Smaller Company Reg A Offering Rules Get Update

Lance Kimmel, a well-regarded attorney and head of SEC Law Firm, provides us with this helpful summary of key developments that should make Reg A offerings more useful again.

To refresh your memory, the current Reg A rules are available by clicking here.

LanceImageFollowing the mandate of the Jumpstart Our Business Start-Up (JOBS) Act, on December 18, 2013 the Securities and Exchange Commission proposed rules to amend largely forgotten and little-used Regulation A.

Having received far less attention than either of the other two major equity raising initiatives under the JOBS Act, general solicitation of accredited investors and equity crowdfunding, the revisions to Regulation A may well be the most far-reaching of the JOBS Act reforms. Informally known as “Regulation A+”.

The new proposal – expected to be adopted by the SEC in the first half of 2014 following a 60-day public comment period – has the potential to become a dramatically less expensive path to going public for many smaller companies whose investors seek an exit strategy or liquidity for their investment.

The SEC’s proposal builds upon existing Regulation A, which is an existing exemption from registration for small offerings of securities up to $5 million within a 12-month period.

The two major drawbacks to Regulation A are the small dollar limit (thereby resulting in high transaction costs as a percentage of the offering) and the fact that Regulation A offerings are not exempt from state blue sky laws, adding additional levels of complexity and cost to completing a Regulation A transaction.

For these reasons, Regulation A receded into relative obscurity over the last few decades. Regulation A, in its current form, will continue as so-called Tier 1 of Regulation A, and we expect reliance on Tier 1 to continue to remain in obscurity.

As proposed, “Regulation A+” will enable companies to publicly offer and sell up to $50 million of securities within a 12-month period under a so-called Tier 2 within Regulation A.

In addition, and crucially, Tier II-registered securities will be exempt from state blue sky laws, something that the state securities administrators strongly oppose. Finally, ongoing reporting obligations will be less burdensome than those for traditional reporting companies.

Proposal
As proposed, both Tier 1 and Tier 2 offerings under Regulation A will:

  • permit companies to submit draft offering statements for non-public SEC review prior to filing;
  • permit the use of “testing the waters” solicitation materials both before and after filing of the offering statement;
  • modernize the qualification, communications and offering process in Regulation A to reflect analogous provisions of the Securities Act registration process; and
  • require electronic filing of offering materials.

In addition, in Tier 2 offerings:

  • investors would be limited to purchasing no more than 10 percent of the greater of the investor’s annual income or net worth.
  • the financial statements (two years in most cases) included in the offering circular would be required to be audited; and
  • the company would be required to file annual and semi-annual periodic reports and current event updates that are similar to the current requirements for public company reporting under the Exchange Act.

The main eligibility requirements to use Regulation A (both Tier 1 or Tier 2) include that the company:

  • must be organized in the United States or Canada;
  • cannot have no specific business plan or purpose or have indicated that its business plan is to engage in a merger or acquisition with an unidentified company;
  • is not or has not been subject to an SEC order revoking the company’s registration under the Exchange Act during the preceding five years; and
  • is not disqualified under the recently adopted “bad actor” disqualification rules.

If you have questions regarding the new SEC proposal, other capital raising initiatives under the JOBS Act, strategic planning to take advantage of the new initiatives or specific fact patterns, please contact:

Lance Jon Kimmel
SEC Law Firm
11693 San Vicente Boulevard
Suite 357
Los Angeles, California 90049
tel. 310/557-3059
lkimmel@seclawfirm.com

Life Sciences IPOs Surge

There were 8 life science IPOs reported in May this year, according to “The Deal” and my colleague, David Feldman of Richardson & Patel.

We’ve just completed the best quarter for IPOs since 2000, reports these sources.

If your company is considering raising capital, now may be the time.

Public companies may find my Public Equity Series of videos helpful in learning the options available to them and the pro’s and con’s of each alternative.

Click here to go to David Feldman’s blog.

Post by Dennis McCarthy
Google

Ban Lifted on Soliciting Private Offerings

Finally, we’re seeing some progress on implementation of JOBS Act provisions.

The SEC, on July 10th, voted to lift the ban on general solicitation of accredited investors in private offerings.  This has been in the works for some time as initially covered in my September post.

Additional information is available on David Feldman’s blog.

 

Post by Dennis McCarthy
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PIPE Investor Trend

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

Today, a small cap public company considering raising equity may find the alternative of using a PIPE, a private investment in a public entity, to be a more attractive option.

That’s my conclusion from the 2012 tally of PIPE investors by Placement Tracker, the well-regarded source of this data.

So, here’s the background.  When I created my Equity Series of videos to help small cap public company executives to better understand the options available to them when raising equity, I created a video on PIPEs.

In my video, I said that because a PIPE is a private investment, historically, hedge funds have been the primary investors, not the larger universe of traditional institutional investors which typically invest in public securities.

Hedge funds invest in PIPEs but negotiate terms that are expensive for the issuing company.

PIPEs, therefore, have come to be considered a relatively more expensive method for a small cap public company to raise equity vs other offering alternatives.

This year, 2012, however, reveals an interesting development.  In the 2012 PIPE investor tally, produced by Placement Tracker, 10 of the top 25 PIPE investors were not hedge funds but more traditional institutional investors.

In fact, the number one PIPE investor is a traditional institutional investor, Fidelity Investments.

So today, a small cap public company’s PIPE may be sold to a larger universe of investors including those traditional institutional investors which purchase stocks on more favorable terms, such as investing at the market price without a discount and without other sweeteners such as warrants.

This is a positive development and makes the option to raise equity through a PIPE offering more attractive.  I hope this trend continues.

I’ve included a link to the online magazine, Growth Capitalist, which first tipped me to this development.  Also, I’ve provided the 2012 PIPE Investor tally from Placement Tracker as well as the link to all its 2012 tables.

As always, please contact me to help your company to raise equity or to complete any capital market project.  

2012 US PIPE Mkt Institutional Investor League Table

Growth Capitalist Article: http://www.growthcapitalist.com/?utm_source=Growth+Capitalist&utm_campaign=a7c6c3845e-RSS_EMAIL_CAMPAIGN&utm_medium=email

Placement Tracker Article: http://www.globenewswire.com/news-release/2013/01/09/515496/10017525/en/PlacementTracker-Publishes-2012-PIPE-Market-League-Tables.html

Raising Equity for Small Cap Public Companies Series

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

See “Equity Series” above on navigation bar.

Today, Wall Street investors are receptive to buying public company stock, even IPOs, initial public offerings, which is a sure sign of investor appetite. 

So, in this receptive Wall Street environment, many small cap public companies are considering raising equity capital.

Now, small cap public companies have many more options for the mechanics of raising equity.  That’s a good thing but requires company management to make some choices, preferably good choices.

To help companies to better understand what options are available as well as some of the tricks and traps, I created a series of videos on raising equity for small cap public companies.

In this equity series, I’ll address topics including:

  • How to get the best deal.
  • What are key regulatory rules.
  • What are the available mechanisms for raising equity and
  • What are the pro’s and con’s of each mechanism.

Each of my videos will be short and focused on one element of the topic.

I plan to supplement my videos with contributions from other professionals who will add their special expertise to the series.

I hope you’ll enjoy this series.  Give me your feedback to make it even better.

 

The JOBS Act – Update

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

The new JOBS Act, intended to make it easier for smaller companies to raise capital, was signed into law by the President on April 5th.

First, let me say that I welcome the reduction in the regulatory burden on smaller companies.  I hope this spirit of deregulation will be extended to existing small cap public companies which continue to operate under the old burdens.

However, some needed changes to encourage capital formation by smaller companies aren’t as easily handled through legislation.  For example, thin liquidity in many small cap stocks has several causes and would require several fixes.  Lack of liquidity, therefore, will likely continue to plague smaller cap stocks.

Also, we can’t legislate good judgment.  Even under the former, so-called stricter rules, investors shoveled money into Chinese stocks, many of which proved to be unwise investments.  The new JOBS Act places even greater responsibility on investors to exert good judgment.

Experience tells me that companies considering raising capital should take advantage of these relaxed rules as soon as possible before some visible blow-ups or disasters trigger re-tightening of the rules.

The following links provide helpful summaries and analyses of the JOBS Act.  Thank you.

Sheppard Mullin: http://www.corporatesecuritieslawblog.com/capital-markets-president-obama-signs-jobs-act-landmark-reform-for-small-and-emerging-growth-companies-now-law.html

TroyGould: http://troygould.com/index.cfm?fuseaction=content.contentDetail&ID=9187&tID=303

Latham & Watkins:http://w.on24.com/r.htm?e=445288&s=1&k=17FD77D843F6EAE8A36641AD5AE93257