Impact Of Jobs Act On Fundraising


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Impact Of Jobs Act On Fundraising

  1. 1. Impact of the JOBS Acton Fundraising by Private Companies Benjamin M. Hron Jonathan Guest 617.449.6584 617.449.6598 @HronEsq 08.01.12
  2. 2. JOBS Act♦ Jumpstart Our Business Startups Act – Signed into law April 5♦ Bipartisan attempt to stimulate economic growth by lowering barriers to raising capital I. Reduces requirements for small company IPOs II. Loosens restrictions on general solicitation and advertising in some private offerings III. Allows equity crowdfunding, subject to limitations IV. Increases max. size of “mini-IPOs” to $50M V. Eases mandatory SEC reporting triggers♦ SEC Rules still to come
  3. 3. Securities Laws in a Nutshell♦ Dual Federal/State Regulation♦ Prohibit offer or sale of securities unless – the securities are “registered” (ex. IPO) – an applicable exemption is available♦ Exemptions – Exempt Securities/Transactions – Separate state and federal exemptions required unless federal exemption preempts state law♦ Consequences of Non-Compliance – Rescission; Risk to future investors
  4. 4. Securities Laws in a Nutshell♦ Federal Laws – Disclosure based regulations – Securities Act of 1933 (“33 Act”) – Regulation D (private placements) Especially Rule 506 – Regulation A (mini-IPOs)♦ State “Blue Sky” Laws – “Disclosure Review” or “Merit Qualification” – Federal preemption in limited circumstances Including Rule 506
  5. 5. Key Concept: Accredited Investors♦ Natural Person with – Net Worth (w/ or w/o spouse) >$1M (excl. home) – Income >$200K in past 2 years and current year – Joint income >$300K in past 2 years and current year♦ Director, executive officer or general partner of the company♦ Business in which all the equity owners are accredited investors♦ Entities with > $5M in assets
  6. 6. Private Placements Under Rule 506Currently♦ No $$$ limit♦ If offers & sales limited to “accredited” investors: – No limit on # of investors – No affirmative disclosure obligation♦ No general solicitation/advertising permitted♦ Strict limitations on use of third-party “finders”
  7. 7. Private Placements Under Rule 506Under JOBS Act♦ Still no $$$ limit♦ Sales limited to “accredited” investors: – No limit on # of investors – No affirmative disclosure obligation – General solicitation/advertising permitted – Unpaid third-party finders permitted – But ... new obligations of issuers TBD Mandatory pre-filing of Form D? SEC rules on advertising materials?
  8. 8. Private Placements Under Rule 506Verifying Investor’s “Accredited” Status♦ Currently – “reasonable belief” standard – Typically verified by investor self-certification♦ JOBS Act – More rigorous verification required (by 3rd party?) – Possibility of losing exemption for sale to a single non-accredited investor even if “verified”
  9. 9. Private Placements Under Rule 506♦ Impact on fundraising: – Easier to reach out to potential investors – Legitimizes Angel List and similar sites “Finders Fees” still illegal – Will require more vigilance – Additional requirements may be imposed♦ New rules due July 4, but not yet proposed – SEC hearing August 22
  10. 10. Mini-IPOs Under Regulation ACurrently♦ Permits sales of securities to the public – No investor qualification requirements – Shares freely tradable♦ Offering statement reviewed by SEC – Streamlined disclosure requirements (vi-a-vis IPO)♦ Limited to $5 million in 12 mo. period
  11. 11. Mini-IPOs Under Regulation AJOBS Act♦ Increases $$ threshold to $50 million in 12 mo.♦ Federal preemption Blue Sky laws if sales only to “qualified purchasers” (to be defined by SEC)♦ But … – Companies must file disclosure information and make periodic reports, incl. audited financials♦ No specific deadline for new rules
  12. 12. Crowdfunding♦ Funding a project or venture by raising small amounts of money from a large number of people♦ Not possible pre-JOBS Act♦ New exemption from registration – Companies may raise up to $1M in 12 mo. – Federal preemption of state Blue Sky laws – No wealth thresholds for investor participation, wealth does impact amount that can be invested – Limited disclosure requirements Partly determined by amount of financing
  13. 13. Crowdfunding♦ Companies required to use approved portals – Portals must be registered with SEC and FINRA – Obligations of portals TBD♦ Issues – Increased risk of fraud? – Potential for hundreds of shareholders creates corporate governance and record-keeping issues – How will crowdfunding be looked at by traditional VCs?♦ Rules due January 2013, but likely late
  14. 14. Takeaways1. JOBS Act may make fundraising easier2. BUT a lot depends on SEC rules3. Rule 506 with general solicitation will necessitate strict compliance with requirements4. Reg A+ may become a viable method of fundraising for more mature startups5. Crowdfunding could be a game changer for raising seed funding, but much is TBD
  15. 15. McCarter & English LLP Questions? Benjamin M. Hron Jonathan Guest 617.449.6584 617.449.6598 @HronEsq