investment amount.

The Commission didn’t set forth specific required verification methods because it felt a “one-size-fits-all” approach would be overly burdensome, impractical and ineffective.  At first glance this seems like a very issuer friendly approach. 
Continue Reading Elimination of ban on general solicitation and advertising may leave some questions unanswered