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 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.

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.

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.

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.

A.       The New “Emerging Growth Company” Category

The JOBS Act will create a new category of companies defined as “Emerging Growth Companies” (EGC).  An EGC will be defined as a company with annual gross revenues of less than $1 billion, that has been public and reporting for a minimum of five years and whose non-affiliated public float is valued at less than $700 million.  EGC’s will have reduced requirements associated with initial public offerings (IPO’s) and ongoing reporting requirements.  For many purposes, EGC’s will be allowed to use the less stringent reporting requirements now available for small public companies, defined as those with less than $75 million in revenues.

In particular, (i) EGC’s will only need to provide two years of audited financial statements instead of the now required three years; (ii) EGC’s can report executive compensation as a small business and will not be required to obtain shareholder approval for executive officer compensation; (iii) no internal control over financial reporting audit requirements; (iv) relief from compliance with new US GAAP accounting requirements; (v) confidential treatment of IPO filing documents until just 21 days prior to commencing a road show; (vi) elimination of restrictions on publishing analyst research and communications while IPO’s are underway.

B.        Amendments to Regulation A

The JOBS Act will increase the offering limit under Regulation A from $5million to $50 million and allow solicitation in association with a Regulation A offering.  A Regulation A offering involves the filing of a short form registration statement with the SEC, results in freely tradeable (unrestricted securities), but does not result in public reporting requirements.  That is, companies will now be able to use Regulation A to complete large private offerings, and then investors in the Regulation A offering will immediately be able to sell or transfer their interests using private company market places (PCMP’s).  A new public/private trading platform if you will.

And – my favorite:

C.        Crowdfunding

The following is a summary of the new crowdfunding rules:

(i)            Issuers are limited to raising no more than $1 million in any 12 month period (like the current Rule 504 exemption)

(ii)           Each investor is limited to the greater of $2,000 or 5% of their annual income if such income is $100,000 or less; or $100,000 or 10% of annual income for investors with an annual income in excess of $100,000

(iii)          Issuers must file a report with the SEC and provide investors with the report disclosing (a) financial statements (unaudited for offerings less than $500,000 and audited for over $500,000); (b) business description; (c) intended use of proceeds; (d) offering amount and term of offering; (e) pricing and method used to determine pricing; (f) management and bios of same; and (g) current ownership/capitalization

(iv)         Issuers will be required to file limited annual financial statements for a period after the offering;

(v)          offerings will need to be conducted through licensed intermediaries; intermediaries do not need to licensed broker dealers but will be required to be members of an SRO such as the new Crowdfund Intermediary Regulatory Association (CFIRA)

(vi)         advertising will be allowed in a limited fashion such as a tombstone ad directing investors to the licensed intermediary;

(vii)        securities sold will be subject to holding periods and resale restrictions

(viii)       only available to U.S. organized entities;

(ix)         only available to non-reporting entities;

(x)          pre-empts state law such as Rule 506 does now;

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 Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade 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 compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). 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 the Exchange Act, state law and FINRA 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.

Opportunity For All Americans

Crowdfunding provides an opportunity for all Americans, whether accredited or not, and whether connected with an elite investment banking firm or not, to invest small amounts of money in small businesses that they know or just believe in.  Small businesses provide jobs and sometimes small businesses become big businesses.  For the first time in history average Americans will have an opportunity to invest in these businesses at the ground level.  The crowdfunding bill accomplishes this goal in two ways.  First it creates a legal exemption to allow small investors to invest small amounts of money in businesses without first requiring registration with the SEC.  Second, it allows small businesses to advertise for these investors, through CFIRA member intermediaries, where before such advertisement was strictly prohibited.

In addition to providing investors with the opportunity to invest on the ground floor level of businesses, the bill provides small businesses with access to capital, and access to capital means the ability to hire employees.

SEC to Structure New Regulations

The crowdfunding bill gives the SEC nine months to structure the new regulations.  The CFIRA will work closely with the SEC to accomplish this goal.  It is anticipated that the new regulatory framework will, at the least provide for (i) a method to test an investors understanding of the investment and risk; (ii) basic background on the Issuers including criminal checks; (iii) adequate disclosure on the investment; (iv) confidentiality regarding information provided by investors, including financial information; (v) centralized reporting by both issuers and investors to ensure that the statutory dollar limits are not exceeded; and (vi) set forth regulations for the operations of the intermediaries, including professional conduct and rules of fair play.

From a more specific legal standpoint, the new regulations will:

• Create a new exemption under Regulation D allowing for the private placement of securities to unaccredited investors through crowdfunding intermediary websites;

• Allow for the public advertising and promotion of private securities offerings;

• Amend the Sarbanes-Oxley Act of 2002 to decrease the reporting and internal control requirements for smaller public companies;

• Expand the number of private shareholders from 500 to 2,000 before mandatory SEC reporting;

• Provide regulations to support private company market places (PCM’s)

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 Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade 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 compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). 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 the Exchange Act, state law and FINRA 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.

Crowdfunding Exemption Possibilities

The exemption will likely be limited to $1 million in any twelve (12) month period, or up to $2 million if the company provides certain financial disclosure such as audited financial statements.  As proposed, each investor will be limited $10,000 or 10% of their annual income, whichever is less.  As crowdfunding is structured as an exemption, the Issuer remains private until, when and if, it embarks on a going public transaction, such as filing a registration statement on its existing shareholders, completing an IPO, competing a reverse merger, etc..

In addition to creating regulations for the raising of the funds, a new self regulatory organization (SRO) is being formed to regulate and oversee the intermediaries and portals which will serve the crowdfunding needs.  The new SRO is The Crowdfunding Intermediary Regulatory Association (CFIRA) and its formation is underway.  The CFIRA will be charged with ensuring investor protection and market integrity.  The CFIRA will have members from crowdfunding investor intermediaries as well as related industries such as venture capital firms.  In addition to regulating its members, the CFIRA will provide investors with information such as learning about crowdfunding and its risks.

CAPS Program

A new program initiative is also underway with the goal of educating and protecting investors, crowdfunding intermediaries and Issuers.  This program is the Crowdfunding Accreditation for Platform Standards (CAPS).  The CAPS program will, hopefully, provide funding and capital to assist in this new securities sector.  It will review the industry and provide feedback and qualification criteria.

There is so much information already available on this exciting new securities sector.  I feel as if I’m in school again, and I’ll share the knowledge as I go.

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 Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade 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 compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). 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 the Exchange Act, state law and FINRA 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.

A Whole New Exemption

Over the years I have consistently received calls from potential clients that wish to use the exemptions provided for in Regulation D to raise money for small or start up ventures.  Many of these individuals believe, mistakenly, that Regulation D provides them with a method to raise money.  It does not.  Regulation D only lays out rules to follow to utilize an exemption from the registration requirements in the Securities Act of 1933.  These rules include such items as limitations on the dollar amount raised; who you can raise money from, how you can raise money, prohibitions on advertising and solicitation, disclosure documents required, etc…  All of these rules are necessary and serve a function, but the rules do not provide any insight on how to actually go about raising the money.  For the first time in history, or at least my history, the government may fashion a system that not only sets out an exemption from registration, but provides the “how to raise the money” aspect as well.

Ok, so the JOBS Act doesn’t result in “pick your check up here” but it will allow entrepreneurs, innovators, job creators, and the world of small business to access capital markets in a way never before possible.  The crowdfunding bill provides for SEC regulations that will allow companies to utilize the internet to raise funds from a large number of smaller investors.  The bill removes SEC regulations prohibiting advertising and solicitation for private placements.

In short, companies will be able to raise small amounts of money either directly off their own website or using intermediaries set up for the purpose.  The exemption will likely be codified as a new and separate exemption under Regulation D and will include an overhaul of the current general provisions of Regulation D found in Rules 501-503.  The exemption will be limited to $1 million in any twelve (12) month period.

Crowdfunding Exemption

The exemption is really designed for start-ups and smaller companies that need seed capital.  Since the amount raised is per twelve months, companies need to plan accordingly.  Moreover, since a Company could end up with a couple hundred shareholders to raise $1mill, they will likely need a transfer agent to maintain shareholder records.   At a couple hundred shareholders per round of financing, this is not a route that a company will want to tap more than once or twice.  If a Company will need $30 mil in the next 2-4 years, crowdfunding is not viable, but if they need $2 mil in the same time frame, it is a workable option.

Attorneys for crowdfunding clients should make sure that the insiders maintain shareholder voting control under their state of incorporation to avoid problems getting shareholder approval for future financings or going public transactions.  Attorneys should carefully discuss future plans with their clients.  It is uncertain how venture capital firms, investment bankers and wall street in general will respond to companies that start off with a large shareholder base.  There will definitely be a learning curve, so companies that foresee the need to go the traditional IPO or wall street route within a few years should be cautious.  That doesn’t mean that they shouldn’t partake in the crowdfunding though.  I firmly believe that the markets will quickly adjust and find ways to move these companies up the food chain, where the product, revenues and interest exist.

Other than this brief statement, I will not devote time in this blog to the naysayers because I see too much positive potential and too much of a serious need for this bill to dilute with the negative.   The naysayers are concerned that the changes open the door to additional fraud and scams in the investment world.  There has always been and will likely always be financial crimes committed by the unscrupulous, and opportunistic fraudsters will always find a way to commit their crimes using our capital markets.   Part of progress is dealing with that reality, not ceasing progression.

I’ll discuss more on that in the next blog.

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 Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade 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 compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). 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 the Exchange Act, state law and FINRA 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’s Stance

As noted in the SEC opinion:

“…DTC provides clearance, settlement, custodial, underwriting, registration, dividend, and proxy services for a substantial portion of all equities, corporate and municipal debt, exchange traded funds, and money market instruments available for trading in the United States.  In 2010, DTC processed 295,000,000 book entry transfers of securities worth $273.8 trillion.”

If DTC doesn’t process and settle trading in your securities, it just doesn’t happen.

My previous blogs discussed how to become DTC eligible.  From the DTC perspective, a chill does not change the eligibility status of an Issuer’s securities, just what services the DTC will offer for those securities.  So while an Issuer’s securities may still be in street name (a CEDE account), DTC can refuse to allow the book entry trading and settlement of those securities.

International Power Group, Ltd.

On March 15, 2012 the Securities and Exchange Commission (SEC) issued an administrative opinion that sheds some light, though not much, on the DTC process (In the Matter of the Application of International Power Group, Ltd. Admin. Proc. File No. 3-13687).  As further discussed herein, the SEC ultimately issued an opinion stating that an Issuer is entitled to due process proceedings by DTC as a result of a DTC chill placed on an Issuers securities.

In the Matter of the Application of International Power Group, Ltd. (IPWG), in September 2009, DTC put a chill on the trading of IPWG’s securities following the initiation by the SEC of an action against certain defendants, not IPWG, for improper issuance and trading in certain OTC securities, including IPWG and 3 other Issuers.  Neither IPWG nor any of its officers or directors was a party to the SEC proceeding.

The portion of the SEC action related to IPWG indicated that about 80,000,000 shares of IPWG stock was sold in the public markets without proper registration or an exemption from registration.  In May 2010 the SEC settled with the Defendants related to IPWG for the usual penalties and permanent injunctions, which settlement did not address the already issued securities.

DTC Hearings and Rule 22

Upon learning of the DTC chill, IPWG requested that DTC provide a hearing in accordance with its Rule 22, the only DTC rule that allows for some sort of hearing process.  Rule 22 provides an opportunity for Interest Persons to be heard on any determination by DTC that an Issuer’s security is no longer an eligible security.  DTC denied IPWG’s request for a hearing stating that IPWG’s securities were still eligible and that it would lift the chill “once the matter of the unregistered IPWG shares is resolved with the SEC.”  DTC suggested IPWG take the matter up with the SEC.

IPWG was in a quandary.

There was no action pending with the SEC within which IPWG was a party and the SEC action related to IPWG shares had been settled, without addressing the “matter of the unregistered IPWG shares.”

No Clear Way Out

There was no clear way to take the matter up with the SEC.  In addition, there was no clear way to take the matter up with DTC.  DTC works through Participants – i.e. licensed broker-dealers not Issuers.  (See my previous blog on DTC eligibility).  Moreover, the shares it actually holds and trades are already issued and belong to shareholders, not the Issuer.  So, although IPWG was clearly and undeniably greatly impacted by the DTC chill, DTC took the position that it didn’t have any particular obligation to IPWG for its actions.

IPWG filed an administrative appeal with the SEC looking for assistance.  A discussion of jurisdiction and the rules vis a vie getting this matter in front of the SEC is beyond the scope of this blog, but suffice it to say, after much legal wrangling and a realization by all involved that there was no precedent to look upon, the SEC agreed to take the matter on.

Definition of Interested Person

In its opinion, the SEC held that an Issuer, in this case IPWG, was an Interested Person for purposes of Rule 22 and was impacted by the DTC chill such that they are entitled to due process and fair proceedings. The SEC did not tell DTC what the criteria for determining whether the chill was appropriate or not should be, only that the Issuer is entitled to “fair procedures”.  However, prior to the March 15, 2012 opinion, DTC could affect a chill on the trading of an Issuer’s security for an indefinite time, at its sole discretion, without recourse.  In fact, the way Rule 22 was written, prior to the March 15, ruling, not even a Participant broker dealer could appeal a chill.

Moreover, and importantly, the SEC held that in the future, an Issuer who is negatively impacted by DTC action can avail itself of the SEC administrative proceedings process for appeal following a negative decision in a DTC hearing and proceeding.

Emergency Chills and Fair Practice

Finally, the SEC confirmed that DTC can still put a chill on an Issuer’s security, prior to giving notice and an opportunity to be heard to that Issuer, in an emergency situation, stating “[H]owever, in such circumstances, these processes should balance the identifiable need for emergency action with the issuer’s right to fair procedures under the Exchange Act.  Under such procedures, DTC would be authorized to act to avert imminent harm, but it could not maintain such a suspension indefinitely without providing expedited fair process to the affected issuer.”

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 Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade 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 compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). 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 the Exchange Act, state law and FINRA 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.