New JOBS Act – Outlined

My friend, Louis Dienes, at TroyGould Attorneys is planning to distribute early next week an updated summary of the JOBS Act just signed into law.

At the end of March, Louis had prepared the following outline of the new JOBS Act for quick reading.

Here is a shortened link to the TroyGould website page: http://bit.ly/HoRMFE

Here is the page content headed up by Louis’ smiling face.

Client Alert

Louis Dienes

Louis R. Dienes
310.789.1212
LRD@troygould.com
PRACTICE AREAS
Business Finance
Corporate
Emerging Growth Companies
and Venture Capital

Intellectual Property
Mergers and Acquisitions
Securities

The JOBS Act bill is intended to stimulate economic growth by improving access to the capital markets for emerging growth companies     JOBS Act Makes Major Revisions to Securities Laws; Eases Capital-Raising for Smaller Companies

On March 27, 2012, the U.S. House of Representatives passed the Jumpstart Our Business Startups Act (the JOBS Act), following with strong bipartisan support the U.S. Senate’s March 22, 2012, passage of the JOBS Act.  It is widely expected that President Obama will sign the act into law later this week.

The JOBS Act is intended to stimulate job creation and economic growth by improving access to the capital markets for emerging growth companies.

The JOBS Act contains a number of provisions designed to ease capital-raising for private companies, including:

Allows equity-based crowdfunding

  • “Crowdfunding” activities are permitted, so that issuers may raise up to $1 million from a large pool of small investors, subject to limitations based on investor income levels.  Issuers will be allowed to rely on investor certifications of income.
  • An investor with an annual income or net worth of less than $100,000 may invest no more than the greater of $2,000 or 5% of his or her annual income or net worth in any 12‑month period in a given company, and an investor with an annual income or net worth of more than $100,000 may invest up to 10% of his or her annual income or net worth annually (with a cap of $100,000 per investor, per company annually).
  • Companies relying on these provisions must satisfy the following financial statement requirements:
    • Raising amounts up to $100,000 annually requires the certification of the principal financial officer that the financial statements are true and correct;
    • Amounts between $100,000 and $500,000 annually will require review by an independent public accountant; and
    • Amounts above $500,000 annually will require audited financial statements.
  • Offerings will have to be conducted through a broker or a “funding portal.”
    • Issuers may not advertise the terms of the offering other than to direct investors, brokers or funding portals.
    • Issuers will be required to file with the SEC and provide to investors and intermediaries a range of information regarding the offering and the issuer (at least 21 days prior to the first sale to any investor and not less than annually thereafter).
  • Securities issued will be “covered securities” and exempt from state Blue-Sky registration.
  • Securities issued will be subject to transfer restrictions (with limited exceptions) for one year.

Removes the prohibitions on general solicitation or general advertising when conducting private placements under Rule 506 of Regulation D

  • The SEC must remove the prohibition on general solicitation or general advertising when conducting private placements under Rule 506 of Regulation D, thus allowing companies to advertise broadly when conducting private placements.

Increases threshold for Regulation A “mini public offerings”

  • The JOBS Act raises the limit for offerings under Regulation A (the little used small offerings exemption) from $5 million to $50 million and exempts Reg A offerings from state securities laws, so long as the securities are:
    • Offered or sold over a national securities exchange, or
    • Sold to “qualified purchasers” – a term that will need to be defined by SEC rulemaking.
  • The revised Regulation A will require issuers to file audited financial statements annually with the SEC, and the JOBS Act directs the SEC to develop rules relating to periodic disclosure by Regulation A issuers and to develop rules requiring an issuer to file and distribute to prospective investors an offering statement containing specified disclosures.

Initial Public Offering “On-Ramp”

  • The JOBS Act creates a category of issuer called an “emerging growth company,” which is defined as a company with under $1 billion in annual revenue.
  • A company will remain an emerging growth company until the earliest of:
    • Five years after the company’s initial public offering (IPO);
    • When the company becomes a “large accelerated filer,” defined as an issuer with in excess of $700 million in unaffiliated public float;
    • When the company has issued $1.0 billion or more of non-convertible debt in the previous three years, or
    • When the company reaches $1 billion or more in annual revenue.
  • Under the JOBS Act, emerging growth companies:
    • Will be permitted to include only two years of audited financial statements (and two years of Management Discussion & Analysis and selected financial information) in its IPO registration statement, and future filings would not need to go back any earlier
    • Will not be required to provide an auditor attestation of management’s assessment of internal controls for financial reporting created under Sarbanes Oxley
    • Will be exempt from certain accounting requirements, including the audit firm rotation and the supplemental information by audit firm requirements
    • Will be exempt from shareholder approval requirements of executive compensation (“Say on Pay”)
  • Research reports relating to emerging growth companies and research communications with investors and management will be made easier:
    • Investment banks will be permitted to publish research during the pendency of a public offering, even if they are the company’s underwriters.
    • The research analyst conflict of interest rules related to marketing of IPOs and “three-way” communication between research, investment banking and management will not apply.
    • There will be no post pricing quiet period or booster shot restrictions on research reports or other communications.
    • Emerging growth companies and their authorized representatives will be permitted to communicate orally or in writing with Qualified Institutional Buyers and Institutional Accredited Investors to determine interest in a potential offering whether before or after the filing of a registration statement for the offering.
  • The SEC will permit IPO filings by emerging growth companies to be made confidentially.
  • A company may only qualify as an emerging growth company if its first sale of common equity pursuant to an effective registration statement occurred after December 8, 2011.

Increases the number of record shareholders that require an issuer to become an SEC-reporting company

  • The maximum number of shareholders of record that a private company can have before it must register with the SEC as a public company has been increased from 500 to 2,000, so long as fewer than 500 are non-accredited investors, and excluding shareholders who received employee compensation plan securities and “crowdfunding” investors.

When will these changes take effect?

  • The timing relating to these provisions varies:
    • Changes to the number of shareholders of record requiring an issuer to become an SEC reporting company will be effective upon enactment;
    • The SEC must make the changes to Rule 506 regarding general solicitation within 90 days;
    • The SEC  must enact rules facilitating the crowdsourcing provisions within 270 days; and
    • Changes to Regulation A will require SEC rulemaking, but no time limit is set by the JOBS Act.
About TroyGould
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It’s Deja Vu All Over Again

 

(213) 222-8260

dennismccarthy@ariesmgmt.com

Yogi Berra was right:  “It’s Déjà vu all over again.” 

Those of us who’ve been in the financial markets for a number of years have seen Wall Street prices rise and fall periodically.  I can’t predict exactly when they’ll rise or fall but I’m certain they will.

Therefore, when stock prices fall across the board, I don’t panic. I know it’s a cycle; prices will rise again eventually. 

Also, experience has taught me that when stock prices fall, public companies should once again pull out and dust off for consideration certain time tested corporate actions.

It’s kind of like pulling out the snow gear this time of year.  It’s a ritual.

What kind of corporate actions are appropriate to consider when stock prices drop?

First, I would say is stock buybacks. 

Yes, I know that my prior blog post cited a McKinsey Quarterly article reporting that companies don’t actually buy back stock when stock prices are low. 

My point is that public companies should consider a buyback program and, if appropriate, follow through.

Next, not to be paranoid, but public companies should review their takeover defenses.

Particularly now when big companies are awash in cash and their organic growth has slowed, big companies may see acquisitions as a smart means to get growth by putting their cash to work. Heaven knows, cash earns nothing sitting in the bank.

There’re a number of common takeover defenses, some which vary depending upon the company’s state of incorporation.  Common defenses include poison pills, staggered boards, shareholder vote submission and vote threshold provisions.

What I’m recommending here is that a company review with its Board, attorneys, investment bankers and IR professionals just what’s appropriate for the company given its circumstances.

Third, be proactive about M&A.

Rather than sit back and wait for a suitor to call, go ahead, evaluate your competition and all the adjacent players, those companies which are not direct competitors but are nearby.  Make sure your analysis includes all the global players too. It’s a very small world now.

For companies operating in several businesses, you really must evaluate each business independently.  Who knows, this might even lead to a split-off like that of ITT and Sara Lee.   

The goal of this analysis is to determine where there are good fits with your company, where one plus one equals three or more.  Even if you don’t immediately act on the analysis, you’re better off knowing the landscape if a suitor calls.

While you’re looking at alternatives, you should consider whether a “go private” or “go dark” transaction makes sense for your company.  Unfortunately, for many companies, the cost of being public outweighs the benefits.

I can help your company to consider all these actions in a timely and cost efficient manner .

Please contact me with questions or to discuss any of these projects.

OK, So What Are Interest Rates Now?

In response to my “Seems Smart Now” post about the risk of a company funding all its capital needs with short-term floating rate debt, I got several inquiries about the rate levels for longer-term debt.  Please see the following article from Churchill Financial’s blog “On The Left” which presents term debt rates for the 4th quarter 2011 by industry sector (data provided by Thomson Reuters).

3 Yr Term Loan Interest Rates by Industry Provided by Thomson Reuters

Interest Rate Stats Provided by Thomson Reuters

The Corporate ATM

dennismccarthy@ariesmgmt.com – (213) 222-8260

Comparing ATMs and Equity Lines

Small cap companies are increasingly using the “at the market” or ATM offering as a means to raise capital in response to a volatile and unpredictable stock market environment.

An “at the market” offering enables a company to take advantage of a receptive stock market to raise capital either by dribbling out its shares over time or by doing a large offering.

How does a corporate “at the market” offering work?    First, the requirements:

In order to create a corporate ATM, a public company must be traded on NASDAQ or one of the exchanges, NYSE, AMEX, etc.

These public companies can register shares for future sale by filing an SEC “shelf” offering.  This “shelf” permits a company to sell its shares in the future whenever it wishes either by “dribbling out” its shares or by selling them all at once.

The shares sold are fully registered so the buyer can resell them whenever it wishes which expands the universe of potential investors and reduces the liquidity risk.

In a typical corporate ATM, the company picks an investment bank (or banks) to be its agent in selling the shares over time.

The shares are sold “at the market” less a small agent fee.

The company determines the timing and amount of shares to be sold constrained only by what the market will accept.

In theory, the shares are sold to long-term holders but there’s no guarantee.

Let’s compare this with an equity line which is another increasingly common means to raise equity over time.

In an equity line, like a corporate ATM, a company files a registration statement for its planned share sales.

In the equity line, however, the company selects an investor to buy the shares.  There is no agent or agent fee. 

This investor, however, will structure the relationship with the company to limit the investor’s risk.

This typically means that the investor will price the shares at a healthy discount to market and may add warrants to sweeten its return.

Also, the investor typically limits the amount of shares it will purchase at any one time.

An equity line investor is typically not a long-term holder but rather intends to resell the shares at a profit.  Stock market fear of this resale volume has been blamed for depressing an equity line company’s stock price and has slowed the growth of this type of offering.

In contrast, as companies come to learn about the advantages of an “at the market” offering, its use is growing.

If you have any questions about “at the market” or other types of offerings, please contact me.

dennismccarthy@ariesmgmt.com or dmccarthy@cca-ccs.com

(213) 222-8260

Short-term Debt Seems Smart Now

dennismccarthy@ariesmgmt.com

(213) 222-8260

With short-term interest rates at historically low levels, many small cap companies are funding all their capital needs with short-term debt.

Can you blame them?  Small cap companies are borrowing at 2 to 3% floating rates or a bit more if swapped to fixed rates.

Yes, it is a short maturity, one to three years, but the lenders will extend it when due.  They said they would.

 Yes, we all know that old maxim, fund long-term assets with long-term capital but companies are saving so much in interest by borrowing short-term.

What’s the risk, anyway? If rates start to rise, companies can refinance with long-term capital then.

I hear this a lot.  It worries me.  

Interest rates may rise unexpectedly and fast.  When the time comes to lock in long-term capital, there’ll likely be a rush to refinance.

First,  who lends for 5 to 10 years – insurance companies, specialty lenders, the public bond market?

There are limits to how much and how fast these markets can absorb new debt.

Second, what will happen to interest rates?  Spreads on corporate debt have already widened since this summer.  What do you think will happen to interest rates when there’s a rush to refinance?

I’ve been encouraging small cap companies to be prudent, to borrow some capital long-term.  Create a relationship with the long-term debt market now, before the rush.

In the rush to refinance, you’ll want your company to be the first in line because your company is already a known participant in the long-term debt market. 

Now, that’s a smart move.

Please contact me to discuss this or any of my posts. Thank you.

Impending 13D Rule Changes

Lippert Heilshorn & Associates Inc., the well-known investor relations firm (LHA), has published the following interesting summary of the impending rule change to 13D reporting and shareholder buying (www.lhai.com).

Schedule 13D Rules

Large fund managers, activist investors and hedge funds are squaring off against some major corporations and their legal counsel over a proposal to significantly modify the Schedule 13D reporting requirements.  Currently, institutional investors must report to the SEC when they have reached a 5% or greater equity stake in a public company within 10 days of establishing the position.  The proposal sent to the SEC by the prominent law firm Wachtell, Lipton, Rosen & Katz recommends shortening that reporting period to one day, followed by a two-day cooling off before being able to buy more shares.

According to Wachtell, the current system allows “market manipulation and abusive tactics” as investors can buy far more than 5% before the public is aware of its intentions.  The firm cites the case of J.C. Penney, where two hedge funds amassed 27% of the company’s shares before filing a 13D.  Wachtell adds that investors who sell shares in the days prior to the 13D filing lose out on a potential profit, as share prices typically increase following the disclosure.

As expected, funds and activist investors see this as an attempt to unjustly protect underperforming corporate management and, according to a document they presented to the SEC, will “chill activity which helps give life to shareholder democracy.”  They contend that shortening the reporting period increases their cost of building a position; consequently, they would invest in fewer companies and fewer shareholders would receive the premium hedge funds pay.  Some of the nation’s largest money managers and pension funds joined together earlier this year in a meeting with the SEC to argue against the Wachtell proposal.

LHA’s position is that the SEC needs to consider what is best for all investors and the market, as well as look at its requirements for “transparency” as applied to issuers against its requirements of investors and other market participants.  We believe timely disclosure of accurate information leads to efficient markets.  Thus, a shortening of the window between accumulating and reporting a position is positive. On the other hand, a two-day cooling-off period makes no sense if the objective is an efficient market.  We also note that according to Factset Mergermetrics, there have been only two cases since 2008 where hedge funds have accumulated positions greater than 15%, one of which is the aforementioned J.C. Penney.  As one blogger wrote, the Wachtell proposal “may be a remedy in search of a problem.”

Finally, from our investor relations perspective, if information flow is made more efficient by earlier disclosure via a Schedule 13D, the same logic applies to shortening the Form 13F reporting rules, under which institutional investors currently report their holdings on a quarterly basis some 45 days after the quarter end.  Certainly the technology exists to drastically cut that timeframe, which would allow for better communication with current shareholders.

Timing Stock Buybacks

dennismccarthy@ariesmgmt.com

(213) 222-8260

The McKinsey Quarterly has come out with another interesting article, this time about stock buybacks.

In this article, the authors suggest that most company buyback programs don’t work the way they’re intended, to buy back stock when prices are low.

Most companies end up buying back stock at high prices, not at low prices.

It seems that companies, like many investors, are not good at market timing.

I suppose it’s human nature that companies initiate buyback programs when the company is doing well but the stock price seems to lags the fundamentals.

The irony is that companies typically don’t maintain buyback programs when a company’s situation is less favorable and its stock price has dropped.

The bias, therefore, is to buy back stock only at high prices.

The authors calculated that companies’ buyback programs would have been more successful if applied consistently over time, in good times or bad.

The SEC permits these programs, like 10(b)5 programs, to accomplish what the authors suggest.

I noticed in the article’s footnotes, however, that other academic studies have shown that smaller companies have used one-time purchases, like tender offers, to successfully buy back stock at low prices.

I can help you to evaluate which kind of stock buyback program best fits your company and on setting up the program.

Again, my name is Dennis McCarthy. Please contact me to discuss.  Thank you.

dennismccarthy@ariesmgmt.com

(213) 222-8260

www.capitalmarketalerts.com

Offer Yield Securities – What Investors Want

dennismccarthy@ariesmgmt.com

(213) 222-8260

This is the second in a series of posts about how a company can best  respond to our current capital markets environment.

Frequently, our clients express their frustration that the equity market is so volatile now that investors seem reluctant to act.  Many investors are unsure whether they’ll get a positive return on their investment.

This has driven many to seek out securities with a yield, maybe interest on debt or a dividend on equity.

Seeing this, we’ve come up with a transaction which responds to investors’ current preferences.

We’ve advised companies to offer their common shareholders a new yield-oriented security in exchange for their common.

We’ve tailored the exchange offers to fit our client’s specific circumstances, there are a number of variations available.

The key is that our clients offer what is in great demand, a yield security, in exchange for what seems less in demand, plain common stock.

We’d be happy to discuss this idea with you to determine whether it works in your situation. 

Please call me or email me.  Thank you.

dennismccarthy@ariesmgmt.com

(213) 222-8260

Capitalmarketalerts.com

Living with No Growth

dennismccarthy@ariesmgmt.com

(213) 222-8260

Lately, I’ve been struggling with what it will mean to live in a world of slow to no growth.

First, I tried denial.   There can’t be a world without growth.

Pick up any company annual report or analyst research report, they always project growth.

It’s in our Wall Street DNA.

We need growth to cover our costs, to justify higher salaries, to reward our shareholders?

But, what if, as is now widely expected, we face a global slowdown for our near-term future?

How do we behave in a slow to no growth world?

We’re going to have to rethink many of our basic assumptions. Here are a couple which come to mind.

First, I think cost control will become more critical without revenue growth to bail us out.

Will this trigger a power shift in companies?  Will the path to become CEO now run through accounting?

Second, I think that, without growth, current cash flow is king.  There’ll be more skepticism about the promise of future cash flow.

Will this spark a rash of corporate acquisitions as large, cash-flowing companies gobble up companies with no or low cash flow?

On the financing front, with slow to no growth, will companies borrow more to get as much financial leverage as possible.

Or, will equity securities change?  Will we see more companies begin to pay dividends or do regular stock buybacks to pay a current return to their equity shareholders.

These are just a few ideas.  There are many more potential implications.

Please contact me to discuss the capital markets implications for your company.

My contact information is below. Thank you.

dennismccarthy@ariesmgmt.com

(213) 222-8260

Capitalmarketalerts.com

Slow Road Ahead

Living with slow to no growth

What now? Where can I get capital?

dennismccarthy@ariesmgmt.com

(213) 222-8260

Well, it’s the Fall of 2011, Wall Street has been highly volatile as fears of a new recession and disarray in the Eurozone dominate the news.

As I talk with clients and friends, the discussion always comes around to the question “now what?”  What if my company needs capital?  Where can I go?

First, there’s debt.

The debt markets are open for business.  Based on my experience, finance companies and banks are lending.  The public debt market is open too.

A borrower’s projections may get more “stress testing” now but interest rates are historically low.

Second, there’s asset sales

In part because debt is available, buyers are active. If your company needs to raise cash, you might consider selling a business.

I know companies who’ve raised cash in this manner.  They’ve gotten good prices for the businesses sold and are now deploying the money. 

Third, large cash-rich corporations may be a source of capital for your company. 

Sometimes these relationships take the form of direct equity investments into your company but many times they take the form of JVs, licenses, cash advances or even simple grants.

These deals work when the relationship benefits the large company’s business, even if indirectly. 

Lastly, don’t forget equity.

You may wish for higher prices when selling equity but you should also be pragmatic.  You should ask yourself “how critical is the having cash now?  What is the investment opportunity?  Does it justify the cost of raising equity now?”

Again, my name is Dennis McCarthy.  I’m happy to discuss funding options with you.  My contact information is below.