On May 14, 2012, the SEC staff met with representative of the National Crowdfunding Association to discuss issues regarding the implementation of Title III of the JOBS Act, i.e. the Crowdfunding Act.  The SEC posted a memo on the meeting, which is available for review on the SEC website.  This blog summarizes the memo, which memo was prepared by the National Crowdfunding Association prior to the meeting as an agenda and discussion memo and was subsequently posted on the SEC website, by the SEC.

National Crowdfunding Association Compiles List of Issues and Comments

The National Crowdfunding Association set forth a list of issues and comments on the pending Crowdfunding Act SEC rules and regulations.  Unless otherwise stated, I agree with and support all of the comments and issues discussed by the National Crowdfunding Association.

The issues and comments are summarized as follow:

1.         Investment Limitations.  The crowdfunding exemption allows Issuers to raise up to $1 million in a twelve month period, as long as no individual investment exceeds certain threshold amounts.  The threshold amount sold to any single investor, cannot exceed (a) the greater of $2,000 or 5% of the annual income or net worth of such investor, if their annual income or next worth is less and $100,000; and (b) 10% of the annual income or net worth of such investor, not to exceed a maximum $100,000, if their annual income or net worth is more than $100,000.  Funding intermediaries are required to make efforts to ensure that no investors exceed these threshold amounts.

The National Crowdfunding Association points out the need for a clear definition of the term  “investor.”  The National Crowdfunding Association notes that SEC rules and regulations generally differentiate between non-accredited, institutional and accredited investors.  Generally, accredited and institutional investors are sophisticated and able to fend for themselves.  Like many other exemptions from registration it is argued and requested that accredited and institutional investors be excluded from the definition of an “investor” and that no limits on the amount or number of offerings be imposed on such investors.

2.         Rights of Rescission.  The Crowdfunding Act grants investors the right of rescission until the target offering amount is reached.  The National Crowdfunding Association points out that it is unclear when an investor’s commitment becomes binding.  The National Crowdfunding Association suggests that the SEC rules limit the right to rescind to 48 hours from the time of the initial commitment, a change of investment terms, or a materially adverse disclosure.  They point out that the current rule would promote unfair practices such as seeding a deal by having investors commit that later intend to rescind once enough attention is brought to a project.  I completely agree with the rational and suggested limitation.

3.         Compensation.  The Act requires that a funding portal “Prohibit its directors, officers or partners from having any financial interest in any Issuer using its service.”  It is unclear whether equity is considered a financial interest and accordingly whether services can be paid for with equity.  The National Crowdfunding Association suggests that the limitation be limited to the time of the offering.  I do not necessarily agree.  I think intermediaries should be allowed a financial interest so long as such interest is disclosed and other safeguards are put in place such as against promotion of a deal they have an interest in vs. one they do not, are put in place.  In addition, the interest could be capped to a non-affiliated level (under 10%).

4.         Fees.  The fee structure to which an intermediary may request and be paid is completely unclear.  The Act really provides little if any guidance on what fee structure would be acceptable and what services can properly be charged for.  The National Crowdfunding Association asks for clarification.

5.         Liability.  The Act provides for a private cause of action by investors against Issuer’s for material misstatements and omissions.  The National Crowdfunding Association requests clarification as to whether an intermediary will be required to confirm information and what, if any, liability the intermediary will have for misstatement and omissions by an Issuer.

6.         Personal Liability of Directors and Officers.  The National Crowdfunding Association asks for clarification as to the extent that directors and officers of crowdfunding issuers could face personal or derivative liability and in particular in connection with shareholder actions.

7.         Securities. The Act permits the sale of equity, debt, and debt convertible into equity.  The Act does not distinguish classes of securities.  The National Crowdfunding Association requests that it be clearly set out that Issuers can also offer classes of each type of securities, such as preferred stock.

8.         Integration.  It is unclear what other exempt offerings will integrate with a crowdfunding offering which is limited to $1 million in any 12 month period.  The National Crowdfunding Association believes that the Act only integrates offerings made under the crowdfunding exemption (Section 4(6)), however, clarification is needed and requested.

I note that in different sections of the JOBS Act, the wording is “all other offerings” and in other sections the wording is limited to Section 4(6) offerings.  The SEC will need to be very clear as to the integration standards among both Section 4 and Section 3 offerings.

9.         Held of Record.  The Act requires a one year holding period by investors, with certain exceptions.  The National Crowdfunding Association reads the Act such that original crowdfunding investors are not included in the count of shareholders of record but rather only transferees of such securities are counted.  Clarification is needed.  Issuers should that have over 2,000 shareholders from a crowdfunding offering should not see necessary registration looming within a year of the offering.

10.       Advertisements.  The crowdfunding exemption requires that Issuers “not advertise the terms of the offering, except for notices which direct investors to the funding portal or broker.”  The National Crowdfunding Association advocates that the rules allow the placement of a notice on the Issuer’s website including the basic terms of the offering.  Moreover, they also advocate such notice be allowed in mailings to customers or mailing list subscribers.   Moreover, it is unclear whether the SEC rules will permit notices to state the offering period, that investors may contact the issuers management to discuss the offering or if it may include names of accredited investors participating in the offering.

I also suggest reading my previous blog summarizing a letter from the CFIRA to the SEC addressing the topic of advertising and general solicitation.  The CFIRA had great suggestions regarding the use of social media.

11.       Issuer Solicitation.  The Act does not prohibit the compensation to portal employees or agents to solicit Issuers (as opposed to investors).The National Crowdfunding Association advocates allowing such compensation.  Clarification is indeed needed.

12.       Intermediary Services.  The Act requires that intermediaries not hold, manage, possess or otherwise handle investor funds or securities.  The National Crowdfunding Association advocates that intermediaries be allowed to act as transfer agents for issuers during the one year holding period following an offering.

13.       Investment Advice. The Act prohibits intermediaries from offering investment advice or recommendations.  However, the Act does not define either investment advice or recommendations.  The National Crowdfunding Association requests clarification as to whether any of the following would constitute investment advice or recommendations: (i) removing an offering after a period of time for lack of sufficient investor commitments; (ii) preventing an Issuer from offering its securities on the intermediary’s website due to a failure to provide sufficient due diligence; (iii) assuming an intermediary allows interactive comments and questions from investors or potential investors on their website, monitoring and removing fraudulent or inappropriate comments; (iv) the positioning of the Issuers documents or offering within the website; (v) providing market and news updated; or (vi) declining to post an offering for not fitting into certain parameters or characteristics.

14.       Disclosures. The Act requires that the intermediary provide certain disclosure and educational materials to investors.  Clarification is needed as to the form and substance of this information.

I note that clarification needs to be made as to whether these disclosures and educational materials can be deemed investment advice.

15.       Investor Education Information. The Act requires that the intermediary provide certain educational materials to investors and confirm that the investors understand the risks of the offering. Clarification is needed as to the form and substance of these materials and the method of obtaining affirmation of the understanding of the risks.

16.       Background Checks.  The Act requires intermediaries to take measures to reduce the risk of fraud by establishing rules and procedures including obtaining background and securities enforcement history checks on each officer, director and person holding more than 20% of the outstanding equity of an Issuer.  It is unclear whether the intermediary must simply inform the crowd of their findings and let them determine the value or weight of such findings or whether the intermediary will be required to pass judgment on such findings and take actions, such as denying the Issuer use of their portal.

17.       Annual Financial Disclosure.  The Act requires Issuers to file annual reports with the SEC and provide such reports to investors, with results of operations and financial statements.  The form and substance of this report needs to be clarified as does what constitutes delivery to investors.

18.       Audit Requirements. The Act requires that issuers of offerings more than $500,000 provide audited financial statement.  The audit standards need to be clarified.  Must an Issuer follow GAAP and be prepared by PCAOB qualified auditors? The National Crowdfunding Association suggests that crowdfunding issuers only be required to use accounting standards board (ASB) qualified auditors and not PCAOB.

19.       Record Keeping.  The Act requires issuers to provide risk disclosure and “ensure their understanding.”  The National Crowdfunding Association suggests the use of an online questionnaire.

20.       Record Keeping of Aggregate Investments.  The Act requires that intermediaries make efforts to ensure that no investor exceeds its allowable investment amount in any 12 month period, including from all Issuers, and all Funding Portals.  The SEC must provide detailed guidance on how an intermediary can achieve such requirement.

21.       Registration.  The Crowdfunding Act requires that all Crowdfunding offerings be conducted through an intermediary that is a broker dealer or funding portal that is registered with the SEC and are members of a registered self regulatory organization (SRO).    Currently that SRO is Financial Industry Regulatory Authority (FINRA).  The National Crowdfunding Association requests guidance on this registration process as quickly as possible.  If the rules come into play without sufficient time for non broker dealers to register with the SEC, broker dealers will be given an unfair advantage.

22.       Registration of Service Providers.  The registration requirements are unclear as to the extent an intermediary uses a third party service provider for certain services and pays fees to such service provider.  It is unclear whether such third party also needs to be registered, and whether and to what extent their services need to be disclosed.

23.       Self-Regulatory Organization.  The Crowdfunding Act requires that all Crowdfunding offerings be conducted through an intermediary that is a broker dealer or funding portal that is registered with the SEC and are members of a registered self regulatory organization (SRO).  Clarification as to the SRO is needed.

24.       Funding Portal.  The Act defines a funding portal in accordance with Section 3(a)(80) of the Securities Exchange Act of 1934 with the caveat that such funding portal does not: (i) offer investment advice or recommendations; (ii) solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal; (iii) compensate employees, agents, or other persons for such solicitation or based on the sale of securities it lists; or (iv) hold, manage, possess, or otherwise handle investor funds.  Such definition is in connection with what it does and not the form it takes.  The National Crowdfunding Association believes a registered funding portal should be able to own and operate several portal websites.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

The CFIRA (Crowdfund Intermediaries Regulatory Advocates) was established by crowdfunding industry professionals for the purpose of working with the SEC and FINRA on establishing and maintaining crowdfunding rules and industry practices.  As I blogged in the past, I believed at one point, based on news and information released from the CFIRA, that the CFIRA intended to become a self regulatory organization (SRO) and register with the SEC under Section 15A. As of today, it appears that the CFIRA is still working towards the goal of becoming an SRO. In any event, I expect that the CFIRA will be an active participant in the crowdfunding industry and invaluable source of input and information.

CFIRA and the SEC

On May 15, 2012, the CFIRA submitted a comment letter to the SEC regarding the pending Crowdfunding regulations.  The comment letter specifically addressed issues regarding how the general solicitation rules will interact with social media and the internet.  The letter addressed the general solicitation changes to Rule 506 of Regulation D and the new Section 4(6), crowdfunding exemption.  The full text of the letter is available on the SEC website.

In particular, and as I have enumerated in past blogs, the Rule 506, Regulation D change is such as to eliminate the prohibition on general solicitation and general advertising in a Rule 506 offering, so long as all purchasers in such offering are accredited investors.  The crowdfunding exemption requires that Issuers “not advertise the terms of the offering, except for notices which direct investors to the funding portal or broker.”  The current definition of general solicitation set forth in Rule 501 is “any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.”

CFIRA and SEC Rulemaking

The CFIRA letter to the SEC appropriately requested that the SEC rulemaking address the following questions:

“1. Will issuers offering and selling securities pursuant to Section 230.506 be permitted to send notices to potential investors that do not constitute a general solicitations and, as a result, retain their ability to sell securities to up to 35 non-accredited investors?

2.  Will the rules require any specific disclosure in a section 230.506 solicitation?

3.  What information may be included in a “notice” directing investors to a funding portal or broker?

4.  The rules should contemplate the role of social media (including, but not limited to, Facebook/Twitter/Linkedin/Google+).  We anticipate that entrepreneurs will solicit from their networks via social media buttons on SEC regulated funding portals”

CFIRA Makes Suggestions

The CFIRA letter continues to make suggestions as to the questions.  In particular, the CFIRA suggests (the following paraphrased for brevity):

1.  Issuers should be permitted to send notices to investors without being deemed to be engaged in a general solicitation.  The SEC should regulate the content of such notices.

2.  Social media content is short and accordingly disclosures and legends are problematic.  The CFIRA suggests that the rules allow the use of social media without legends so long as legends and disclosures are otherwise provided in an effective manner, such as by link.

3.  General solicitation prohibitions for crowdfunding should be limited to Issuers and not include communications by third parties out of the control of the issuer, such as when potential investors forward communications or share communications via social media.

4.  Exemption language should be included which reflects distribution or promotion of offerings via “0 characters” such as one-click buttons for Facebook “likes”, Google+1, Pin it, etc.

5.         The CFIRA suggest the following information be permitted in a crowdfunding notice, and not constitute a general solicitation: (i) name of business; (ii) amount of offering and type; name of intermediary and link to offering; and (iii) informational in nature, no guarantees of rates of return disclosure.

Finally, the CFIRA letter gives examples of 0 character, 140 character, 360 character and 1500 character language.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

On April 5, 2012 President Obama signed the JOBS Act into law. Part of the JOBS Act is the Crowdfunding Act, the full title of which is the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012”. The Crowdfunding Act, creates a new exemption to the registration requirements under a newly designated Section 4(6) of the Securities Act of 1933, as amended.

The new crowdfunding exemption allows Issuers to raise up to $1 million in a twelve month period, as long as no individual investment exceeds certain threshold amounts.  The threshold amount sold to any single investor, cannot exceed (a) the greater of $2,000 or 5% of the annual income or net worth of such investor, if their annual income or next worth is less and $100,000; and (b) 10% of the annual income or net worth of such investor, not to exceed a maximum $100,000, if their annual income or net worth is more than $100,000.  The Crowdfunding Act reads such that this exemption will integrate with (i.e. be added to) securities sold under other exemptions during the 12 month period.

In addition, an Issuer must:

(1)  File with the SEC and provide investors and the funding intermediary (whether a Funding Portal or broker dealer) and make available to potential investors:

(a) The name, legal status, physical address, and website address of the Issuer;

(b)  The names of the directors and officers, and each person holding more than 20% of the shares of the Issuer;

(c)  A description of the business of the Issuer and the anticipated business plan of the Issuer;

(d)  a description of the financial condition of the Issuer, including (i) for offerings of $100,000 or less – income tax returns for the most recently completed year and financial statements certified by the principal executive officer as true and correct; (ii) for offerings of more than $100,000 but less than $500,000 – financial statement reviewed by an independent public accountant in accordance with SEC standards and rules for such review; and (iii) for offerings more than $500,000 – audited financial statements; (note that the offering amount is determined by totaling all Section 4(6) offerings within the preceding 12 month period)

(e)  A description of the stated purpose and intended use of the proceeds of the offering;

(f)  The target offering amount and a deadline to reach the target and regular updates regarding the progress of meeting the target;

(g)  The price to the public of the securities and the method of determining the price;

(h)  A description of the ownership and capital structure of the Issuer including (i) terms of other securities offered and all other classes of securities of the Issuer including details on the differences and potential dilution that could result from a different class (for example, if preferred stock was converted); (ii) a description of how the exercise of rights held by principal shareholders could negatively impact the purchasers of the securities being offered; (iii) name and ownership levels of each existing shareholder owning 20% or more; (iv) how securities being offered are valued and examples of how they may be valued in the future; and (v) risks related to minority ownership and other capital related risk, such as by the issuance of additional shares, sales of assets, transactions with related parties;

(i)  All other risk factors of the offering;

(2)  Not advertise the terms of the offering, except for notices which direct investors to the Funding Portal or broker;

(3)  Not compensate, directly or indirectly, any person to promote the offering, unless certain disclosures are made regarding all such compensation; and

(4) File annual reports with the SEC and provide such reports to investors, with results of operations and financial statements.

These are the requirements laid out in the Crowdfunding Act and all are subject to “such other requirements that the SEC may, by rule, prescribe, for the protection of investors and the public.”  The SEC has not issued proposed rules as of today.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

On April 5, 2012 President Obama signed the JOBS Act into law. Part of the JOBS Act is the Crowdfunding Act, the full title of which is the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012”.  The SEC has been mandated with the task of drafting the crowdfunding rules and regulations by early 2013. In addition to fashioning the exemption that will allow companies to raise funds using the Crowdfunding Act, the SEC must also fashion rules to govern the crowdfunding intermediaries that companies will be required to use in the process.

Crowdfunding Intermediaries or Funding portals (the terms are interchangeable) are hurrying up to be ready to implement rules that will be enacted in early 2013 while at the same time, waiting to find out what those rules will be.  On May 7, 2012, the SEC issued limited guidance for crowdfunding intermediaries.  As has been the case since enactment of the JOBS Act, the SEC continues to ask for public comments and input on its regulatory initiative.  The full text of the guidance discussed in this blog is available on the SEC website.

For my information on funding portals and details of the JOBS Act text related to them, please see my blog entitled Jobs Act Intermediaries – hurry up and wait.

Intermediary Use and Registration Requirements

The Crowdfunding Act amends Section 4 by of the Securities Act of 1933 (the Securities Act) to create a new exemption to the registration requirements of Section 5 of the Securities Act.  The new exemption allows Issuers to solicit “crowds” to sell up to $1 million in securities as long as no individual investment exceeds certain threshold amounts.  In addition, Section 302 of the Crowdfunding Act requires that all

Crowdfunding offerings be conducted through an intermediary that is a broker dealer or funding portal that is registered with the SEC and are members of a registered self regulatory organization (SRO).  Currently that SRO is Financial Industry Regulatory Authority (FINRA).

• The Crowdfunding Act carves out a new class of “broker dealer” called “Funding Portals” that can act as Crowdfunding intermediaries.  Section 304 of the Crowdfunding Act provides that Funding Portals are exempt from the broker dealer registration requirements, as long as they are registered with the SEC as Funding Portals and follow all such registration and ongoing rule and reporting requirements.  In accordance with Section 304, Funding Portals must be “subject to the examination, enforcement and other rulemaking authority” of the SEC and must be a member of an SRO, such as FINRA.

Funding Portal Defined

Subject to additional requirements that the SEC may by rule draft, a funding portal is defined as a crowdfunding intermediary that does not: (i) offer investment advice or recommendations; (ii) solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal; (iii) compensate employees, agents, or other persons for such solicitation or based on the sale of securities it lists; or (iv) hold, manage, possess, or otherwise handle investor funds.

SEC Guidance

The SEC guidance reminds all potential funding portals that they may not act as such until when and if the SEC has drafted and enacted the Crowdfunding rules and regulations and each funding portal has registered with the SEC.  The SEC reminded broker dealers that they are under the same restriction.  Crowdfunding is not yet legal and the SEC has issued many reminders to people to not jump the gun.

The SEC further stated the obvious, they don’t know yet what the forms or process will be for registration, as the rules have not yet been written, nor the forms drafted.

Although it is unclear if FINRA or a new SRO will ultimately act as the regulatory for funding portals, the SEC reminded us that as of today, FINRA is the only SRO in existence registered with the SEC and accordingly, unless and until a new SRO registers under Section 15A of the Securities Exchange Act, FINRA will be the regulating SRO.

The SEC set forth the general terms of the JOBS Act related to funding portals, including that a Funding Portal must:

1. Provide disclosures, including disclosures related to risks;
2. Ensure that each investor reviews investor education information and positively affirms that they understand that they risk losing their entire investment and can afford such loss;
3. Ensure that each investor answers questions demonstrating an understanding of the level of risk generally applicable to investments in startups; emerging businesses, and small issuers;
4. Ensure that each investor answers questions demonstrating an understanding of the risk of illiquidity;
5. Take measures to reduce the risk of fraud by establishing rules and procedures including obtaining background and securities enforcement history checks on each officer, director and person holding more than 20% of the outstanding equity of an Issuer;
6. Not later than 21 days prior to the first day securities are sold file with the SEC and make available to potential investors all disclosure information required and provided by the Issuer
7. Ensure that no offering proceeds are given or available to the Issuer until the target offering amount has been raised and allow investors to cancel their investment during that time;
8. Make efforts to ensure that no investor exceeds its allowable investment amount in any 12 month period, including from all Issuers, and all Funding Portals (i.e. $2,000 or 5% of annual net income or net worth if net income or net worth is less than $100,000 or 10% of annual income or net worth up to $100,000 if annual income or net worth is over $100,000)
9. Take steps to protect the privacy of information collected from investors;
10. Not compensate promoters, finders, or lead generators for providing the broker or Funding Portal with personal indentifying information of any potential investor; and
11. Prohibit its directors, officers or partners from having any financial interest in any Issuer using its service.
12. Not offer investment advice or make recommendations or solicit purchases, sales or offers of securities
13. Not compensate employees, agent, or other persons for soliciting purchases, sales or offers of securities
14. Not hold, manage, possess or otherwise handle investor funds or securities

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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The Securities and Exchange Commission (SEC) today suspended the trading in 379 dormant shell companies.  This is the most trading suspensions in a single day in the history of the SEC.  The trading suspensions are part of an SEC initiative tabbed Operation Shell-Expel by the SEC’s Microcap Fraud Working Group.  Each of the companies was a dormant shell that was lacking any and all public disclosures.  That is, each of the companies failed to have adequate current public information available either through the news service on OTC Markets or filed with the SEC via EDGAR.

The federal securities laws allow the SEC to suspend trading in any stock for up to 10 business days. Once a company is suspended from trading, it cannot be quoted again until it provides updated information including complete disclosure of its business and accurate financial statements.  In addition to providing the necessary information, to begin to trade again, a company must enlist a market maker to file a new 15c2-11 application with FINRA.  For a Company with a trading suspension this is a difficult process.  Many market makers are unwilling to take on the assignment and when they do, the comment process with FINRA can be lengthy.  Moreover, even if a 211 application is approved by FINRA, DTC may still refuse to qualify the security for electronic trading.

I expect that the SEC is not finished sending its very loud message that companies without current information will not be allowed to trade.  Just as when the SEC first began suspending the trading of delinquent filers, I believe this is the first in many sweeping trading suspensions of shell companies.

The message is clear; either have current information available on OTC Markets or become a reporting entity on EDGAR, and remain current in your reporting obligations, or face a trading suspension.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

The SEC has approved the recent NASDAQ rule change to lower the minimum bid listing requirement from $4.00 to either $2.00 or $3.00 depending on qualification for certain other listing requirements.  The text of the entire new rule is available on the SEC website.

Pursuant to the new rule, a security would qualify for listing on the NASDAQ Capital Market if, for at least five consecutive business days prior to approval, the security has a minimum closing price of:

A. At least $3 per share, if the issuer meets either of the following standards determined as follows:

I. Under the Equity Standard, the Issuer would need to meet, among other things:

(i) stockholders’ equity of at least $5 million;

(ii) market value of publicly held shares of at least $15 million; and

(iii) two year operating history.

II. Under the Net Income Standard, the Issuer would have to meet, among other things:

(i) net income from continuing operations of $750,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years;

(ii) stockholders’ equity of at least $4 million; and

(iii) market value of publicly held shares of at least $5 million.

or

B. At least $2 per share, if the issuer meets the Market Value of Listed Securities Standard, which requires, among other things, that:

(i) market value of listed securities of at least $50 million (this requirement and the price requirement must be met for 90 consecutive trading days prior to applying for listing under this standard);

(ii) stockholders’ equity of at least $4 million; and

(iii) market value of publicly held shares of at least $15 million.

In addition, all issuers applying based on the new standards set forth above, must have either (a) net tangible assets as follows: (i) in excess of $2 million, if it has been in continuous operation for at least three years; or (ii) in excess of $5 million, if it has been in continuous operation for less than three years; or (b) average revenue of at least $6 million for the last three years.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

On April 5, 2012 President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) into law.  The other day I blogged about the changes to the general solicitation and advertising rules brought about by the JOBS Act.  Today I am focusing on the impact those rule changes will have on hedgefunds, and in particular, smaller hedgefunds.

Summary of JOBS Act Changes Effecting General Solicitation and Advertising of Private Offerings

Title II of the JOBS Act provides that, within 90 days of the passage of the JOBS Act (i.e. July 5, 2012), the SEC will amend Section 4(2) of the Securities Act of 1933 and Regulation D promulgated there under, to eliminate the prohibition on general solicitation and general advertising in a Rule 506 offering, so long as all purchasers in such offering are accredited investors.  The JOBS Act directs the SEC to make the same amendment to Rule 144A so long as all purchasers in the Rule 144A offering are qualified institutional buyers.  Neither a Rule 506 offering nor a Rule 144A offering will be considered a public offering (i.e. will lose its exemption) by virtue of a general solicitation or general advertising so long as the issuer has taken reasonable steps to verify that purchasers are either accredited investors or qualified institutional buyers, respectively.  Since it would be impossible to ensure that only accredited investors, or qualified institutional buyers, receive, review or become aware of general solicitations and advertisements, the rule focuses on ensuring that the purchasers qualify.

The SEC will need to formulate rules to determine what “reasonable steps” will be required from issuers to verify a purchaser’s status as either an accredited investor or a qualified institutional buyer.

JOBS Act Changes Number of Shareholders Requiring Registration

The JOBS Act amends Section 12(g) and Section 15(d) of the Exchange Act as to threshold shareholder requirements and registration and deregistration requirements such that the shareholder threshold before requiring registration and subsequent reporting with the SEC has been increased from 500 to either (a) 2,000 or more, or (b) 500 or more unaccredited shareholders;

Impact on Hedge Funds

The impact on hedge funds is obvious – they can now advertise for both accredited and qualified institutional investors.  Moreover, with the increased number of shareholders allowed before registration, a fund qualified for an exemption under Section 3(c)(7) of the Investment Company Act of 1940, can now advertise, and have 1999 accredited shareholders before they would have to register with the SEC and become reporting.

The lift on advertising goes beyond your basic ability to promote on the internet.  It is a lift on the ban for general solicitation, advertising and marketing in general.  For instance, for the first time, hedgefunds will be able to sponsor sporting events and sporting teams.

One caveat of the new rules is that advertising is only allowed where ALL investors are accredited or qualified institutions.  Accordingly, a fund with 35 unaccredited investors, would not be able to advertise, while those unaccredited investors remain in the fund.

Right now, many hedgefunds do not provide any details at all about their investment strategies, historical performance or forecasts of future performance for fear that such open information could be viewed as a solicitation and therefore a violation of the rules.  Upon enactment of the new rules (around mid July) that will all change.

Hedge Funds May Discuss Strategies and Performance

Now, not only will hedge funds be able to discuss their strategies, deal and performance in depth on their website, but on a broader scale, amongst each other.  Broker dealers will be able to pitch investors with glossy brochures.  Open invitation seminars, together with all the trimmings will make a comeback.

Of course the SEC and state anti-fraud rules stay in place (and I expect will be beefed up) as do FDA standard truth in advertising rules.

It is widely agreed that these changes will have a dramatic impact on smaller hedgefunds.  Now the big boys turn away investors; the smaller ones now have a way to find them.  Established hedgefunds think the idea of advertising is not only ludicrous, but somehow below them – a sign of weakness.   Although in the short term, they will not feel the impact, I would bet that in two years’ time, the entire hedge fund landscape will have evolved.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Title II of the JOBS Act provides that, within 90 days of the passage of the JOBS Act (i.e. July 5, 2012), the SEC will amend Section 4(2) of the Securities Act of 1933 and Regulation D promulgated there under, to eliminate the prohibition on general solicitation and general advertising in a Rule 506 offering, so long as all purchasers in such offering are accredited investors.  The JOBS Act directs the SEC to make the same amendment to Rule 144A so long as all purchasers in the Rule 144A offering are qualified institutional buyers.

Neither a Rule 506 offering nor a Rule 144A offering will be considered a public offering (i.e. will lose its exemption) by virtue of a general solicitation or general advertising so long as the issuer has taken reasonable steps to verify that purchasers are either accredited investors or qualified institutional buyers, respectively.  Since it would be impossible to ensure that only accredited investors, or qualified institutional buyers, receive, review or become aware of general solicitations and advertisements, the rule focuses on ensuring that the purchasers qualify.

The SEC will need to formulate rules to determine what “reasonable steps” will be required from issuers to verify a purchaser’s status as either an accredited investor or a qualified institutional buyer.

Allowing Middlemen that are not Broker Dealers

In addition, the JOBS Act opens the door for third parties to use general solicitation and advertising to sell and Issuer’s securities without being a registered broker dealer.  In particular, for a Rule 506 offering, a new exemption to the broker dealer registration requirements is added for:

(A) a person that  maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitations, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through any other means (i.e. has a website to advertise and sell other companies securities)

(B) that person or any person associated with that person co-invests in such securities; or

(C) that person or any person associated with that person provides ancillary services with respect to such securities.

Ancillary services are defined in the JOBS Act as (A) the provision of due diligence services, in connection with the offer, sale, purchase, or negotiation of such security, so long as such services do not include, for separate compensation, investment advice or recommendations to issuers or investors; and (B) the provision of standardized documents to the issuers and investors, so long as such person or entity does not negotiate the terms of the issuance for and on behalf of third parties and issuers are not required to use the standardized documents as a condition of using the service.

Finally, the exemption from registration as a broker or dealer also requires that such person and each person associated with such person (A) receives no compensation in connection with the purchase or sale of the security; (B) does not have possession of customer funds or securities in connection with the purchase or sale; and (C) is not subject to statutory disqualification pursuant to Section 3(a)(39) of the Exchange Act (i.e. bad boy provisions).

CONCLUSION

Title II of the JOBS Act allows the use of general solicitation and advertising to raise private funds for Issuers and hedgefunds.  It also removes any doubt that a website or middle man can introduce accredited investors to Issuers and be compensated for their services.  They still can’t collect a commission on the sale, but clearly now non-licensed individuals can make introductions for a fee (presumably an upfront or flat non-performance based fee).  Of course, this rule will allow crowdfunding sites to advertise offerings that will be limited to accredited investors.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Anyone that reads the trade journals knows that at-the-market offerings, or ATM’s as they are now known, have recently gained in popularity and are expected to continue to do so.  An ATM is the offering of securities by an Issuer either directly or through an underwriter, which securities are offered and distributed at the existing trading price.  In layman’s terms, an ATM occurs when an already public trading Issuer registers and sells additional securities to the public at the existing trading price, as opposed to a fixed price.  Accordingly, the price that shares sell at in an ATM will vary with the market price on any given day, or even throughout the day.

Under an ATM offering program, an exchange-listed company incrementally sells newly issued shares into the trading market through a designated broker-dealer at prevailing market prices, rather than via a traditional underwritten offering of a fixed number of shares at a fixed price all at once.  To complete an ATM, an Issuer must qualify to use Form S-3 for a shelf registration.  Although there are many ways for a larger company to qualify to use an S-3, generally an Issuer must have a public float valued in excess of $75 million.

Generally, the Issuer enters into a sales agreement with a market maker or broker dealer that agrees to “place” the shares that have been registered under the shelf registration statement when requested by the Issuer.  The Issuer must keep the shelf registration statement current until the offering is completed.

An ATM is a fantastic vehicle for both the qualifying Issuer and placement agent.  The qualifying Issuer can raise money on an as needed basis, basically there stock as a form of currency.  The placement agent can earn a fee for placing the stock, without the risk associated with a firm commitment underwriting.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.