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

Practical Guide to New Deal Marketing

I’ve just posted to my Growth Capital site (click here) practical steps to implementing the new marketing rules permitted under the JOBS Act.

Click or copy and paste this link: http://growth-cap.com/practical-guide-to-new-deal-marketing/

 

By Dennis McCarthy

Google

Financing Window for Middle Market Private Companies

GettingMoneyThe window is open for smaller middle market private companies to obtain capital from private equity funds.  The former cutoff of $5 million EBITDA to get interest from private equity firms seems no longer in place.  Smaller firms with less than $5 million of EBITDA are attracting interest.

If your smaller middle market company would benefit from additional equity capital, now may be the time.

Click here to go to my article on the new site, Growth Capital.
 By Dennis McCarthy
  Google

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
Google

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.

 

JOBS Act Progress on General Solicitation

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

Well, I’m calling it progress.

The SEC has submitted for comment some revised rules under the recently enacted JOBS Act.

The proposed rules would permit offerings of securities which are exempt from registration, commonly known as private placements,  to be marketed more widely than is currently possible.

The current rules limit the number of potential investors that can receive the offer.  Under the proposed rules, those limits are removed.

What remains generally the same are the rules defining who can invest.  They must meet tests to qualify as accredited investors.

That’s why I call it progress as long as something like the proposed rule gets adopted.

Today, companies and their agents raising capital have the technology to reach out to just about every potential investor on the planet, so why not?

At the same time, restricting investors to those who are accredited maintains some protection for unsuitable investors.

There’s more progress needed but this is a step.  The SEC press release is available at the link below.

As always, please contact me to help your company raise equity or debt or complete M&A deals.

SEC Press Release: http://www.sec.gov/news/press/2012/2012-170.htm

 

 

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

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
Founded in 1970, TroyGould is a Los Angeles law firm with a diverse client base and a practice covering a broad range of business transactions, litigation, and legal counseling, with emphasis in the areas of corporate finance, mergers & acquisitions, real estate, financial services, entertainment, employment, tax, and competitive business practices.
©2012 TroyGould PC. All Rights Reserved. The information in this e-mail has been prepared by TroyGould PC for informational purposes only and not as legal advice. Neither the transmission, nor your receipt, of information from this correspondence create an attorney-client relationship between you and TroyGould PC. You are receiving this email from TroyGould PC because you have a business relationship with our firm and/or its attorneys.
TROYGOULD PC
1801 Century Park East • Los Angeles 90067 • 310.553.4441
www.troygould.com