The JOBS Act Implementation Update
 

The JOBS Act Implementation Update

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    The JOBS Act Implementation Update The JOBS Act Implementation Update Presentation Transcript

    • Monthly  Webinar  Series    presents    The  JOBS  Act  Implementation  Update    October  11,  2012    Panelists  David  Weild,  Grant  Thornton,  CMA  Partners  John  D.  Hogoboom,  Lowenstein  Sandler  Tim  Keating,  Keating  Capital    Moderator  Brett  Goetschius,  Growth  Capital  Investor    
    • Thank  you  for  participating  in  “The  JOBS  Act  Implementation  Update.”    This  manual  contains  information  you  will  need  to  prepare  for  this  webinar.    CONFERENCE  MANUAL    This  manual  contains:       •Dial-­‐in/log-­‐on  instructions.     Speaker  bio  and  contact  information.     •Tips  for  submitting  questions.     •Pertinent  information  from  the  pages  of     Growth  Capital  Investor.    CONFERENCE  DETAILS    The  webinar  is  scheduled  for  Thursday,  October  11,  2012  at  2:00  p.m.  EDT,  1:00  p.m.  CDT,  12:00  p.m.  MDT,  and  11:00  a.m.  PDT.  It  will  last  110  minutes.    HOW  TO  JOIN  THE  WEBINAR    Online  With  Streaming  Audio  •Go  to  http://web.beaconlive.com  •On  the  “Join  a  Meeting”  side  of  the  login  page,  enter  meeting  room:  mnm2  •Enter  your  unique  PIN  (same  as  the  audio  PIN  you  received).  •Click  on  “Join  Meeting”  to  access  the  presentation.    Optional  Telephone  Access  If  you  have  trouble  streaming  the  sound  through  your  computer,  please  follow  these  instructions  to  listen  by  phone:    •Dial  1-­‐  866-­‐953-­‐3919  about  5-­‐10  minutes  before  the  start  of  the  conference.    •Enter  your  unique  PIN  (sent  in  your  e-­‐mail  confirmation).  •You  will  hear  music  on  hold  until  the  conference  has  started  or  be  connected  directly  if  it  has  already  begun.  •If  you  have  trouble  with  your  PIN  stay  on  the  line  and  an  operator  will  assist  you.  •If  you  are  using  a  speakerphone,  put  the  phone  on  MUTE  for  the  best  sound  quality.  •If  you  are  disconnected  at  any  point,  just  repeat  the  processes  above.      PLEASE  NOTE:  Only  one  dial  in  and  one  log  on  per  PIN  are  allowed.      If  you  have  problems  accessing  the  webinar,  please  call  877-­‐297-­‐2901.    HOW  TO  SUBMIT  QUESTIONS    Questions  may  be  submitted  at  any  time  during  the  call  using  the  chat  function  on    the  web  interface  in  the  lower  left  corner  of  your  screen.  Just  type  in  your  question  and  send  it  to  “Q&A  session”  in  the  drop-­‐down  menu.    Conference Manual Page 1
    • SPEAKER  BIOS  AND  CONTACT  INFORMATION        David  Weild  IV  is  Chairman  and  CEO  of  Capital  Markets  Advisory  Partners  and  heads  Capital  Markets  at  Grant  Thornton.  He  was  a  former  Vice  Chairman  and  executive  committee  member  of  The  NASDAQ  Stock  Market.  David  is  an  expert  on  how  stock  market  structure  impacts  capital  formation  and  job  creation.  Together  with  Ed  Kim,  their  work  created  the  rationale  that  gave  rise  to  The  JOBS  Act.  David  and  co-­‐author  Ed  Kim’s  written  work  was  the  first  to  identify  how  changes  in  stock  market  structure  are  harming  capital  formation  and  job  growth  in  the  United  States.  He  was  also  a  member  of  the  NYSE  and  NVCA’s  (National  Venture  Capital  Association)  Blue  Ribbon  Panel  to  restore  liquidity  in  the  US  venture  capital  industry  and  his  work  was  cited  in  the  NVCA’s  final  report.    CONTACT  David  Weild  IV  Chairman  and  CEO  Capital  Markets  Advisory  Partners  david.weild@us.gt.com  david.weild@cmapartners.com  212-­‐542-­‐9979  Conference Manual Page 2
    • © Grant Thornton LLP. All rights reserved.The JOBS Act:David Weild: How It Came AboutOctober 11, 2012Conference Manual Page 3
    • © Grant Thornton LLP. All rights reserved. 2Important publicationsContain exhibits that helped identify the problem for CongressContain recommendations that are now found in the JOBS Act- Cited in Congress - Cited by the U.S. Treasury - Cited by the SEC- Cited by the Senate - Cited by The Presidents Jobs CouncilSubscribe to the Capital Markets Series at www.GrantThornton.com/subscribeNovember 2008 November 2009 June 2010 October 2011 September 2012Conference Manual Page 4
    • © Grant Thornton LLP. All rights reserved. 3Attended the signing of the JOBS Act in the WhiteHouse Rose GardenThought leadership citations and public policyactivity“The problems documented by[Weild & Kims] studies led tothe JOBS Act (HR 3606).""Broken Markets"Sal Arnuk and Joseph Saluzzipage 198FT PressMay 2012Conference Manual Page 5
    • © Grant Thornton LLP. All rights reserved. 4Small IPO collapse before Decimalization andSarbanes-OxleyEarlier version show in the House Subcommittee on Capital Markets0%10%20%30%40%50%60%70%80%90%100%91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11PercentageoftotalU.S.IPOsOrder Handling RulesRegulation NMSRegulation ATSDecimalizationSources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and DealogicData includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs.Transactions raisingless than $50 millionTransactions raisingat least $50 millionMajor U.S. regulationsSarbanes-OxleyConference Manual Page 6
    • © Grant Thornton LLP. All rights reserved. 5U.S. has lost over 43.5% of publicly listed companiessince 1997Earlier version shown in the House Subcommittee on Capital Markets(100)(50)05010015020025091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11Indexedvalueofselectedglobalexchangelistings(1997=0)The U.S. listed markets—unlike other developed markets—have been in steady decline, with no rebound,since 1997Hong KongChinaAustraliaUnited StatesDeutsche BörseTokyoToronto LondonSources: Capital Markets Advisory Partners LLC and World Federation of ExchangesBased on the number of listed companies at year-end, excluding funds. Data as of Dec. 31, 2011.Conference Manual Page 7
    • © Grant Thornton LLP. All rights reserved. 6The JOBS ActSeminal events   NYSE/NVCA Blue Ribbon Task Force20082009  Senator Kaufman speech on the floor of the U.S.Senate  CFTC-SEC Joint Panel on Emerging RegulatoryIssues20102011Title IV - House subcommittee on capital markets(testimony 3/16)  President Obama cites IPO market problems(9/8 speech)  SEC Small Business Forum (testimony 11/17)  Signing of The JOBS Act  SEC Advisory Committee testimony(Decimalization)  Congressional testimony (Decimalization)2012"How can we create a market structure that works for a $25million IPO—both in the offering and the secondaryaftermarket. If we can answer that question, this countrywill be back in business."Title I - Met with to interest Kate Mitchell who laterChaired the IPO Task Force for the US TreasuryWhy are IPOs inthe ICU? (11/2008)Titles II, V, VI - A wake up call for America(11/2009)"We’re also planning to cut away the red tapethat prevents too many rapidly growingstartup companies from raising capital andgoing public."Conference Manual Page 8
    • © Grant Thornton LLP. All rights reserved. 7IPO crisis led to higher unemploymentMillions of jobs were likely lost to the U.S. economy-510152002004006008001,0001,20091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11AdditionaljobsMillionsDomesticcompaniesgoingpublicintheU.S.Minimumadditional jobs(direct plusprivate marketeffect)*+3.1 million jobs (direct)*Best estimate of the multiplier effect in the private market of more companies going publicSources: Grant Thornton LLP, Dealogic and the U.S. Department of Commerce Bureau of Economic AnalysisDomestic corporate companies going public in the U.S. as of Dec. 31, 2011, excluding funds, REITs and other trusts, SPACs and LPs.Assumes an annual growth rate of 2.57% (U.S. real GDP growth, 1991-2011) and 822 jobs created on average post-IPO (see "Post-IPOEmployment and Revenue Growth for U.S. IPOs," Kauffman Foundation).+6.2 million jobs (direct plus private market effect)+9.4 million jobs (direct)+18.8 million jobs (direct plus private market effect)Minimumadditional IPOsActual number ofdomestic IPOsMaximumadditional IPOsMinimumadditional jobs(direct)Maximumadditional jobs(direct plusprivate marketeffect)*Maximumadditional jobs(direct)A major contributor to employmentConference Manual Page 9
    •    John  D.  Hogoboom  is  a  founding  member  of  the  Lowenstein  Sandler  Specialty  Finance  Group  and  is  co-­‐chair  of  the  Life  Sciences  group.  He  specializes  in  representing  clients  in  the  life  sciences  and  other  industries  in  mergers  and  acquisitions,  public  and  private  securities  offerings,  private  equity  investments  and  general  corporate  and  securities  law.  John  is  listed  among  The  Best  Lawyers  in  America  in  the  2007-­‐2012  editions  of  the  publication  in  both  the  corporate  law  and  securities  law  categories.        CONTACT  John  D.  Hogoboom  Founding  Member  Lowenstein  Sandler  Specialty  Finance  Group  973-­‐597-­‐2382    jhogoboom@lowenstein.com  Conference Manual Page 10
    • Jumpstart Our BusinessStartups Act (“JOBS Act”)General Solicitation ProvisionsOctober 2012Conference Manual Page 11
    • JOBS Act – General Solicitation  Section 201(a) of the JOBS Act required the SEC to adopt final rules on orbefore July 4, 2012 permitting widespread advertising and other forms of“general solicitation” in private offerings in reliance on Rule 506 underRegulation D or Rule 144A so long as all of the actual purchasers of thesecurities were “accredited investors” (in the case of Regulation D) or “qualifiedinstitutional buyers” (in the case of Rule 144A).  SEC failed to meet the required deadline.  On August 29, 2012, the SEC proposed amendments to Rule 506 ofRegulation D and Rule 144A to implement the requirements of Section 201(a).  Comments on the proposed rules were due by October 5, 2012. Expect finalrules to be issued shortly.Conference Manual Page 12
    • Summary of Proposed Rules  Rule 506 would be amended to add paragraph (c), providing a newand separate exemption under the Rule that would permit an issuer touse general solicitation and general advertising to offer securities,provided that the issuer takes reasonable steps to verify that allpurchasers of the securities are accredited investors.  The proposed rules would continue to apply the “reasonable belief”standard to the condition that all purchasers are accredited investors.  Whether the steps taken by the issuer to verify the accredited investorstatus of the purchasers are “reasonable” would be an objectivedetermination, based on the particular facts and circumstances of eachoffering and investor. The proposed rules do not prescribe particularverification procedures.Conference Manual Page 13
    • Effects on Other Requirements  The SEC confirmed in the proposing release that:–  Consistent with the historical treatment of concurrent Regulation Sand Rule 144A/Rule 506 offerings, concurrent offshore offerings thatare conducted in compliance with Regulation S would not beintegrated with domestic unregistered offerings that are conducted incompliance with Rule 506 or Rule 144A, as proposed to beamended.–  Privately offered funds would be permitted to make a generalsolicitation under amended Rule 506 without losing the ability to relyon Sections 3(c)(1) and 3(c)(7) of the Investment Company Act,which provide commonly used exclusions from the definition of“investment company”.Conference Manual Page 14
    • Proposed Rule 506(c)  Under proposed Rule 506(c), an issuer (and any selling agents) wouldbe permitted to use general solicitation and general advertising to offerand sell securities, provided that the following conditions are satisfied:–  The issuer must take reasonable steps to verify that all purchasers of thesecurities are accredited investors.–  All purchasers of the securities must be accredited investors, either becausethey come within one of the enumerated categories of persons that qualifyas accredited investors or because the issuer reasonably believes that theydo, at the time of the sale of the securities, in each case as defined underexisting Rule 501 of Regulation D.–  All terms and conditions of existing Rules 501 (definitions), 502(a)(integration restriction) and 502(d) (resale limitations) of Regulation D mustbe satisfied. Existing Rule 502(c), prohibiting general solicitation andgeneral advertising, would not apply.Conference Manual Page 15
    • Verification Requirement  In the proposing release, the SEC did not propose specific verification methods.  Objective test determining the reasonableness of the verification steps  The issuer must consider the facts and circumstances of the transaction, including, among otherthings:–  The nature of the purchaser and the type of accredited investor that the purchaser claims to be.§  For example, more may be required to verify information about an individual using the net worth test than about an institutionalinvestor.–  The amount and type of information that the issuer has about the purchaser.§  The more information an issuer has, the fewer steps would be required to verify the purchaser’s status.-  Publicly available filings-  Third-party evidence such as W-2s-  Third-party verification (including by broker-dealers) so long as issuer has a reasonable basis to rely on the verification-  If issuer has pre-existing, substantive relationship with proposed investor, may not be required to verify the investor’s status–  The nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering,and the terms of the offering, such as a minimum investment amount.§  Require more to verify an unknown purchaser solicited through general advertisement§  Not sufficient to check a box or sign a form absent other information§  Higher the minimum investment amount, less likely that a non-accredited investor would be able to purchase  Issuers must maintain adequate records documenting the verification process.  Many existing practices may satisfy the new verification requirements.  Exemption continues to be based on reasonable belief. Presence of a non-accredited investor notfatal as long as the issuer had a reasonable belief that the investor was accredited.Conference Manual Page 16
    • No impact on existing Rule 506  New verification requirement would only apply to offeringsof securities conducted pursuant to the new Rule 506(c).Other offerings conducted pursuant to existing Rule 506(b)that do not involve general solicitation or generaladvertising will not be subject to the verificationrequirement.  506(c) not likely to benefit existing public companies whohave other compelling reasons to maintain confidentiality ofoffering process.Conference Manual Page 17
    • Impact on other requirements  Proposed Amendments to Rule 144A–  Under the proposed amendments to Rule 144A, securities sold pursuant to Rule 144A may beoffered to persons other than “qualified institutional buyers”, including by means of generalsolicitation or general advertising, provided that the securities are sold only to persons that theseller and any person acting on behalf of the seller reasonably believe is a qualified institutionalbuyer.  Impact on Concurrent Regulation S Offerings–  Regulation S provides a safe harbor for offers and sales of securities outside the United States,provided that the securities are sold in an offshore transaction and the issuer has not engaged inany “directed selling efforts” in the United States. In the proposing release, the SEC confirmed thatconcurrent offshore offerings that are conducted in compliance with Regulation S would not beintegrated with domestic unregistered offerings that are conducted in compliance with Rule 506 orRule 144A, as proposed to be amended.  Investment Company Act Exclusion for Private Funds–  Privately offered funds, such as hedge funds, venture capital funds and private equity funds,generally rely on exclusions in the Investment Company Act that are not available if the fundmakes a public offering of securities. In the proposing release, the SEC affirmed its belief thatSection 201(b) of the JOBS Act, which provides that offers and sales exempt under Rule 506 ofRegulation D (as revised pursuant to the JOBS Act) “shall not be deemed public offerings underthe Federal securities laws as a result of general advertising or general solicitation”, permitsprivately offered funds to make a general solicitation under proposed new Rule 506(c) withoutlosing the benefit of the exclusions under the Investment Company Act.Conference Manual Page 18
    • SEC Monitoring Potential Abuse  The SEC has noted that the proposed rules are narrowly focused onimplementing the statutory mandate under Section 201(a) of the JOBSAct and that the SEC and its staff will continue to monitor the privateplacement market as a whole to analyze the impact, including anyunintended consequences, of the proposed rules on investors, issuersand the markets.  The SEC also noted that that the Dodd-Frank Act requires ongoingevaluations of the definition of “accredited investor” that would give theSEC flexibility to combat abusive practices.  Pursuant to the Dodd-Frank Act, the SEC has proposed rulesdisqualifying felons and other “bad actors” from relying on the Rule 506exemption to offer and sell securities.Conference Manual Page 19
    • Other Considerations  Unclear what the impact of proposed Rule 506(c) will be on statesecurities regulations, many of which condition exemptions on the lackof general solicitation.  Will the SEC acknowledge that rules permitting general solicitationmean that public and “private” deals now can be done side-by-side.  Will issuers use third-party verification services?Conference Manual Page 20
    • JOBS Act – Analyst Provisions  Section 105 of the JOBS Act contains provisionsallowing greater analyst participation in initialpublic offerings for “emerging growth companies”.Conference Manual Page 21
    • Summary of Analyst Provisions  Section 105 of the JOBS Act:§  Permits a broker or dealer to publish research on an emerging growth company that is thesubject of a proposed public offering at any time even if the broker or dealer is participating inthe offering (not limited to IPOs);§  Permits publication of research on an emerging growth company after its IPO withoutcomplying with any waiting period or waiting for the expiration of any lock-up agreement;§  Prohibits the SEC or any national securities association from adopting or maintaining any rulerestricting, based on functional role, which associated persons of a broker, dealer, or memberof a national securities association, may arrange for communications between a securitiesanalyst and a potential investor in an IPO of an emerging growth company; and§  Prohibits the SEC or any national securities association from adopting or maintaining any rulerestricting a securities analyst from participating in any communications with the managementof an emerging growth company that is also attended by any other non-research employee.Conference Manual Page 22
    • Staff FAQs  On August 22, 2012, the Staff of the SEC issued a series of “frequently asked questions”relating to the analyst provisions in the JOBS Act.  The provisions of the JOBS Act do not amend or modify the Global Research Settlement(the "Settlement"). Any firm subject to the Settlement would have to petition the court fora modification of the Settlement in order to take advantage of the JOBS Act provisions.  The "test the waters" provisions of the JOBS Act allow underwriters to seek nonbindingindications of interest but not to ask for a purchase commitment from customers.  The JOBS Act does not address communications where investors are present togetherwith company management, analysts and investment banking personnel. Accordingly,analysts remain prohibited from participating in road shows or otherwise engaging incommunications with customers about a transaction while in the presence of investmentbankers or company management.  The Staff indicates that further updates to these FAQs may be provided.Conference Manual Page 23
    • Continuing Analyst Prohibitions  The Staff believes that, consistent with current SEC and SRO rules, analysts may attend meetingswith management of an emerging-growth company and investment banking personnel.  Analysts continue to be subject to existing restrictions, such as:–  prohibitions on soliciting investment banking business,–  changing a recommendation in exchange for investment banking business,–  exchanging favorable recommendations for investment banking business, and–  publishing research with which the analyst personally disagrees.  Investment banking personnel may not direct an analyst to engage in sales and marketing effortsrelating to a proposed offering.  Analysts continue to be prohibited from participating in roadshows or otherwise engaging incommunications with customers about an investment banking transaction in the presence ofinvestment bankers or the company’s management.  SRO rules regarding supervision, compensation or evaluation of analysts have not changed.  Firms are cautioned to ensure that they institute and enforce appropriate controls to ensure thatanalysts are not engaging in prohibited conduct, including solicitations, at meetings that are alsoattended by investment banking personnel.Conference Manual Page 24
    • Permissible Analyst Activities  Prior to engagement, at meetings with management and investment banking personnel, analysts atfirms not subject to the Settlement can–  introduce themselves,–  outline their research program and the types of factors that the analyst would consider in his or her analysis, and–  ask follow-up questions to better understand factual statements made by company management.  After engagement, such analysts can–  participate in presentations by management of an emerging-growth company to sales forces (but only to avoid theneed to make separate presentations to the analysts),–  discuss industry trends,–  provide information obtained from investing customers and–  communicate their views.  Investment bankers can forward a list of clients to an analyst for the analyst to contact.  An analyst may provide a list of potential clients he or she intends to contact for investment bankingpersonnel "to facilitate scheduling.“  Bankers can also arrange, but may not participate in, calls analysts have with clients.  Deemed not to be directing an analyst to engage in sales or marketing efforts in violation of FINRAand NYSE rules.Conference Manual Page 25
    • Free-Writing  The Staff believes that, consistent with the intent of the JOBS Act, research reportsshould be allowed to be published with respect to an emerging-growth company duringall quiet periods — whether before or after the expiration, termination or waiver of alockup period or whether the lockup relates to an IPO or a secondary offering of thecompanys securities.  On September 28, FINRA filed a notice of proposed rule change with the SEC toconform applicable NASD rules to the FAQs. The notice indicates that FINRA intends toeliminate the following quiet periods:–  40-day period for manager or co-manager of an IPO–  25-day period for other IPO participants–  15-day period applicable to manager or co-manager of an IPO prior to expiration, waiver ortermination of a lock-up agreement.–  10-day quiet period on manager or co-manager of a secondary offering–  All quiet periods applicable after the expiration, termination or waiver of a lock-up agreement.  FINRA is seeking SEC approval for these changes prior to the end of the normal 30-paypost publication period and that the approval be retroactive to April 5, 2012 (the date ofenactment of the JOBS Act).Conference Manual Page 26
    • Summary of Proposed Rules  Rule 506 would be amended to add paragraph (c), providing a newand separate exemption under the Rule that would permit an issuer touse general solicitation and general advertising to offer securities,provided that the issuer takes reasonable steps to verify that allpurchasers of the securities are accredited investors.  The proposed rules would continue to apply the “reasonable belief”standard to the condition that all purchasers are accredited investors.  Whether the steps taken by the issuer to verify the accredited investorstatus of the purchasers are “reasonable” would be an objectivedetermination, based on the particular facts and circumstances of eachoffering and investor. The proposed rules do not prescribe particularverification procedures.Conference Manual Page 27
    • Effects on Other Requirements  The SEC confirmed in the proposing release that:–  Consistent with the historical treatment of concurrent Regulation Sand Rule 144A/Rule 506 offerings, concurrent offshore offerings thatare conducted in compliance with Regulation S would not beintegrated with domestic unregistered offerings that are conducted incompliance with Rule 506 or Rule 144A, as proposed to beamended.–  Privately offered funds would be permitted to make a generalsolicitation under amended Rule 506 without losing the ability to relyon Sections 3(c)(1) and 3(c)(7) of the Investment Company Act,which provide commonly used exclusions from the definition of“investment company”.Conference Manual Page 28
    • Proposed Rule 506(c)  Under proposed Rule 506(c), an issuer (and any selling agents) wouldbe permitted to use general solicitation and general advertising to offerand sell securities, provided that the following conditions are satisfied:–  The issuer must take reasonable steps to verify that all purchasers of thesecurities are accredited investors.–  All purchasers of the securities must be accredited investors, either becausethey come within one of the enumerated categories of persons that qualifyas accredited investors or because the issuer reasonably believes that theydo, at the time of the sale of the securities, in each case as defined underexisting Rule 501 of Regulation D.–  All terms and conditions of existing Rules 501 (definitions), 502(a)(integration restriction) and 502(d) (resale limitations) of Regulation D mustbe satisfied. Existing Rule 502(c), prohibiting general solicitation andgeneral advertising, would not apply.Conference Manual Page 29
    • Verification Requirement  In the proposing release, the SEC did not propose specific verification methods.  Objective test determining the reasonableness of the verification steps  The issuer must consider the facts and circumstances of the transaction, including, among otherthings:–  The nature of the purchaser and the type of accredited investor that the purchaser claims to be.§  For example, more may be required to verify information about an individual using the net worth test than about an institutionalinvestor.–  The amount and type of information that the issuer has about the purchaser.§  The more information an issuer has, the fewer steps would be required to verify the purchaser’s status.-  Publicly available filings-  Third-party evidence such as W-2s-  Third-party verification (including by broker-dealers) so long as issuer has a reasonable basis to rely on the verification-  If issuer has pre-existing, substantive relationship with proposed investor, may not be required to verify the investor’s status–  The nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering,and the terms of the offering, such as a minimum investment amount.§  Require more to verify an unknown purchaser solicited through general advertisement§  Not sufficient to check a box or sign a form absent other information§  Higher the minimum investment amount, less likely that a non-accredited investor would be able to purchase  Issuers must maintain adequate records documenting the verification process.  Many existing practices may satisfy the new verification requirements.  Exemption continues to be based on reasonable belief. Presence of a non-accredited investor notfatal as long as the issuer had a reasonable belief that the investor was accredited.Conference Manual Page 30
    • No impact on existing Rule 506  New verification requirement would only apply to offerings of securitiesconducted pursuant to the new Rule 506(c). Other offerings conductedpursuant to existing Rule 506(b) that do not involve general solicitation orgeneral advertising will not be subject to the verification requirement.  506(c) not likely to benefit existing public companies who have othercompelling reasons to maintain confidentiality of offering process.Conference Manual Page 31
    • Impact on other requirements  Proposed Amendments to Rule 144A–  Under the proposed amendments to Rule 144A, securities sold pursuant to Rule 144A may beoffered to persons other than “qualified institutional buyers”, including by means of generalsolicitation or general advertising, provided that the securities are sold only to persons that theseller and any person acting on behalf of the seller reasonably believe is a qualified institutionalbuyer.  Impact on Concurrent Regulation S Offerings–  Regulation S provides a safe harbor for offers and sales of securities outside the United States,provided that the securities are sold in an offshore transaction and the issuer has not engaged inany “directed selling efforts” in the United States. In the proposing release, the SEC confirmed thatconcurrent offshore offerings that are conducted in compliance with Regulation S would not beintegrated with domestic unregistered offerings that are conducted in compliance with Rule 506 orRule 144A, as proposed to be amended.  Investment Company Act Exclusion for Private Funds–  Privately offered funds, such as hedge funds, venture capital funds and private equity funds,generally rely on exclusions in the Investment Company Act that are not available if the fundmakes a public offering of securities. In the proposing release, the SEC affirmed its belief thatSection 201(b) of the JOBS Act, which provides that offers and sales exempt under Rule 506 ofRegulation D (as revised pursuant to the JOBS Act) “shall not be deemed public offerings underthe Federal securities laws as a result of general advertising or general solicitation”, permitsprivately offered funds to make a general solicitation under proposed new Rule 506(c) withoutlosing the benefit of the exclusions under the Investment Company Act.Conference Manual Page 32
    • SEC Monitoring Potential Abuse  The SEC has noted that the proposed rules are narrowly focused onimplementing the statutory mandate under Section 201(a) of the JOBS Act andthat the SEC and its staff will continue to monitor the private placement marketas a whole to analyze the impact, including any unintended consequences, ofthe proposed rules on investors, issuers and the markets.  The SEC also noted that that the Dodd-Frank Act requires ongoing evaluationsof the definition of “accredited investor” that would give the SEC flexibility tocombat abusive practices.  Pursuant to the Dodd-Frank Act, the SEC has proposed rules disqualifyingfelons and other “bad actors” from relying on the Rule 506 exemption to offerand sell securities.Conference Manual Page 33
    • Other Considerations  Unclear what the impact of proposed Rule 506(c) will be on statesecurities regulations, many of which condition exemptions on the lackof general solicitation.  Comments on the proposed rules were due by October 5, 2012.Conference Manual Page 34
    • Legal DisclaimerAlthough this presentation may provide information concerning potentiallegal issues, it is not a substitute for legal advice from qualified counsel.The presentation is not created or designed to address the unique factsof circumstances that may arise in any specific instance, and you shouldnot and are not authorized to rely on the contents of this presentation asa source of legal advice and this presentation material does not createany attorney-client relationship between you and Lowenstein Sandler PC.Conference Manual Page 35
    •    Tim  Keating  is  the  Chief  Executive  Officer  of  Keating  Capital,  Inc.  (Nasdaq:  KIPO),  a  publicly  traded  business  development  company  that  specializes  in  making  pre-­‐IPO  investments  in  innovative,  emerging  growth  companies  that  are  committed  to  and  capable  of  becoming  public.  Previously,  he  held  senior  management  positions  in  the  Equity  and  Equity  Derivatives  departments  of  Bear  Stearns,  Nomura  and  Kidder,  Peabody  in  both  London  and  New  York.  Tim  has  been  widely  quoted  in  the  national  media,  including  publications  such  as  The  Wall  Street  Journal,  Forbes,  SmartMoney  and  the  Venture  Capital  Journal.  Tim  has  also  been  a  guest  contributor  to  Forbes.com  and  InvestmentNews.    CONTACT  Tim  Keating  Chief  Executive  Officer  Keating  Capital,  Inc.  720-­‐889-­‐0139  tk@KeatingInvestments.com    Conference Manual Page 36
    • www.KeatingCapital.comJOBS Act PresentationInvestor Perspective of the IPO On-RampOctober 11, 2012Buy Privately, Sell Publicly, Capture the Difference™Conference Manual Page 37
    • The JOBS Act has the Potential to Streamline IPO Process…JOBS ActIPO On-Ramp Private Capital Formation♦  Eases the IPO process and public reporting requirements forEmerging Growth Companies (“EGCs”), those companies withannual revenues of less than $1 billion in their most recent fiscalyear1♦  Permits EGCs to:  Provide two years of audited financial statements in theirregistration statement; currently three years required  Submit IPO registration statement and subsequentamendments on a confidential basis provided a publicfiling is made at least 21 days prior to the IPO roadshow  Hold meetings with institutional accredited investors andqualified institutional buyers prior to filing the registrationstatement to “test the waters” without being subject tocurrent pre-IPO communication restrictions♦  Allows investment bankers to publish research related to an EGCaround the time of the IPO and the lockup period expiration;modifies rules relating to research analysts communication♦  Other disclosure and financial reporting exemptions following IPO,importantly no SOX 404(b) auditor attestation♦  Provides a number of reforms aimed at easing the restrictions oncompanies seeking to raise capital in private offerings♦  The JOBS Act:  Permits general solicitations and advertising in certainprivate offerings to accredited investors; proposedregulations issued  Raises the thresholds triggering public company reporting  Facilitates “crowdfunding,” which creates a new registrationexemption allowing a private company to sell $1 million to alarger number of small investors over a 12-month periodo  Companies seeking to raise $100,000 to $500,000in capital would have to get independentaccountants to review their financial statementso  Audited financial statements required for companiesseeking more than $500,000 in capital♦  Expands Regulation A to increase the amount of securities thatcan be issued over a 12-month period from $5 million to $50million… and reduce many of the current disincentives to U.S. IPOs for a broad swath of companies1A company would retain EGC status, until the earliest of: (i) the first fiscal year after its annual revenues exceed $1 billion, (ii) the first fiscal year after the fifth anniversary of itsIPO, (iii) the date on which the EGC has, during the previous three-year period, issued more than $1billion in non-convertible debt, or (iv) the first fiscal year in which the EGCachieves “large accelerated filer” status (i.e., $700 million of public equity float that has been reporting for at least one year).2  Buy Privately, Sell Publicly, Capture the DifferenceTMConference Manual Page 38
    • NegativeJOBS Act Report Card: Private Capital Formation♦  General Solicitation♦  Public Company ReportingThresholds♦  Regulation A♦  CrowdfundingNeutralPositive3  Buy Privately, Sell Publicly, Capture the DifferenceTMConference Manual Page 39
    • NegativeJOBS Act Report Card: IPO On-Ramp♦  Research Reports♦  Securities AnalystCommunications♦  Communications Before andDuring the Offering Process♦  Auditor Attestation onInternal Controls♦  Financial Information in SECFilings♦  Accounting Standards♦  Auditor Rotation and OtherPCAOB Rules♦  Executive CompensationDisclosure♦  Say on Pay♦  Confidential FilingsNeutralPositive4  Buy Privately, Sell Publicly, Capture the DifferenceTMConference Manual Page 40
    • Research Reports and Analyst CommunicationsReform Current Rule Under the JOBS ActResearchReports/AnalystCommunications♦  Generally, managingunderwriters in an IPO areprohibited from: (i) publishingor distributing research on theissuer until 40 days after theIPO, (ii) making any publicappearance for 25 daysfollowing the IPO date, ifparticipating, (iii) publishing ordistributing any researchreport or making any publicappearance during the 15days before and after thelockup expiration♦  Communications by analystswith EGCs and potential IPOinvestors are subject to anumber of conflicts of interestand other restrictions♦  Permits the publication and distribution of research reports and publicappearances with respect to securities of EGC any time after IPO (includingquiet periods), even if research reports issued by brokers that are participating orwill participate in the offering♦  Analysts can attend meetings with EGC’s management and investment bankers(avoids separate and duplicate management presentations to analysts), butanalysts remain subject to existing conflicts of interest restrictions♦  Analysts of non-Global Settlement firms can attend pre-engagement meetings,i.e., pitch meetings, with EGC management and investment bankers to introducethemselves and to outline their research program and factors that analysts mayconsider, and to ask management questions to better understand factual matters,but still prohibited from soliciting investment banking business♦  After underwriter engaged, non-Global Settlement firm analysts can participate inEGC management presentations to sales teams, discuss industry trends andcommunicate their views♦  SRO rules still prohibit analysts from participating in roadshows orcommunicating with investors about an IPO in the presence of investmentbankers or EGC’s management (intended to reduce pressure on analyst’sassessment of the offering and keep analyst from being viewed as part of salesteam)♦  Bankers can arrange, but not participate in, calls between analysts and investorsKeatingPerspective♦  Improves communication and transparency before and after IPO♦  Asymmetry of information available to individual and institutional investors is conceptually highly problematic andcontrary to the intent of Regulation FD (currently permitted oral communications or “whispers” outside prospectusdisclosure to investment bankers clients needs to be corrected)♦  Bulge bracket firms that are party to Global Settlement are still subject to the terms of that agreement and therefore notable to avail themselves of all relief that is available to others under the JOBS Act; but middle market firms will also notavail themselves of this relief for fear of being frozen out of public offerings controlled by the bulge bracket firms(however, middle market firms may have potential to provide significant value add)♦  Additional reform is urgently needed in this area to rectify this regulatory anomaly5  Buy Privately, Sell Publicly, Capture the DifferenceTMConference Manual Page 41
    • Communications Before/During the Offering ProcessReform Current Rule Under the JOBS ActCommunicationsBefore and Duringthe Offering Process♦  “Test the waters” communications with respect topublic offering not allowed prior to filing ofregistration statement♦  Limited ability to “test the waters” after registrationstatement filed♦  After filing of registration statement, underwritersrequired to provide sales representatives withpreliminary prospectus before soliciting customerorders♦  Expand permissible communications to allowEGCs and their underwriters, both before andafter filing a registration statement, to “test thewaters” by engaging in oral or writtencommunications with qualified institutional buyersand institutional accredited investors to determineinterest in an offering♦  Following the “filing” of registration statement,“test the waters” communications can continuewithout the underwriter making availablepreliminary prospectus to its salesrepresentatives as long as only non-bindingindications of interest and not purchasecommitments are sought from potential investors,i.e., not soliciting customer order)♦  Submitting confidential draft registrationstatement for SEC review is not considered a“filing” of a registration statementKeating Perspective ♦  Improves communication with investors♦  Extremely important for issuers to be able to determine the viability of a public offering before publiclydisclosing business and financial information, which could affect competitive landscape or harm reputation ifIPO not pursued♦  Ideally will serve to clear the zombies in the SEC registration queue6  Buy Privately, Sell Publicly, Capture the DifferenceTMConference Manual Page 42
    • Auditor Attestation on Internal ControlsReform Current Rule Under the JOBS ActAuditor Attestationon Internal Controls♦  Auditor attestation on effectiveness of internalcontrols over financial reporting required in secondannual report after IPO♦  Non-accelerated filers currently not required tocomply♦  Transition period for compliance up to 5 years,i.e., for so long as the issuer is deemed to be anEGCKeating Perspective ♦  Reduces public company costs♦  Single most important reform in the JOBS Act♦  Will provide greater cost relief to EGCs (which represent 90% of all companies that go public) relative to thecosts incurred by large companies♦  While the cost savings are important, they are dwarfed in comparison to the positive boost in psychology in theventure capital community♦  After a decade of “why would any company want to go public?” mentality in Silicon Valley, were thankfullygetting back to a mindset where the IPO is the ultimate end game7  Buy Privately, Sell Publicly, Capture the DifferenceTMConference Manual Page 43
    • Confidential Submissions of Draft IPO Registration StatementsReform Current Rule Under the JOBS ActConfidentialSubmissions of DraftIPO RegistrationStatements♦  Historically only foreign issuers were permitted tosubmit confidential draft registration statements withthe SEC♦  In December 2011, the SEC announced that it wouldonly review submissions by foreign private issuerson a confidential basis in specified circumstances;as a result, many non-U.S. companies submittingtheir initial registration statement to the SEC inconnection with a U.S. IPO or listing will have to doso via a public filing♦  An EGC is permitted to submit to the SEC a draftIPO registration statement for confidential reviewprior to public filing♦  However, public filing of any confidentialsubmission and any amendments must be madewith the SEC not later than 21 days before theEGC begins its roadshowKeating Perspective ♦  Worsens communication♦  Dubious value, if any, to any party especially since the “test the waters” process should ferret out investorinterest♦  No compelling reasons why EGCs should be given the ability to confidentially assess whether the SEC hasconcerns with their financial and business disclosures♦  Risk of scarce SEC resources being consumed and bandwidth clogged by issuers that are not serious abouttaking an IPO to completion♦  Instead of creating a level playing field for domestic issuers, the better solution would have been for the SEC toabolish confidential filings for all parties8  Buy Privately, Sell Publicly, Capture the DifferenceTMConference Manual Page 44
    • © Grant Thornton LLP. All rights reserved.The JOBS Act:David Weild: The Next ChapterConference Manual Page 45
    • © Grant Thornton LLP. All rights reserved. 10SEC issued its study on decimalization in JulyConference Manual Page 46
    • © Grant Thornton LLP. All rights reserved. 11The JOBS Act provided two of the three legs webelieve are needed to revive capital formationImproved issuercommunicationwith investorsüLowered costfor issuersüImprove economicincentives to supportespecially small-cap stocks(increases in tick sizes)Conference Manual Page 47
    • © Grant Thornton LLP. All rights reserved. 12Grant Thornton issued its study on decimalizationRequest a copy at www.grantthornton.com/ticksizesConference Manual Page 48
    • © Grant Thornton LLP. All rights reserved. 13The third leg is to create economic incentives tosupport small companies once they are public!See new study entitled, "The trouble with small tick sizes"$0.00$0.05$0.10$0.15$0.20$0.25$0.300%10%20%30%40%50%60%70%80%90%100%91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11NASDAQticksizesPercentageoftotalU.S.IPOsSources: Grant Thornton LLP, Capital Markets Advisory Partners LLC and DealogicData includes corporate IPOs as of Dec. 31, 2011, excluding funds, REITs, SPACs and LPs.11991: $0.125 for NASDAQ stocks ≥ $10; 1997: $0.0625 for NASDAQ stocks ≥ $10.21991: $0.03125 for NASDAQ stocks < $10.Tick size changes on the NASDAQ Stock Market overlaid on the drop in thenumber of small IPOsA Order Handling RulesB Regulation ATSC DecimalizationD Sarbanes-Oxley ActE Regulation NMSA B C D EQuote-driven market (pre-Reg. ATS)Effective tick size > minimum tick sizeElectronic order book market (post-Reg. ATS)Effective tick size collapsed to minimum tick sizeTransactions raisingless than $50 millionTransactions raisingat least $50 millionTick size for stocks≥ $101"Bankable" spreador effective tick sizeTick size for stocks< $102Conference Manual Page 49
    • © Grant Thornton LLP. All rights reserved. 14Small tick sizes, commission compression andelectronic trading together caused a collapseSmall-cap companies and capital formationBefore 1997 After 2001 % changeTick sizes (“bankable spread”) $0.25 per share $0.01 per share -96%Retail commissions $250 per trade $5 per trade -98%Investment banks (acting as a bookrunner) 167 (1994) 39 (2006) -77%Small company IPOs 2,990 (1991–1997) 233 (2001–2007) -92%As popularized by free market economist Milton Friedman:"Theres no such thing as a free lunch."Conference Manual Page 50
    • © Grant Thornton LLP. All rights reserved. 15IPOs maintaining IPO price 30 days after the offering(trailing 30 IPOs)  Facebook–  Not an anomaly–  Unintentional–  Underlying causes  Distribution of Wall Streetis too narrow (Problem wework with issuers toneutralize)0%10%20%30%40%50%60%70%80%90%100%93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12Success rate of IPOs maintaining issue priceone month after going publicSource: Capital Markets Advisory Partners LLC, All rights reservedIncludes only corporate issuers, excluding funds, MLPs, SPACs and REITs.Based on the average success rate of the last 30 filed deals, up to onemonth ago. A successful deal is defined as trading at or above issue priceone month after pricing.Conference Manual Page 51
    • © Grant Thornton LLP. All rights reserved. 16Changing tick sizes impacts short- and long-term marketqualityLarger tick sizes will improve investor confidence, capital formation and job growthLarge-cap stocks (naturally liquid) Small- and micro-cap stocks (naturally illiquid)SmallerticksizesDecreases order depth Decreases order depthIncreases liquidity Decreases liquidityIncreases stepping ahead/gaming Increases stepping ahead/gamingIncreases quote flickering Discourages marketing (sales) supportUndermines investor confidence Discourages active research supportDiscourages capital commitmentUndermines investor confidenceLargerticksizesIncreases order depth Increases order depthDecreases liquidity (but stocks are stillextremely liquid)Increases liquidityDiscourages stepping ahead/gamingLimits stepping ahead/gaming Encourages marketing (sales) supportDecreases quote flickering Encourages active research supportImproves investor confidence (market seemsmore transparent)Incentivizes capital commitmentImproves investor confidenceSources: Grant Thornton LLP and Capital Markets Advisory Partners LLC.Conference Manual Page 52
    • © Grant Thornton LLP. All rights reserved. 17Quote: Bright Trading, 2012Smaller tick sizes harming liquidity"I think many of our problems with market liquidity in small and mid-capscan be traced right back to decimalization [tick sizes]," said Dennis Dick,prop trader at Bright Trading in Detroit. "Where decimalization hashelped to reduce spreads in the large-cap space, it has actually harmedliquidity in the small- and mid-cap space."For blocks, "Its nearly impossible to execute any sizable order withoutsignificant price impact," Dick said.SEC to Examine Tick Size for Small CapsTraders Magazine Online NewsApril 17, 2012John DAntona Jr.Conference Manual Page 53
    • © Grant Thornton LLP. All rights reserved. 18The JOBS Act, Part 2: Two alternative solutionsCould be used individually or in combination:1.  Issuer choice of tick size, where issuers of all sizes, butsmall-cap companies in particular, are given the authorityto choose their own tick size within a range (e.g., up to 5percent of share price)2.  Algorithmic customization of tick size, where the SECcould automate the “mass customization” of tick sizes viaa simple algorithm (e.g., tick size = natural spread TTMor natural spread TTM/2)Conference Manual Page 54
    • © Grant Thornton LLP. All rights reserved. 19What to expect going forward  Continued focus by Congress on improving our capitalmarkets  Is capital formation growing?  Are the markets improving for smaller public companies and theirinvestors?  Is investor confidence improving?  Are jobs being created?  Does SEC rulemaking reflect the intent of Congress with regard tothe JOBS Act.  Possible pause after the elections–  Changes in Congressional leadership–  Possible vacancies at the SECConference Manual Page 55
    • © Grant Thornton LLP. All rights reserved.David Weilddavid.weild@us.gt.comdavid.weild@cmapartners.com212-542-9979Conference Manual Page 56
    • Growth Capital InvestorInvestment ($B) Deals0$1$2$3$4 billionJan. Feb. Mar. Apr. May June July Aug.365142494840 3944Growth Capital EPPs 2012Source: PlacementTracker, a service of Sagient ResearchVol. I Issue 4 The Journal of Emerging Growth Company Finance September 3, 2012SEC CansAd Banon Private Placementsby Joe GoseIt’s hard to imagine any one constituent group being overly enthused about theSecurities and Exchange Commission’s effort to write rules that implementgeneral solicitation in private offerings as mandated by the JOBS Act.Although the proposal was accepted on a vote of 4-1, lawmakers and somecommissioners voiced displeasure that the SEC failed to meet the law’s proscribed90-day deadline and that SEC Chairman Mary Schapiro late in the game elected toissue a proposal and take comments for 30 days instead releasing of an interim finalrule. State regulators and other organizations predicting widespread fraud can’t bepleased that the proposal didn’t include their suggestions for strict, well-definedprocedures for issuers to follow when verifying that a purchaser is an accreditedinvestor.Parties that lobbied to keep the verification process the same as it is today –largely certification by buyers that they are accredited investors via questionnaires– may be uncomfortable with the proposed “facts and circumstances” test to es-tablish a “reasonable belief” that a purchaser is in fact an accredited investor. Andalthough allowing general solicitation has been a centerpiece of discussion amongmarket participants over the last several months, practitioners may neverthelesshave a tough time wrapping their minds around the change.“It’s kind of weird because you can now conduct a private placement andyet have general solicitation as long as your buyers are OK,” said Dean Hanley, aSEC Files New ComplaintAgainst NIR’s Ribotsky,Dworkinby Paul SpringerThe Securities and Exchange Commission filed an amended complaintagainst NIR Group, its founder Corey Ribotsky, and former analystDaryl Dworkin. The document reiterates most of the commission’s al-legations that Ribotsky engaged in fraudulent accounting, lied to investors andstole over $1 million from one of his funds, but it also provides new specifics tothe regulator’s claims that Ribotsky profited from management fees from phan-tom gains and engaged in questionable accounting.The suit was originally filed last September in Manhattan’s U.S. DistrictCourt.Funds managed by NIR, which include four AJW entities and New Mil-lennium Capital Partners II, committed $225 million to 144 PIPEs from 1999through 2010, according to PlacementTracker data.INTHIS ISSUEShells Brandish Emerging GrowthCompany LabelThe JOBS Act is fueling a boom in the “emerginggrowth company shell”..........................................2Turmoil at DirectMarkets/Rodman & RenshawDisarray, losses, employee exodus, and regulatorycensure take their toll at top PIPE banker................3Funds Sue DJSP OverPost-SPAC DisclosureTwo hedge funds are suing a foreclosure processingbusiness that merged with a SPAC in 2010............4ALSO INSIDEBaystar’s Goldfarb Still Fighting Prosecution; HedgeFunds Say China Medical CEO Tanked Company;SECSuesE-LionheartforDumpingBillionsofShares;LuxeYard’s One Luxurious Deal;TJ Management inBogus Placements,SEC Says;and other stories......6EPP, PIPE &APO MARKET DATAAggregateYear-to-Date MarketActivity................17Deal Performance – Growth Capital EPPs............18Growth Capital EPP Candidates...........................20Growth Capital and PIPE LeagueTables...............21SPACs and Reverse MergerAPOs.........................24See Ad Ban on page 25See Ribotsky on page 26
    • September 3, 2012 Copyright © 2012 MarketNexus Media, Inc. 25Growth Capital Investorpartner in the Boston office of Foley Hoag. “It’s so foreign to theway people have been brought up on these issues.”Reasonable TestsThe SEC’s long-awaited say on general solicitation stemsfrom Title II of the JOBS Act. Under the provision, Congresseliminated the ban on general solicitation in private offeringsconducted under Rule 506 of Regulation D, provided issuerstake “reasonable steps” – as determined by the commission – toverify that only accredited investors participate. Previously, is-suers were generally required to have a prior relationship withinvestors in such deals.Individuals or couples that have net worth exceeding $1million – excluding the value of a primary residence – as well asan individual with income of more than $200,000 or a couplewith joint income in excess of $300,000 in each of the two pre-ceding years qualify as accredited investors.Private placement issuers, including private and publiclytraded companies and private investment funds, typically rely onthe registration exemption provided by Rule 506. To implementthe JOBS Act’s provision to end the ban on general solicitation,the commission is proposing to create Rule 506(c), under whichissuers can advertise their offerings provided that certain condi-tions are satisfied. Not only must issuers take reasonable steps toverify that securities purchasers are accredited investors, they alsomust reasonably believe that buyers are accredited investors at thetime of the offering.Instead of establishing hard and fast steps that would pro-vide issuers with safe harbor – checking boxes that W-2s, taxreturns or financial statements have been reviewed, for instance– the commission said it proposed the facts and circumstancestest to provide flexibility to varying kinds of issuers and offerings.To determine whether they’re reasonably verifying accred-ited investor status in any given transaction, issuers would con-sider several factors. Those include the nature of the purchaserand the type of accredited investor it claims to be, the amountand type of information that the issuer has about the purchaser,and the nature of the offering in terms of how the purchaser wassolicited and the minimum investment amount.In one example, the commission noted that the less infor-mation that an issuer has about a purchaser, the more steps itwould have to take to verify accredited investor status, and viceversa. Additional steps an issuer could rely on include reviews ofW-2s, reviews of industry trade publications that disclose com-pensation for certain employee levels, or the receipt of third-par-ty verification from a broker-dealer or accountant.What’s more, the SEC said that an issuer using a websiteor social media to solicit buyers would probably be obligated topursue more verification measures compared with targeting a listof pre-screened accredited investors compiled and verified by abroker-dealer. In other cases, if a minimum cash investment is solarge that only an accredited investor could participate, no othersteps may be necessary, as long as the issuer has verified the buyerisn’t using third-party financing, the commission said.Under the proposal, issuers would not lose the Rule 506(c)exemption if a non-accredited investor circumvented the rulesand participated in the offering as long as issuers took reasonableverification steps and reasonably believed a purchaser was an ac-credited investor.On balance, the facts-and-circumstances approach to deter-mining the “reasonableness” of an issuer’s means of qualifyingbuyers of Rule 506-exempted securities will likely mean restrict-ed securities purchasers will be required to disclose and confirmmore financial information to issuers than has been the case inthe past, when a short questionnaire and simple declaration ofeligibility by would-be accredited investors was enough to satisfythe qualification requirements, said John Hogoboom of Lowen-stein Sandler.“Now the question is, what are people going to do now?”he said. “I think the investor is going to have to disclose moreinformation.”Hogoboom also echoed the warnings of other securitiescounsel that relaxed federal general solicitation rules may conflictwith individual states’ Blue Sky laws, particularly those states thathad yet to adopt a Uniform Limited Offering Exemption rule for506 offerings, noting that federal pre-emption cannot be reliedupon to prevail in such instances.Among other changes, the commission is proposing to add acheck box to Form D for Rule 506(c) issuers so that the SEC canmonitor its use. (Two commissioners urged the SEC to considerrevising the final rule so that issuers would be required to fileForm D prior to the offering to better prevent fraud. Issuers nowfile the form within 15 days after the first sale.)The agency also is proposing to maintain Rule 506 and itsban on general solicitation, suggesting that some issuers may notwant to comply with Rule 506(c) rules and may want to contin-ue to offer securities to up to 35 non-accredited investors.Opening MarketsEliminating general solicitation restrictions could help smallprivate companies and hedge funds tap deeper reservoirs of capi-tal in a crowdfunding type of structure, predicted Alexander Da-vie, a partner with the Nashville, Tenn.-based Riggs Davie lawfirm. Angel investor networks are popping up in several marketsaround the country, he said, and issuers could conduct onlineofferings targeting those groups. The angel networks themselvescould provide third-party accredited investor verification, headded.“There are already networks in place that invest together indifferent local ventures, but they’ve always operated in a legalgray area because it’s possible that there have been violations ofthe general solicitation ban,” Davie said. “This section of theJOBS Act allows start-ups to market to people they don’t knowat all. It has real potential.”Ad Ban continued from front page
    • September 3, 2012 Copyright © 2012 MarketNexus Media, Inc. 26Growth Capital InvestorOn the other hand, Anna Pinedo, a partner in the New Yorkoffice of Morrison & Foerster, echoed the conventional wisdomthat small public companies likely wouldn’t use general solicita-tion in private placements. After all, what issuer wants to precip-itate a sell-off or shorting of its stock by announcing that they areabout to launch a private transaction?One issue that the SEC acknowledged in the proposal, butdeclined to address, centers on the content of potential advertis-ing materials. Some letter writers pointed out that hedge fundsuse different criteria to measure performance, which could con-fuse people, said David Pankey, a partner in the Washington,D.C., office of McGuireWoods. Years ago mutual fund com-panies advertised using differing criteria as well, he added, butthe commission eventually imposed a fairly standardized regime.Uncertainty over content could ultimately make some issuershesitant to use Rule 506(c), he suggested.“Some people think that the only folks who are going to use ad-vertising initially are those who are not credible,” Pankey said. “Wedon’t know that for sure, but there probably will need to be a fairlyhigh confidence level for a majority of industry participants as towhat the practice should be before they start advertising. Maybe theSEC will put something in the adopting release to clarify that.” Dworkin plead guilty to charges of securities fraud in a sep-arate criminal case in 2010. Ribotsky resigned earlier this yearfrom his management role at the AJW funds.While the original complaint touched on Ribotsky’s educa-tional background, the new version is more direct.“Defendants lied about the educational background of itsprincipal,” the complaint says. “For example, the 2006 OffshorePrivate Placement Memorandum claimed that Ribotsky ‘re-ceived an MBA in finance and operations from New York Uni-versity, Leonard N. Stern Graduate School of Business.’ This wasfalse. Ribotsky also gave the erroneous impression to investors atin-person meetings that he was a lawyer and had an MBA.”The commission continues to maintain that Ribotsky andhis firm The NIR Group LLC repeatedly lied to investors to hidethe truth that his PIPE investment strategy was failing duringthe financial crisis. And the commission continues to state thatalthough the manager told clients he could liquidate his PIPE in-vestments in four years, independent liquidity analysis indicatesthat some positions would have taken literal centuries to sell off.One new allegation is that Ribotsky actually avoided realiz-ing gains when nebulous unrealized gains were more profitableto him personally. “Defendants never disclosed to investors thatthey declined the chance to realize some gains, albeit at some lossfrom face value, preferring to incur phantom unrealized gains onwhich management and performance fees could be charged,” theamended complaint alleges.“NIR continued to earn management and performance feesthat were calculated, in part, by reference to the period-over-pe-riod increase in unrealized gains for the AJW Funds’ now illiq-uid PIPE investment portfolio,” the SEC claims. “For example,during the first six months of 2008, NIR earned approximately$7.5 million in management fees.”The commission had previously alleged that Ribotsky hadcreated an investment entity called “Equilibrium Equity” that heused as part of a scheme to liquidate client assets and use the pro-ceeds for personal expenses. The new complaint says Ribotskywas warned by both NIR’s CFO and an outside accountant thathe should not take distributions from Equilibrium. The outsideaccountant said Ribotsky had improperly reclassified distribu-tions as loans, though there was no loan documentation or evi-dence or repayment.Ribotsky lied to clients about liquidity in person and inwritten communications, the SEC alleges. “Ribotsky participat-ed in almost every meeting with prospective investors,” accord-ing to the SEC. “These misrepresentations about the time to exitinvestments were made to investors in all funds at numerousmeetings, and were common to all NIR efforts to market theAJW Funds.”The commission has added some detail to its accounts ofRibotsky’s dealings with “the Purchaser,” an individual the SECdoes not identify other than generically as a finder. The purchaseinvolved nine sales totaling $42.3 million of AJW Funds’ con-vertible PIPE debenture assets that allegedly had an actual facevalue of $12.6 million.The commission cites an email communication as an in-dication that the sale was engineered to avoid recording a lossthat would have to be revealed to fund investors. “We sell it toyou,” Ribotsky purportedly said in an email to the Purchaser.“For marked value. So we don’t take a hit on the books.”“The email exchange between Ribotsky and the Purchaserpredating the transaction is telling in how nakedly it reveals thata major motivation for Defendants was not the best interests ofthe funds they managed, but preserving their fees,” the SEC said.The commission’s attorneys continued, “As another emailfrom the Purchaser noted, even though the note isn’t realized it‘doesn’t have to be marked to market because it’s not a publiclytraded security. Goes on your books but eliminates the aged pa-per off your books.’”“Obviously if we do this,” Ribotsky allegedly replied, “thisremains hush hush.”The Purchaser defaulted on the note, to the detriment offund investors, but the commission alleges Ribotsky had amplereason to have been suspicious of the Purchaser ahead of thetransaction.Ribotsky continued from front page
    • Growth Capital InvestorInvestment ($B) Deals0$1$2$3$4 billionApr. May June July Aug. Sept.49 4840 394420Growth Capital EPPs 2012Source: PlacementTracker, a service of Sagient Research.September data thru 9/14/12.Vol. I Issue 5 The Journal of Emerging Growth Company Finance September 17, 2012Emerging Growth Issuers LargelyImmune to Broad Market Sentimentby Joe GoseFor all the focus being placed on boosting small business to create jobs andfuel an economic recovery, emerging growth companies struggling to findtraction in the public markets.As a group, small issuers that have conducted private placements over the lastseveral months have generally lagged the stock market’s rise over the last year – theDow Jones Industrial Average Index has risen 20% – suggesting that the firms areless influenced by broad market sentiment.But exactly how far out of whack is the performance of small private place-ment issuers with the rest of the market? Growth Capital Investor reviewed equityprivate placement (EPP) activity from June 1, 2011 through May 30, 2012, usingSagient Research’s PlacementTracker database.The analysis focused on growth equity private placements (GEPPs): unregis-tered and registered common stock sales, rights offerings, fixed-price convertibleissuances, and non-convertible debt and preferred stock sales, issued at fixed-priceissuance and conversion terms. No placements involving variable-priced securities,equity lines or at-the-market offerings were included. The issuer parameters fo-cused on emerging growth companies that had a minimum share price of $1 andmarket capitalizations ranging from $10 million to $1 billion.The goal was to get a snapshot of how companies and a handful of activesectors performed following the transactions against comparable indices. WhileSEC Forgoes Rule MakingandAddresses ResearchAnalystReforms under JOBSAct in FAQby Brett GoetschiusWhile much of the emerging growth capital market was fixated overthe past two weeks on the Securities and Exchange Commission’svague proposals lifting the ban on public solicitation for investmentsin private placements, the agency issued a FAQ outlining its stance on the JOBSAct’s repeal of restrictions on sell-side research analysts’ participation in investmentbanking activities. While similarly paradigm-shifting in its impact on capital rais-ing, the release of the interpretative document has received little attention outsideof securities law circles.The SEC’s Division of Trading and Markets issued the FAQ in late August asan alternative to new rulemaking vis-à-vis the JOBS Act, which explicitly forbidsINTHIS ISSUEMuddy Solicitation Proposal TakesWind Out of CrowdfundersThe SEC’s proposed rules on general solicitationof investments draws jeers from the crowd cap-italists...............................................................2NIR Group Investors Facedwith 97% LossInvestorsinbeleagueredPIPEfundmanagerreceivedharsh news last week.............................................3PIPE Player RodmanCloses Banking BusinessThelong-timemostactivebankerinthePIPEmarketcloses its doors........................................................4ALSO INSIDEDirect Markets Investor Pared Holdings Ahead ofNews; Internal Fixation Accused of Manipulation,Misleading Reporting; China Hydroelectric SuesDissidents inValue Fracas;Fairfax Financial ShortingCaseTossed;SECSuspendsShellAccountantHatfield;SECSuesChinaSkyOneforFakeRevenue;andotherstories.....................................................................5EPP, PIPE &APO MARKET DATAAggregateYear-to-Date MarketActivity................12Deal Performance – Growth Capital EPPs............13Growth Capital EPP Candidates...........................15See Immune on page 16See FAQ on page 17
    • September 17, 2012 Copyright © 2012 MarketNexus Media, Inc. 17Growth Capital Investorand Needham & Co. The agents earned a cash fee of more than$4.4 million, or 3%.The shares of New York-based application developer Viggle(VGGL), formerly Function (X), have fared the worst. They’veplunged 94% since the company sold 14 million shares for $2.50each – a 61.5% discount – to raise $35 million in August 2011.The deal also included three-year warrants to purchase another14 million shares at an exercise price of $4 a share.Banks Consistent PerformersBanks have exhibited the most consistent performance rela-tive to a comparable index among the sectors reviewed. Shares ofsavings institutions that raised $1 billion in 18 transactions haveclimbed an average of 25% since their respective closings. That’sjust 10 percentage points behind the KBW Bank Index (BKX)’sreturn performance over the 12 months ended Sept. 10.Shares of Wheeling, Ill.-based Taylor Capital Group(TAYC) posted the best performance, surging 115% since itclosed a 35 million rights offering in December. The biggest loserwas Norfolk, Va.-based Hampton Roads Bankshares (HMPR).Its shares fell 24% following its $45 million rights offering thatclosed in May.Energy issuers, on the other hand, have woefully lagged thebroader market. While the SIG Oil Exploration & ProductionIndex (EPX) has fallen 3% over 12 months ended Sept. 10, oiland exploration companies that raised $1.4 billion in 19 privateplacements from June 1, 2011 to May 30, 2012 have seen theirshares drop an average of 35% since the close of their respectivedeals.Houston-based Halcon Resources Corp. (HK), formerlyRAM Energy Resources, raised $900 million in three deals thatclosed in December, February and March. Its shares are up 140%following its December transaction, but they’ve tumbled 22% and25% since the February and March closings, respectively. Hunts-ville, Tenn.-based Miller Energy Resources (MILL), which hasseen its stock price appreciate 13% since raising $10 million in anon-convertible preferred stock deal in April, represents the onlyother oil and gas issuer with a positive performance. preventing analysts from participating in capital raising meetingswith investors and company management teams. That had beenthe case since the Global Analyst Research Settlement agreementon sell-side research activities was adopted in 2003. The post-JOBS Act interpretation of permitted analyst conduct construesthe Act’s provisions “narrowly” according to Sidley Austin’s JimBrigagliano, a former deputy director at the SEC, in a clientbriefing published in late August.Brigagliano wrote that the SEC interprets the JOBS Actchanges to provide that:• Investment banking personnel may play a role in arrang-ing analyst communications with investors.• Analysts may participate with investment banking person-nel in meetings with emerging growth company (EGC)management but may not solicit investment bankingbusiness.• Analysts may not participate in road shows.• Research concerning EGCs may be published, post-of-fering, without restriction both before and after lock-upagreements end, however they end—whether by expira-tion, termination, or waiver—as well as after both prima-ry (IPO) and secondary offerings of EGC securities.• The Global Settlement was not affected by JOBS Act andGlobal Settlement firms must continue to comply with itsapplicable provisions unless and until such provisions areamended by court order or superseded by Commission orSRO rule.With regard to analyst communications with investors andcompany management, Goodwin Proctor’s Eric Fischer notedthat while the SEC stated explicitly that the JOBS Act did notchange the terms of engagement for any firm that was a party tothe Global Settlement, “ firms not subject to the Global Settle-ment may permit research analysts and investment banking per-sonnel to attend meetings with company management, providedthat the firm’s personnel do not otherwise violate the intent ofthe research analysts rules. This would happen if, for example,investment banking personnel at the meeting attempted to influ-ence the research analyst’s views or recommendations.”Bingham’s Amy Natterson Kroll goes further, stating, “ananalyst cannot change his or her research in an effort to obtaininvestment banking business, cannot allow an expectation of fa-vorable research coverage if the analyst’s firm is chosen to un-derwrite the IPO, cannot provide research that is inconsistentwith the analyst’s personal views, and cannot engage in sales ormarketing efforts related to an investment banking transaction.”David Jenson of Leonard, Street and Deinhard adds thatdue to the SEC’s highly restrictive interpretation of the JOBSAct’s Section 105(b) “research analysts are still prohibited byNASD Rule 2711 from participating in road shows or engagingin communications with customers about an investment bank-ing transaction in the presence of investment bankers. Researchanalysts are also unable to participate in ‘test the waters’ commu-nications.”The JOBS Act’s repeal of the ban on publishing sell-sideresearch during an investment banking client’s IPO quiet periodwas not interpreted narrowly, but rather explicitly, by the agency,according to Kroll. “The SEC staff interprets [the act’s] Section105(d)(2) broadly to override all quiet periods in the SRO rulesFAQ continued from front page
    • September 17, 2012 Copyright © 2012 MarketNexus Media, Inc. 18Growth Capital InvestorSign Up for a Subscription$1,995/year, includes complete online access to all articles.n Invoice me n Charge my credit cardCard Number Expiration Security Code Signature Name Title Company Street City State Zip Country Phone Fax Email Growth Capital InvestorFax this form to:360-364-2752Or mail to:MarketNexus Media, Inc.P.O. Box 7172Petaluma, CA 94955Or send an email to:subscribe@marketnexusmedia.comQuestions? Call 707-364-2757Satisfaction Guaranteed. If for any reason you are not satisfied with thepublication, you may cancel at any time and receive a full refund of the unusedportion of your subscription.prior to the end of a lock up period. The SEC Staff further statesthat the policies underlying Section 105(d)(2) apply equally tothe quiet periods currently imposed after the expiration, waiveror termination of a lock-up period, and also after a secondaryoffering,” she wrote in a Sept. 4 briefing.Goodwin Proctor’s Fischer notes that the SEC was also ex-plicit in stating what the JOBS Act does not change regardinganalyst activities. “The SEC does not consider the JOBS Act toaffect the application of the SRO rules with respect to: the super-vision, compensation or evaluation of analysts, the prohibitionon pre-publication review of research reports by non-researchpersonnel or an emerging growth company, or the prohibitionon promises of favorable research in exchange for the businessof, or compensation from, an emerging growth company. TheJOBS Act does not affect the analysis of the types of commu-nications that constitute a research report for purposes of SECRegulation AC and does not affect Regulation AC in any otherrespect.”Nor does the JOBS Act impact any of the requirementsunder NASD Rule 2210 relating to communications with thepublic, adding that he expects that NASD Rule 2210 and its in-terpretive memorandums will be replaced by new FINRA Rules2210 and 2212-2216 in February 2013.Jack Hogoboom, of Lowenstein Sandler, says that otherthan the amendments to the FINRA regulations to bring theSRO’s rules in compliance with the JOBS Act’s repeal of researchquiet periods after a public offering, he believes there will be noother rule-making with regard to analyst participation in invest-ment banking activities. So, unlike the other aspects of the lawsuch as equity crowdfunding and the general solicitation reforms,these provisions are effective immediately.Overall, the changes will “bring some rationality to the pro-cess,” Hogoboom said. “If (using Facebook (FB) as an example),a bank’s analysts are in the process of revising their earnings es-timates on a company in the process of completing an IPO, thebankers and IPO investors ought to be able to know.”However, that doesn’t mean there may not be additional in-terpretive announcements surrounding some of the finer pointsof the law, Hogoboom said. “One of the tough parts is the prohi-bition of analysts directing solicitation of banking activities. Thebankers are going to want the analysts out there talking to man-agement teams, whether they are ‘directing’ the effort or not.”What is the difference between participating and ‘directing’?“You are talking about a fine line here,” added Hogoboom. None-theless, Hogoboom believes investment bankers active in growthequity private placements will embrace the new analyst freedomsquickly. “We have clients waiting to get their analysts back in themix.”