Private Companies

The SEC’s Proposed Rules and Amendments to Allow General Solicitation and General Advertising in Private Offerings

by Vanessa Schoenthaler on September 3, 2012

Print Friendly

In an open meeting last Wednesday the Securities and Exchange Commission voted to propose rules and amendments to implement Section 201(a) of the JOBS Act, which is responsible for eliminating the prohibition on general solicitation and general advertising in private offerings conducted pursuant to Rule 506 of Regulation D and private resales conducted pursuant to Rule 144A of the Securities Act of 1933; provided that, in the case of Rule 506, all purchasers are accredited investors and reasonable steps have been take to verify their status as such, and, in the case of Rule 144A, all purchasers are qualified institutional buyers.

In 2011 issuer’s raised an estimated $895 billion in offerings using Rule 506 and an estimated $168 billion in offerings using Rule 144A. In 2010 those numbers were even higher, with an estimated $902 billion raised in offerings using Rule 506 and an estimated $233 billion raised in offerings using Rule 144A. In reality the Rule 506 numbers may be higher still, as even the Commission acknowledges that not everyone who uses the exemption files a Form D (which is a requirement, but not a condition to the availability, of the exemption).

Offers and Sales that Involve General Solicitation and General Advertising Under Rule 506

Under the proposed rules and amendments a new subsection (c) would be added to Rule 506 which would permit general solicitation and general advertising in offers and sales of securities provided that:

  • the issuer of the securities–whether a company or a private investment fund, such as a hedge fund, venture capital fund or private equity fund–takes “reasonable steps to verify” that the purchasers are accredited investors;
  • all of the purchasers are accredited investors because at the time of the sale of the securities they either came within the definition of an accredited investor, as set forth in Rule 501(a) of Regulation D, or the issuer reasonably believed that they came within the definition; and
  • all of the terms and conditions of Rules 501 (Definitions), 502(a) (Integration) and 502(d) (Limitations on resale) of Regulation D are met.

Note: offers and sales of securities made pursuant new Rule 506(c) would not be subject to the information disclosure requirements of Rule 502(b), because all of the purchasers in such an offering would be accredited investors.

Reasonable Steps to Verify Accredited Investor Status

In an effort to provide flexibility to accommodate the various types of issuers, investors and methods of verification, the Commission declined to define what constitutes taking “reasonable steps to verify” that a purchaser is an accredited investor. Instead the proposing release indicates that reasonableness should be an objective determination, based on the facts and circumstances surrounding a given transaction. The proposing release also goes on to discuss in some detail three factors that an issuer might consider, among others, when assessing the reasonable likelihood that a purchaser is an accredited investor and the reasonable steps that would be necessary to verify a purchaser’s status as such.

The Nature of the Purchaser

The first factor to consider is the nature of the purchaser and the type of accredited investor that the purchaser claims to be. For example, verifying that a broker-dealer is an accredited investor by virtue of being registered under Section 15 of the Securities Exchange Act of 1934, can be accomplished by simply conducting a FINRA BrokerCheck search. Whereas verifying that an individual purchaser is an accredited investor under the annual income or net worth standards may require several steps and raise additional issues, such as privacy concerns regarding the type of personal financial information that a purchaser may need to provide to verify their status as an accredited investor.

Information About the Purchaser

The second factor to consider is the amount and type of information that an issuer has about a purchaser. For example, certain verifying information may already be in the public domain, such as information about a purchaser’s annual income garnered from a proxy statement or information found in a Form 990 about a non-profit organization’s total assets. Other third-party information that is not available publicly may also provide reasonably reliable evidence of a purchaser’s accredited investor status, such as copies of an individual’s Forms W-2 or 1099 to verify annual income. Additionally, a purchaser’s status as an accredited investor might be verified by a third-party service provider, such as a broker-dealer, attorney, accountant or other reasonably reliable third-party that offers verification services.

The Nature and the Terms of the Offering

The third factor to consider is really twofold: the nature of the offering and the terms of the offering. For example, the manner in which a purchaser is solicited, such as through a website accessible to the general public, a widely disseminated email or by social media, as compared to from a database of pre-screened accredited investors maintained by a reasonably reliable third-party, will require a greater or lesser number of steps to verify that the purchaser is an accredited investor. Likewise, the terms of the offering itself may bear on the number of steps required to verify that a purchaser is an accredited investor. For example, in the release the Commission notes that it tends to agree with the view that a purchaser’s ability to meet a high minimum investment amount could be relevant to an issuer’s evaluation of the steps necessary to verify the purchaser’s status as an accredited investor.

A Note on the Importance of Adequate Record Keeping

The proposing release also stresses the importance of an issuer retaining adequate records that document the steps taken to verify a purchaser’s status as an accredited investor because, in the event that a question should ever arise, the burden of demonstrating entitlement to an exemption from registration falls entirely on the issuer.

Offers and Sales that Do Not Involve General Solicitation and General Advertising Under Rule 506

In its current form, Rule 506 permits offers and sales of securities to an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors, provided that when non-accredited investors participate in an offering the information disclosure requirements of Rule 502(b) are met. As proposed the rules and amendments would preserve Rule 506 in its existing form in amended subsection (b), maintaining the rule’s availability for those issuers who do not wish to engage in general solicitation and general advertising, and thus avoid becoming subject to the requirement that they take reasonable steps to verify purchasers’ accredited investor status, as well as those issuers who would like the option to include sophisticated non-accredited investors in their offerings.

General Solicitation and General Advertising Under Rule 144A

Under the proposed rules and amendments Rule 144A of the Securities Act would also be revised to permit offers of securities to persons other than qualified institutional buyers (QIBS), including by means of general solicitation and general advertising, provided that the securities are sold only to persons that the seller, or anyone acting on the seller’s behalf, reasonably believe to be a QIB.

Proposed Changes to Form D

Finally, the Commission is also proposing to revise Form D to add a separate box to be checked when an issuer uses general solicitation or general advertising in a Rule 506(c) offering. Such information would allow the Commission to get a general sense of the size of the market for offerings that use general solicitation and general advertising.

Comment Period

The Commission is soliciting comments on a number of aspects of the proposed rules and amendments, most notably on a variety of issues related to verification of accredited investor status. Comments are due 30 days from publication of the proposed rules and amendments in the Federal Register.

2 comments

The JOBS Act in a Nutshell – Part V Exchange Act Registration and Termination

by Vanessa Schoenthaler on July 11, 2012

Print Friendly

Jumpstart Our Business StartupsI’m finally getting back to this series on the JOBS Act changes, plus I have a whole slew of other things that I’ve been meaning to write about but haven’t been able to get to (if there were only more hours in the day!); I may have to start an occasional link reading list just to keep tabs. In the meantime, here’s a post on the JOBS Act and Exchange Act registration and termination 101:

A company’s obligation to begin filing periodic reports under the Exchange Act can come about in one of three ways:

  • before listing its securities on a national securities exchange, such as the NYSE or Nasdaq stock markets, a company must register that class of securities under Section 12(b) of the Exchange Act; or
  • once having accumulated total assets in excess of $10 million and a class of equity securities held of record by a certain number of shareholders, a company must register that class of equity securities under Section 12(g) of the Exchange Act (before the JOBS Act went into effect, this was regularly referred to as the 500 shareholder rule); or
  • if a company registers securities for public sale under the Securities Act, but does not meet the registration requirements of Section 12(b) or 12(g) of the Exchange Act, then Section 15(d) of the Exchange Act requires that the company file certain periodic reports for at least the first fiscal year in which its Securities Act registration statement is effective.

The Section 15(d) reporting requirements are somewhat different from the Section 12(b) and 12(g) reporting requirements; most notably Section 15(d) filers are not subject to proxy rules and their officers, directors and shareholders are not subject to the beneficial ownership reporting requirements.

Once a company is obligated to file periodic reports that obligation runs until it is terminated or suspended (by the company either going private or going dark, both topics for another post).

Titles V and VI of the JOBS Act made changes to both the threshold for registration under Exchange Act Section 12(g) and the thresholds for termination and suspension of registration under Exchange Act Sections 12(g) and 15(d), respectively.

The Commission released FAQs regarding the changes back in April.

Changes to the Section 12(g) Registration Threshold

As amended, Section 12(g) now requires that a company (other than a bank holding company) register under the Exchange Act and begin filing periodic reports with the Securities and Exchange Commission once it has accumulated total assets in excess of $10 million and a class of equity securities held of record by either: (i) 2,000 persons, or (ii) 500 persons who are not accredited investors.

In the case of a bank holding company, amended Section 12(g) requires registration once the bank holding company has accumulated total assets in excess of $10 million and a class of equity securities held of record by 2,000 persons.

In addition, amended Section 12(g) excludes from the definition of “held of record” persons who receive equity securities pursuant to an employee compensation plan in a transaction exempt from Securities Act registration. The JOBS Act requires that the Commission adopt safe harbor provisions for determining when securities are received pursuant to an employee compensation plan, though does not specify a date by which such a safe harbor should be enacted.

The JOBS Act also requires that the Commission examine its authority to enforce Rule 12g5-1, relating to the definition of “held of record”, to determine if new tools are needed to enforce the rule’s anti-evasion provisions (remember all of the media attention surrounding Goldman Sachs’ creation of a special purpose vehicle to invest in pre-IPO Facebook shares, and the question of whether that SPV would count as a single shareholder for purposes of the then-500 shareholder rule?). The Commission has until August 3, 2012 to send its recommendations to Congress.

Changes to the Registration Termination and Suspension Thresholds

As noted above, a company’s obligation to file periodic reports continues until it is either terminated or suspended.

For a company with a class of securities listed on a national securities exchange and only registered under Exchange Act Section 12(b), this means until the company withdraws its exchange listing and terminates it registration with the Commission.

If, however, a company has a class of securities that is registered under Exchange Act Section 12(g), that company may only terminate its registration if the securities are held of record: (i) in most cases by less than 300 persons, but in the case of a bank holding company (as amended by the JOBS Act) by less than 1,200 persons, or (ii) by less than 500 persons where the company has total assets that do not exceed $10 million.

Similarly, a company that has a class of securities registered under Exchange Act Section 15(d) may only suspend its registration if the securities are held of record by: (i) in most cases by less than 300 persons, but again in the case of a bank holding company (also as amended by the JOBS Act) by less than 1,200 persons, or (ii) by less than 500 persons where the company has total assets that do not exceed $10 million.

Be the first to comment

SEC Chairman Schapiro Testifies on the Commission’s Progress in Implementing the JOBS Act

by Vanessa Schoenthaler on June 29, 2012

Print Friendly

Jumpstart Our Business StartupsYesterday Securities and Exchange Commission Chairman Mary Schapiro gave testimony before the U.S. House of Representative’s Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs Oversight and Government Reform Committee, updating the Committee on the Commission’s progress in implementing the JOBS Act and the staff’s new guidance regarding economic analysis in rulemaking.

Among other things, Chairman Schapiro noted that:

  • the Commission expects to release the JOBS Act-mandated study on the impact of decimalization on the market for initial public offerings shortly;
  • the staff is currently in the process of reviewing Regulation S-K and preparing recommendations on how it can be updated to modernize and simplify the registration process;
  • the Commission will not meet the deadlines imposed for revising the general solicitation and general advertising requirements of Rules 506 and 144A, but it “will be in a position to act on a staff proposal in the very near future”; and
  • approximately 50 bank holding companies have already deregistered under Exchange Act Section 12(g)’s amended registration threshold, which went into effect immediately upon the JOBS Act’s enactment (in an article unrelated to Chairman Schapiro’s testimony, SNL Financial noted, that as of the end of May, 61 bank holding companies had already begun the deregisteration process).

Be the first to comment

Various and Sundry Items From the Last Week

by Vanessa Schoenthaler on June 4, 2012

Print Friendly

Nasdaq Proposes Changes to Marketplace Rule 5605 Relating to the Composition of Board Committees

On Wednesday the Commission published a notice soliciting comments on proposed changes to certain subsections of Nasdaq’s Marketplace Rule 5605 relating to the independence requirements of a listed company’s audit, compensation and nominations committees.

Rule 5605 generally requires that a company’s audit, compensation and nominations committees be comprised entirely of independent directors. There is a limited exception to the independence requirements (found in each of subsections (c)(2)(B), (d)(3) and (e)(3) of Rule 5605) that allows for one non-independent director to serve on a committee for up to two years if a company’s board affirmatively finds that the non-independent director’s membership is required by the best interests of the company and its shareholders.

If Nasdaq’s proposed rule changes are accepted a non-independent director with a family member who is a non-executive employee would be permitted to serve on a committee under the limited exception. As the rule is currently drafted this is not possible, even though having a family member who is a non-executive employee would not otherwise disqualify an independent director from being independent.

The text of Nasdaq’s proposed rule changes are reproduced below.

The GAO’s Report to Congress on the Commission’s Oversight of FINRA 

Section 964 of the Dodd-Frank Act requires the Government Accountability Office (GAO) to submit a report to Congress evaluating the Commission’s oversight of national securities associations registered under Section 15A of the Exchange Act, of which FINRA is the only one. On Wednesday the GAO released its report, entitled Opportunities Exist to Improve SEC’s Oversight of the Financial Industry Regulatory Authority, which examines, among other things, how the Commission oversees FINRA rule proposals and the effectiveness of FINRA’s rules and how the Commission plans to enhance its oversight of FINRA. The report emphasizes the utility of retrospectives reviews and recommends that the Commission encourage FINRA to conduct its own retrospective rule reviews and that the Commission establish a process for examining those reviews.

The GAO’s full report is reproduced below.

The Commissioners may be Attending Friday’s Meeting of the Advisory Committee on Small and Emerging Companies

On Friday the Commission published a Sunshine Act Meeting Notice related an earlier notice for a public meeting of the Advisory Committee on Small and Emerging Companies to be held this Friday.

The Committee will be discussing the JOBS Act and other matters related to rules and regulations that affect small and emerging companies. The reason for the second, Sunshine Act, notice is that a majority of the Commissioners may be attending Friday’s meeting.

(Download File)

(Download File)

Be the first to comment

The JOBS Act in a Nutshell – Part IV Regulation A Redux

by Vanessa Schoenthaler on May 9, 2012

Print Friendly

Jumpstart Our Business StartupsRegulation A is a conditional securities exemption allowing for public offers and sales of up to $5 million dollars of securities in a 12-month period. To be eligible to use Regulation A a company must be organized under the laws of the United States or Canada, must not be an investment company or blank check company and must not be subject to the periodic reporting requirements of the Securities Exchange Act.

Conducting a Regulation A offering is somewhat analogous to conducting a registered offering, though much simpler in form and substance, and is often referred to as a “mini-registration”.

In a Regulation A offering a company must prepare and file an offering statement with the Securities and Exchange Commission. An offering statement requires disclosures similar to those made in a registration statement, including disclosures regarding a company’s business and financial condition, its officers, directors and principal stockholders, risk factors, a description of the use of offerings proceeds and so on. An offering statement also requires the filing of certain exhibits and the inclusion of financial statements, which can be unaudited but must be prepared in accordance with generally accepted accounting principles.

Once a company’s offering statement is on file it is reviewed and qualified by the Commission, similar to the process of a registration statement being reviewed and declared effective. After the offering statement is qualified an offering circular, which makes up part of the offering statement, must be delivered to prospective investors prior to any securities being sold.

Thereafter the company must file reports with the Commission detailing the securities sold and the use of proceeds from those sales. The reports must be filed every six months until substantially all of the proceeds from the offering have been applied.

Notwithstanding the sales and use of proceeds reports, and unlike in a registered offering, once a Regulation A offering is complete there are no ongoing reporting obligations; no current, quarterly or annual reports to file (unless of course Exchange Act registration is triggered by some other means, such as by crossing the shareholder threshold required for registration). What’s more, any securities sold in a Regulation A offering are unrestricted and may be freely transferred in a secondary market transaction.

Another way in which Regulation A offerings differ from most other offerings is that Regulation A permits a company to gauge investor interest, or to ”test the waters”, by means of general solicitation or general advertising prior to the filing of an offering statement. This ability to test the waters is not without limitation however, for example any written documents or scripts of oral presentations must be filed with the Commission prior to their first use. In addition, a company must also comply with the securities laws in each state in which an offer of securities is to be made, some of which do not permit general solicitation or general advertising.

One other item of note, there are also certain instances in which Regulation A can be used for secondary offerings, allowing shareholders resell up to $1.5 million of securities in a 12-month period.

Even though Regulation A does offer a simpler alternative to a full-scale registered offering it’s hardly ever used, in part because of its $5 million dollar offering limitation. In 2010 there were 25 initial Regulation A offerings filed with the Commission, but only 7 of these offerings were qualified.

A Regulation A Redux

The JOBS Act adds a new Section 3(b) to the Securities Act which calls for the Commission to implement an exemption for the public offer and sale of up to $50 million of securities in any 12-month period. There is no required time frame for implementation of this exemption.

The requirements of the new exemption start out much like an enhanced version of Regulation A. The securities, which can be equity securities, debt securities or debt securities convertible into or exchangeable for equity securities, may be publicly offered and sold and will thereafter be freely transferable (they will not be restricted securities). Additionally, subject to any terms or conditions that the Commission may prescribe, companies that wish avail themselves of the new exemption will be permitted to “test the waters” prior to undertaking an offering.

Similar to Regulation A, the new exemption contemplates the preparation and filing of an offering statement, the form and content of which the Commission will prescribed, but which may include a description of the company’s business and financial condition, its corporate governance principles, use of proceeds and audited financial statements. In addition, the exemption requires that companies file audited financial statements with the Commission on an annual basis and provides that the Commission may also require additional periodic disclosures regarding the company’s business and financial condition, its corporate governance principles and use of the offering proceeds.

Unlike Regulation A, if the securities under the new exemption are offered and sold on a national securities exchange or to qualified purchasers then they will be “covered securities” and exempt from the state securities laws.

The Commission also has the discretion to establish disqualification provisions under which the new exemption would not be available to certain companies or their affiliates for reasons substantially similar to the bad actor disqualification provisions to be established under the Dodd-Frank Act (which are themselves based on the disqualification provisions of Regulation A).

Lastly, every two years the Commission will have to review and increase, if appropriate, the $50 million offering limitation, or, if not increased, report to Congress as to why.

2 comments

The JOBS Act in a Nutshell – Part II Research Reports and Communications Related to Emerging Growth Companies

by Vanessa Schoenthaler on April 19, 2012

Print Friendly

Jumpstart Our Business StartupsSection 105 of the JOBS Act sets out to improve the availability of information about emerging growth companies by eliminating some of the prohibitions on communications and activities that can take place around a registered offering.

Under the Securities Act of 1933, the offering registration process is divided into three periods:

  • the “pre-filing period” which begins with the decision to publicly offer securities and continues until the filing of a registration statement with the Securities and Exchange Commission;
  • the “waiting period” or “quiet period” which begins with the filing of a registration statement and continues until the Commission declares that registration statement effective; and
  • the “post-effective period” which begins once the registration statement is declared effective.

The kinds of communications and activities that are permissible vary depending on where you are in the registration process. For example, prior to enactment of the JOBS Act, the Securities Act generally prohibited any communications containing oral or written offers of securities during the pre-filing period. During the waiting or quiet period, the Securities Act permitted oral offers as well as written offers made by means of a Section 10 prospectus.

The term “offer” is broadly defined to encompass “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value” and has been construed by the courts and the Commission to include “the publication of information and statements, and publicity efforts … [that], although not couched in terms of an express offer, may in fact contribute to conditioning the public mind or arousing public interest … ” in a company or its securities.

Pre-Filing and Waiting or Quiet Period Communications

The JOBS Act significantly changes the communications rules is by allowing an emerging growth company, or any person authorized to act on behalf of an emerging growth company, to engage in oral or written communications with potential investors that are qualified institutional buyers (QIBs) or institutional accredited investors (IAIs) in order to gauge their interest in an offering prior to or following the company’s filing of a registration statement (i.e., during the pre-filing and waiting or quiet periods). A practice often referred to “testing the waters”. Unlike many of the other changes addressed below, an emerging growth company’s ability to test the waters is neither limited to its IPO nor offerings of its common equity and, as such, can be used in follow-on offerings and offerings of debt securities.

Again, prior to enactment of the JOBS Act, oral and written offers of securities were generally prohibited during the pre-filing period and while there were no explicit restrictions on oral offers during the waiting or quiet period written offers had to be made by means of a Section 10 prospectus.

Research Reports

Another way the JOBS Act changes the communications rules is by allowing a broker-dealer to publish and distribute research reports about an emerging growth company that proposes to or is in the process of registering its common equity (i.e., during the pre-filing and waiting or quiet periods) without the reports being deemed an offer of securities, even if the broker-dealer will also be participating as an underwriter in the offering.

For purposes of the exclusion the JOBS Act carves out a slightly expanded definition of the term “research report”, which covers oral as well as written and electronic communications that provide information, analysis, opinions or recommendations about an emerging growth company or its securities, whether or not the information is reasonably sufficient to base an investment decision on.

In addition, the JOBS Act prohibits the Commission or any national securities association, FINRA presently being the only one, from adopting or maintaining any rule or regulation that would prohibit a broker-dealer from publishing or distributing a research report or from making a public appearance with respect to the securities of an emerging growth company following the company’s IPO or in advance of the expiration of its IPO related lock-up agreements (i.e., during the post-effective period).

Before the JOBS Act went into effect, a broker-dealer participating as an underwriter in a company’s IPO was prohibited from publishing and distributing research reports and from making public appearances with respect to the company’s securities prior to and for a period of 40 days following the IPO, and for a period of 15 days both prior to and after the expiration of its IPO related lock-up agreements (these rules remain unaffected with respect to IPOs of non-emerging growth companies).

Analyst Communications

The JOBS Act also prohibits the Commission or any national securities association from adopting or maintaining any rule or regulation in connection with the IPO of an emerging growth company’s common equity that would restrict who at a broker-dealer may arrange for communications between a research analyst and a potential investor, or restrict a research analyst from participating in any meetings with the company’s management that non-analyst employees of the broker-dealer also attend.

Before the JOBS Act went into effect, a research analyst was prohibited from directly or indirectly engaging in communications with current or prospective investors in the presence of a company’s management or a broker-dealer’s non-analyst employees, and was prohibited from participating in company road shows or other meetings.

One thing the JOBS Act doesn’t do is relieve broker-dealers of their obligations related to conflicts of interest or research analysts from the disclosure and certification requirements of Regulation AC.

1 comment

The SEC Releases the Division of RSFI’s Report on Regulation D Offerings

by Vanessa Schoenthaler on April 11, 2012

Print Friendly

Yesterday the Securities and Exchange Commission’s Division of Risk, Strategy and Financial Innovation released a report analyzing information extracted from all Form D filings made with the Commission between January 2009 and March 2011. The report, entitled Capital Raising in the US: The Significance of Unregistered Offerings Using the Regulation D Exemption, coincides with a slide presentation given before the Advisory Committee on Small and Emerging Companies in October 2011. The report looks at the amount of capital raised using the Regulation D exemptions (Rules 504, 505 and 506) as compared to the amount of capital raised using other methods, public and private, and gives us a bit of insight into common Regulation D offering characteristics and the companies that most frequently avail themselves of the Regulation D exemptions.

Common Regulation D Offering Characteristics

Using information reported in response Item 13 of Form D, the report begins by estimating the total amount of capital raised in Regulation D offerings for the 2009 and 2010 calendar years (take a look at the report’s appendix for some of its methodologies and assumptions, including the treatment of Form D amendments). Item 13 of Form D requires that a company specify:

  • the total amount of securities to be offered (Item 13(a)), expressed as a dollar value or as an “Indefinite” amount (indicating that the total offering amount is undetermined or cannot be determined at the time of the Form D filing);
  • the total amount of securities that have been sold as of the time of the Form D filing (Item 13(b)); and
  • the total amount of securities that remain to be sold (Item 13(c)).

Based on a review of these figures the report estimates that, for the 2009 and 2010 calendar years, capital raised through Regulation D offerings ranged from a minimum (calculated using Item 13(b)) of approximately $587 and $905 billion, respectively, to a maximum (calculated using Item 13(a)) of approximately $1.5 and $1.2 trillion, respectively. With the average offering size being approximately $30 million, but the median offering size only being approximately $1 million, suggesting that a large number of smaller offerings took place.

Among the available Regulation D exemptions, Rule 506 was by far the most popular one to be claimed during the period examined. Rule 506 allows you to raise an unlimited amount of capital from an unlimited number of accredited investors, and up to 35 non-accredited investors, provided certain information and other requirements are met.

The data also reveals that during the 2009 and 2010 calendar years the total amount of capital raised in Regulation D offerings was more than twice the total amount of capital raised in public equity offerings. There are, however, other factors that might be influencing these findings, not the least of which being the state of the capital markets during the period in question. It’ll be interesting to see if this trend continues as the environment for public equity improves.

Another interesting bit of information revealed by the data is the number and type of investors that typically participate in a Regulation D offering. Only approximately 10% of investors that participated in offerings during the period examined were non-accredited investors. With approximately 90% of offerings being made up of entirely accredited investors. In addition almost 90% of offerings involved approximately 30 investors or less.

Common Company Characteristics

The report also gives us some insight into the type of companies that most frequently avail themselves of the Regulation D offering exemptions. For example, Item 4 of Form D requires that a company identify its industry group and Item 5 asks that it disclose its revenue range (though companies have the option to “Decline to Disclose”).

Based on a review of the responses to Item 4, nearly one-third, or 29%, of the Form D filers in 2009 and 2010 identified themselves as pooled investments funds (of which approximately half, or 55%, further identified themselves as hedge funds). Of the remaining companies, approximately 15% identified themselves as being in the technology industry, approximately 10% in the health care industry and approximately 8% in the real estate industry.

While approximately half of all companies declined to disclose their revenues, of the companies that did make the disclosure nearly 20% had no revenues at all and another approximately 20% had revenues of $25 million dollars or less (the chart below accounts for a $1.00 – $5 million revenue range and a $1 million – $5 million revenue range, but Form D calls for disclosure in the $1.00 – $1 million and $1 million – $5 million revenue ranges, so it’s unclear to me as to whether there’s overlap in the chart or a typo, though I assume the latter). Finally, less than 4% of all companies raising capital in a Regulation D offering reported revenues in excess of $25 million.

Additionally, during the period examined approximately 25% of all companies that raised capital in a Regulation D offering were foreign companies.

And, of the universe of public companies, approximately 10% raised capital in a Regulation D offering, with those relying on Regulation D tending to be smaller and less profitable then their peers.

A complete copy of the report is embedded below, it’s brief and there are plenty of additional charts to flip through:

(Download File)

2 comments

SharesPost: The Evolution of a Broker-Dealer

by Vanessa Schoenthaler on March 15, 2012

Print Friendly

Yesterday the Securities and Exchange Commission announced that it settled a proposed administrative and cease-and-desist proceeding against SharesPost, Inc., an online private capital marketplace, and its founder and president, Gregg Brogger, for acting as an unregistered broker-dealer.

First, What is a Broker-Dealer?

Under the Securities Exchange Act a “broker” is broadly defined as “any person engaged in the business of effecting transactions in securities for the account of others,” and a dealer as “any person engaged in the business of buying and selling securities for such person’s own account through a broker or otherwise.”

Before a broker-dealer can “effect any transactions in, or … induce or attempt to induce the purchase or sale of, any security …” it must register with the Commission and become a member of FINRA and the SIPC. Additionally, broker-dealers must comply with the registration requirements of the laws of each state in which they intend to operate.

Once a broker-dealer is registered it becomes subject to a number of specific conduct, financial responsibility and reporting requirements, as well as to periodic compliance examinations by the Commission, FINRA and the state securities commissions.

What Does it Mean to be “Engaged in the Business” of Effecting Securities Transactions?

Neither the Exchange Act nor the rules promulgated thereunder define what it means to be “engaged in the business of effecting transactions in securities,” and the courts and the Commission, by means of administrative and enforcement proceedings and through interpretive decisions in the form of no-action letters, have come to construe the phrase broadly to include activities such as:

  • soliciting, structuring or negotiating securities transactions;
  • providing valuation advice;
  • disseminating quotation information;
  • receiving transaction-related compensation;
  • preparing, conveying or collecting transaction-related documentation; or
  • otherwise acting as an intermediary in a securities transaction.

So, What Happened in the SharesPost Case?

SharesPost started out in June 2009 as an online bulletin board for buyers and sellers of private company securities. They charged a flat membership fee for access to their platform and left members to arrange and execute their own transactions. But private sales of securities can be complicated and many members ended up needing “substantial assistance from SharesPost and/or a representative of a registered broker-dealer” in order to complete their transactions. At this point SharesPost probably should have either registered as or merged with a broker-dealer.

Instead, in 2010, SharesPost entered into a series of agreements with registered representatives from various other broker-dealers. The representatives were designated as “Company Specialists” and were each assigned to cover certain categories of companies (e.g., social media, green tech., etc.). Their role was to facilitate transactions between buyers and sellers. As compensation for these services their supervising broker-dealer was paid a transaction based fee. The broker-dealer in turn paid a portion of that fee over to the representative, pursuant to a separate agreement between the broker-dealer and the representative.

To make things a bit more complicated, each representative also entered into an arrangement with SharesPost whereby they agreed to pay 35% of their gross commissions to another broker-dealer to be designated by SharesPost in the future. The only problem is that SharesPost never designated a broker-dealer. It did, however, keep track of the commissions owed and when one of its representatives left SharesPost itself received the accrued commissions (even though it still wasn’t a registered broker-dealer).

By late 2010 SharesPost decided “that maintaining arrangements with multiple registered representatives affiliated with multiple broker-dealers was cumbersome” and so (rather than registering as or merging with a broker-dealer at that point) SharesPost entered into a “Broker-Dealer Independent Affiliate Agreement” with “Broker-Dealer A.”

Pursuant to this latest agreement SharesPost employees who were also registered representatives of a broker-dealer, including its then CEO and other senior executives, facilitated transactions between buyers and sellers on a commissioned basis. Any commissions earned were paid into a compensation pool at Broker-Dealer A. The CEO of SharesPost would then provide Broker-Dealer A with written instructions as to what percentage of funds in the commission pool were to be distributed to each representative and to Broker-Dealer A.

Beyond the creative compensation arrangements SharesPost also engaged in other activities that made it more like a broker-dealer and less like the passive bulletin board that it started out as. Among other things, it made available through its website and suggested that members use its own copyrighted form transaction documents. SharesPost personnel, some of whom were not registered representatives, served as intermediaries between buyers, sellers, companies and transfer agents. It made available free research reports detailing information about the companies whose securities were posted on its bulletin boards and it created a “Venture Index” that aggregated and weighed certain known or estimated data for its most active companies.

Also in late 2010 SharesPost created a series of funds each designed to purchase the securities of one of the companies posted on its bulletin boards. These funds were used to create an auction process. To quote at length from the Commission’s Order:

[P]otential sellers of a company’s stock would set a reserve price for the block of shares they wished to sell. In turn, SharesPost members who posted indications of interest to buy interests in the [fund] were contacted by SharesPost personnel, who were registered representatives of Broker-Dealer A to see if they wanted to participate in the auction. The buyers were bidding on interests in the fund and the fund would in turn purchase the stock. The auction process began to feature prominently on the SharesPost website – thus, at that point, SharesPost was using the website to sell securities (interests in the fund) in which it had a financial interest. The SharesPost subsidiary management company [that oversaw the funds] charged a one-time service fee, which was five percent of the investment and a three percent fee on any distributions to the fund.

Finally, in December 2011, SharesPost acquired a broker-dealer which it also registered with the Commission as an alternative trading system, a development first announced in a press release yesterday.

Overall I think this is a good outcome, SharesPost should have registered or acquired a broker-dealer from the beginning (or at least earlier on) and it’s good to see the Commission reaffirm it’s commitment to both innovation in the market and investor protection. Or as Robert Khuzami noted in the Commission’s press release: “[w]hile we applaud innovation in the capital markets, new platforms and products must obey the rules and ensure the basic fairness and disclosure that are the hallmarks of sound financial regulation.”

(Download File)

(Download File)

2 comments

The Net Worth Standard Under the Definition of Accredited Investor Went Into Effect Today

by Vanessa Schoenthaler on February 27, 2012

Print Friendly

The Securities and Exchange Commission’s final rules and amendments conforming the net worth standard under the definition of accredited investor to the requirements of the Dodd-Frank Act went into effect today, causing the Division of Corporation Finance to withdraw and archive C&DI Questions 179.01 and 255.47, which addressed how to determine the value of an investor’s primary residence for purposes of calculating net worth. Any such future determinations should be made in accordance with the final rules.

1 comment

The First Recommendation from the SEC’s Advisory Committee on Small and Emerging Companies

by Vanessa Schoenthaler on January 10, 2012

Print Friendly

The Advisory Committee on Small and Emerging Companies held a brief telephone meeting on Friday in which it resolved to issue its first recommendation to the Commission. Specifically, the Committee recommended the Commission take “immediate action to … permit general solicitation and general advertising in private offerings of securities under Rule 506 where securities are sold only to accredited investors.” The full recommendation is set forth below.

The Committee is scheduled to hold its next meeting on Wednesday, February 1, 2012, to consider recommendations related the triggers for public registration and reporting, and suspension of reporting obligations (the 500 shareholder rule), crowdfunding and Regulation A, as well as to discuss the IPO On-Ramp report.

The Commission has also made available a number of useful background materials related to the Committee’s work on its website.

(Download File)

Be the first to comment

← Previous Entries