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What Does the JOBS Act Mean for Your Small Business?
 

What Does the JOBS Act Mean for Your Small Business?

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    What Does the JOBS Act Mean for Your Small Business? What Does the JOBS Act Mean for Your Small Business? Presentation Transcript

    • © Copyright 2012. Andrew J. Sherman. All Rights Reserved. 1 3072451
    • © Copyright 2012. Andrew J. Sherman. All Rights Reserved. 2 3072451
    • How to Participate• Submit your questions in the GotoWebinar presentation window• Follow along and share your thoughts on Twitter at #MVPlive© Copyright 2012. Andrew J. Sherman. All Rights Reserved.
    • Andrew J. Sherman Mr. Sherman is a partner in the Washington, D.C. office of Jones Day with over 2,700 lawyers worldwide. He is the author of 23 books on business growth, capital formation and the leveraging of intellectual property. His twenty-second (22nd) book, Harvesting Intangible Assets, Uncover Hidden Revenue in Your Company’s Intellectual Property, (AMACOM) was published in October of 2011. Other recent titles include the best-selling Mergers and Acquisitions from A to Z, third edition was published by AMACOM in 2010. He is also the author of the 2nd edition of the Due Diligence Strategies and Tactics, which was published in the Spring of 2010. His Twenty-third book Essays on Governance, will be published June of 2012. He has appeared as a guest and a commentator on all of the major television networks as well as CNBC’s “Power Lunch,” CNN’s “Day Watch,” CNNfn’s “For Entrepreneurs Only,” USA Network’s “First Business,” and Bloomberg’s “Small Business Weekly.” He has appeared on numerous regional and local television broadcasts as well as national and local radio interviews for National Public Radio (NPR), Business News Network (BNN), Bloomberg Radio, AP Radio Network, Voice of America, Talk America Radio Network and the USA Radio Network, as a resource on capital formation, entrepreneurship and technology development. He has served as a top-rated Adjunct Professor in the Masters of Business Administration (MBA) programs at the University of Maryland for 23 years and at Georgetown University for 15 years where he teaches courses on business growth strategy. He has served as General Counsel to the Young Entrepreneurs’ Organization (YEO) since 1987. In 2003, Fortune magazine named him one of the Top Ten Minds in Entrepreneurship and in February of 2006, Inc. magazine named him one of the all-time champions and supporters of entrepreneurship.© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 4 3072451
    • Overview of the Capital Markets Overview of the Capital Markets© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 5 3072451
    • Assessing Capital Market Conditions Truly Excellent Open(a) Normal Private Equity Conditions (ex. 1994 to 1997, 2010-2011) Companies Access All truly excellent companies Typical Growth and some typical growth Companies companies have access to the capital markets. Weaker (Limited Growth) Closed Access Companies(b) Weak Capital Market Conditions (ex. 2000 to 2002, 2008-2009) Open Truly Excellent Access Only the “best of the best” in favored industry sectors get Companies access to the private equity markets (and even those Typical Growth face much tougher terms Companies Closed and conditions). Access Weaker Limited Growth(c) Abnormally Exuberant Market Conditions Companies (ex. 1998 to 2000) Open Access Truly Excellent The exuberance of the Companies markets provides capital to all excellent, typical, and even Typical Growth some weaker companies, and Companies business models in a “gold Closed rush” mentality. Weaker Limited Growth Access Companies
    • Sources of Growth Capital $ Debt • Commercial Banks Hybrids Equity • Governmental Lending • Bootstrapping • Angels/ and guaranty programs • Alliances and Joint Bands of Angels • Commercial Leasing and Ventures • Private Placements Equipment Finance • Employee Financing • Venture Capital Funds • Factoring and Specialty • Customer Financing • Strategic Investors Lenders • Consortiums • Vendor Financing and Trade Credit Dilution and Control Risk of Default and Obligation to Repay© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 7 3072451
    • Three Types of InvestorsEmotional Financial Strategic• You • VC Funds • Corporate• FFF’s • PE Sources Investors and• Angels Corporate VC• PPM’s Funds • Customers and Vendors • Corporate VC Funds • Some types of PE Funds • Consortiums © Copyright 2012. Andrew J. Sherman. All Rights Reserved. 8 3072451
    • State of the Capital Markets (Not a pretty picture) • Economy is slowly recovering (not recovered) and business and investment transactions are taking longer to close • More business deals and financing transactions derailing due to market conditions or buyer cold feet/seller remorse/valuation disappointment or overall transactional fatigue (loss of momentum/parties run out of steam and passion) • Cost of transactional capital is rising • Breadth and depth of due diligence is wider and deeper and taking longer • “Sky is Falling”/“Boy who cried Wolf”/Fear of Your Own Shadow Market Mindset© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 9 3072451
    • State of the Capital Markets (Not a pretty picture) (Cont’d) • Perceived vs. Real Lack of Quality Deal Flow Relative to Capital (Overhang) • Protection & Risk Allocation-driven deal terms more hotly contested (less wiggle room) • Players seem content on the bench vs. the playing field (are they on injured reserve or out for the season?) • Many VC funds are focused on existing relationships vs. new portfolio companies • The net worths (home values, stock values, etc.) of angels have taken a significant hit and they are feeling less “angelic”© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 10 3072451
    • State of the Capital Markets (Not a pretty picture) (Cont’d) • Focus is on follow-on investment to existing portfolio companies vs. open to new relationships • Big rock stars (Groupon, Living Social, Zynga) and everyone else • The “small deal” ($250 to $750k) that nobody seems to want to do • When bad markets happen to good entrepreneurs (bar is higher and narrower.…) • The social media consequences of the Facebook IPO and the impact on capital formation© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 11 3072451
    • The JOBS Act The JOBS Act© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 12 3072451
    • JOBS Act (Jump Start Our Business Act) • Became law on April 5, 2012 • Designed to facilitate capital raising by reducing regulatory burdens • Many provisions are self executing and were effective immediately, including the provisions relating to:  Facilitating IPOs  Increased shareholder numerical thresholds • Allows “crowdfunding” to include certain types of equity issuances (regulations from the SEC pending)© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 13 3072451
    • JOBS Act (Cont’d) • Other provisions require SEC rulemaking including  The elimination of the restriction on general solicitations (within 90 days) • Many “reforms” will involve policy decisions on whether and to what extent to adopt© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 14 3072451
    • JOBS Act (Cont’d) Most but not all of the JOBS Act provisions are only applicable to EGCs Emerging Growth Companies •IPO companies with annual gross revenues of less than $1 billion during their most recent fiscal year© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 15 3072451
    • JOBS Act (Cont’d) • A company would retain EGC status, and the reduced regulatory and reporting requirements associated with it, until the earliest of: The first fiscal year after its annual revenues exceed $1 billion The first fiscal year following the fifth anniversary of its IPO© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 16 3072451
    • The JOBS Act Crowdfunding Exemption The JOBS Act creates a new exemption for “crowdfunded offerings” Basic Requirements: • The aggregate amount sold to all investors by the issuer during a 12-month period is no more than $1 million • Individual investment amounts are limited 10% of annual income or net worth up to $100,000.[*] ___________________________________ [*] The limit is the greater of $2,000 or 5% of annual income or net worth if the investor’s net worth or annual income is less than $100,000.© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 17 3072451
    • The JOBS Act Crowdfunding Exemption • The transaction must be conducted through a broker or “funding portal.”  A funding portal cannot: (1) provide investment advice or make recommendations; (2) solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal;© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 18 3072451
    • The JOBS Act Crowdfunding Exemption (Cont’d) (3) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; or (4) hold, manage, possess, or otherwise handle investor funds or securities; or (5) engage in any other activities the SEC determines to prohibit in its crowdfunding rulemaking.© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 19 3072451
    • The JOBS Act, Private Placements and Regulation D Prior to the JOBS Act passage, crowdsourcing had been limited to “donations” to early-stage enterprises, musicians, artists, non-profits, etc. without the issuance of equity or debt securities© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 20 3072451
    • The JOBS Act, Private Placements and Regulation D (Cont’d) • Overview of Regulation D today (pre-JOBS Act)  The JOBS Act requires the SEC to revise Regulation D to remove the prohibition against general solicitation and advertising in offers and sales of securities conducted under Rule 506, provided that the ultimate purchasers of securities qualify as "accredited investors" under the SECs current definition.© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 21 3072451
    • The JOBS Act, Private Placements and Regulation D (Cont’d)  The legislation also requires the SEC to make comparable changes to Rule 144A to permit solicitation of nonqualified institutional buyers, provided that only qualified institutional buyers purchase the offered securities.© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 22 3072451
    • The JOBS Act, Private Placements and Regulation D (Cont’d)  The JOBS Act requires the SEC to adopt implementing rules on these changes to Regulation D within 90 days.  These changes represent a major shift in the private placement process and provide issuers and placement agents with additional tools to raise capital without the burden and expense of filing a registration statement.© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 23 3072451
    • The JOBS Act, Private Placements and Regulation D (Cont’d)  These changes permit persons engaging in unregistered transactions to enjoy many of the same benefits of public offerings, but avoid the time constraints of SEC review and the burden of SEC registration.[*] ____________ [*] The JOBS Act also amends Section 3(b) of the Securities Act to require the SEC to establish an exemption for securities that are offered and sold in a 12-month period with an aggregate offering price not to exceed $50 million. This exemption contains conditions, including the requirement that covered issuers file audited financial statements annually with the SEC, and provides that the civil liability provisions of the Securities Act are applicable to offers and sales of these securities.© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 24 3072451
    • The JOBS Act, Private Placements and Regulation D (Cont’d)  Among the topics that the SEC must address in its rulemaking is what steps an issuer must take to verify "accredited investor" status.[**] _____________ [**] In order to comply with Sections 3(c)(1) or 3(c)(7) under the Investment Company Act, private funds (e.g., private equity, venture capital, real estate, and hedge funds) need to conduct their securities offerings in a manner that does not constitute a public offering. The JOBS Act addresses this issue by providing that an offering conducted under revised Rule 506 of Regulation D would also not be viewed as a public offering for purposes of the federal securities laws, including the Investment Company Act.© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 25 3072451
    • The JOBS Act and The RegistrationThreshold • The legislation also raises the threshold for registration under the Exchange Act. • The JOBS Act amends Section 12(g) of the Exchange Act to increase the limit on shareholders of record from 500 to 2,000 or, in the alternative, 500 persons who are not (i) "accredited investors," (ii) employees of the issuer who received shares pursuant to an employee compensation plan, or© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 26 3072451
    • The JOBS Act and The RegistrationThreshold (Cont’d) (iii) investors who received shares under the "crowdfunding“[*] exemption of the JOBS Act. [**] ______________ [*] The JOBS Acts "crowdfunding" provisions would also exempt from registration small capital raising transactions—up to an aggregate amount of $1 million per year—with individual investors. The aggregate amount sold to each individual investor under this exemption is limited to a maximum amount based on the investors income or net worth, and issuers engaged in eligible transactions must satisfy basic informational and SEC filing requirements, among other conditions. [**] The JOBS Act also provides for increased thresholds for banks and bank holding companies.© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 27 3072451
    • The JOBS Act and The Registration Threshold (Cont’d) • Calculation excludes shares issued under employee benefit plans • Shareholder count continues to be based on “record ownership” rather than “beneficial ownership” • Enables issuers to remain private longer • May result in further development of private secondary markets such as SharesPost and SecondMarket© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 28 3072451
    • Practice Tips and Next Steps • CEO’s, CFO’s and entrepreneurs need to evaluate crowdfunding with the same analytical view towards any other type of capital formation strategy – it is not a magic elixir • Business plans, business models, cap tables, dilution impact, etc. all need to be clearly understood and communicated– think through the terms of the offering, valuation issues, risks, etc.© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 29 3072451
    • Practice Tips and Next Steps (Cont’d) • From a governance standpoint, be sure the company is ready for an influx of 100’s of small new investors (who may or may not be sophisticated) • Develop screens and filters and criteria for accepting investor subscriptions© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 30 3072451
    • Are You Really, Really Are You Really, Really Ready to Raise Capital? Ready to Raise Capital?© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 31 3072451
    • Key Variables In Readiness Assessment • Current dynamics of leadership team and stakeholders • Current methodologies for decision-making and how that paradigm will change • How will you react to the typical controls in a Term Sheet (honest self-assessment)? • Are you ready to listen? Adjust? Collaborate? • Do you understand and embrace what it truly means to have a fiduciary duty and stewardship role to protect the best interests of minority shareholders? • Will you be accountable for deadlines, milestones, performance conditions, staggered tranches, penalties for default, etc.?© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 32 3072451
    • Emotional and Psychological Aspects of Capital Formation • In venture investing, due diligence is both strategic and personal • Alignment of core values beliefs, moral fiber and goals with investors • Understanding investor expectations in an era of transparency and distrust • The emotional aspects of angel investing • The delicate balance between love/friendship and money with FFF investors • The dynamics of a business marriage with one or more co- founders/early team members • Embracing your FUD’s about having investors and raising capital • What makes you the happiest? Describe your lifestyle, hobbies, interests, etc. Are these activities aligned with the best interests of the investors? • Can you live your life in a fishbowl?© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 33 3072451
    • Breaking Some Myths • People invest in people (that they trust, like and respect) not in things or plans • A Team/B plan wisdom • Numbers follow, they don’t lead • Real commitment/skin in the game • Some new acronyms to replace IRR, ROI and EBITDA: WSIGAS, CITY AND SMTM • Walk a mile in the shoes of the investor: How does your proposal meet their needs or solve their challenges?© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 34 3072451
    • Developing Capital Formation Developing Capital Formation Strategies Strategies© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 35 3072451
    • Understanding The Capital Formation Strategic Planning Process • Capital Formation Strategic Plan ≠ Business Plan • No “Emperor’s New Clothes” – Must Have A Realistic Assessment of Current Growth Opportunities and SWOT Analysis • Capital Must Be The Fuel That Will Make Your Company Bigger/Better/Faster/More Profitable or Investors Will Take A Pass (Your job is to demonstrate and prove the investment thesis in your Business Plan and presentations) • Understand both the quantitative and the qualitative “cost” of capital (e.g. are you really ready for investors?) • Avoid DITH and DCMBU syndromes!© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 36 3072451
    • Understanding The Capital Formation Strategic Planning Process (Cont’d) • Capital Formation is a Process (in multiple parts) not an Event • Be prepared to invest time and resources into the capital formation process • Have the right advisors in place • Be realistic in your valuation expectations (reflective of industry trends, market conditions, growth plans, operating margins, etc.) to avoid looking like a “pie- in-the-sky” entrepreneur© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 37 3072451
    • Types of Capital To Be Raised (Allocation of Proceeds) Opportunity Capital (take advantage of unforeseen Fudge Factor opportunities (because Murphy’s Law Debt is a law) Repayment (as approved) Capital Raised R&D Capital Day-to-Day Operating Project-Specific Capital Capital© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 38 3072451
    • Balancing Competing Interests Is Key THE DEAL (meeting of the minds/compromise) INVESTOR WANTS/ NEEDS ENTREPRENUER WANTS/NEEDS• Maximum return • Maximum capital/valuation• Mitigate risk/downside • Avoid dilution/control protection • Affordable cost of capital• Input on future and growth of the business/control COMMON OBJECTIVES • Growth in the value of the business • Additional rounds of $ at more favorable valuations • Mutually beneficial exit strategy © Copyright 2012. Andrew J. Sherman. All Rights Reserved. 39 3072451
    • Key Issues For Investor Due Diligence (Value Drivers) Marketing and Defendable branding competitive strategies Durable revenue advantage (IP) streams Strategic, alliances, GROWING Management channels & networks teams ability to COMPANY lead/execute Strong base of loyal and diversified customers Path to Large and clearly profitability defined target is clear market(s)© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 40 3072451
    • Ten Questions All Types of Venture Investors AskLeaders of Growing Companies 1. How much can I make? 2. How much can I lose? 3. What is my exit strategy from this deal? 4. Who else says this deal is viable? (Risk mitigation/credibility) 5. Does the founder (and others) already have resources at risk? (Skin in the game) 6. What other value (beyond money) can I bring to the table? 7. Can I trust this management team? 8. Is this company’s target market large, growing (not stagnant or shrinking), and reachable? 9. Does the company have (or will it have) a sustainable competitive advantage – as a result of either operational effectiveness or its strategic positioning or its intellectual capital or other barriers to entry? 10. Is the company’s business, revenue, and profit model credible, verifiable, efficient, and sustainable?© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 41 3072451
    • Key To Capital Formation Planning: Know Your Audience (and its needs/wants/preferences)• • Angels Venture Capitalists • Economic/Strategic Investors • The business model may be • Clear path for growth secondary to team/personality fit • Strength of management team • Understanding the different levels and willingness to listen of angels • Size of market and• Strategic opportunity/competition • What corporate objectives do they have in place that an • Viability of an exit strategy investment in your company will • Private Placement Investors help facilitate? • Understand synergies, politics, • Sizzle vs. Steak red tape • Understanding their investment• Commercial Lenders objectives/needs • Creditworthiness • Use of intermediary • Ability to Repay • Mitigate and Manage Risk© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 42 3072451
    • Key Strategic Questions Regarding Capital Formation • In what ways are your financial capital issues a strategic growth opportunity vs. a growth impediment? • Debt vs. Equity vs. Hybrid – What Flavor Of $ Should You Raise? • Market Conditions – Help or Hinder To Your Plans? • Proposed Allocation of Proceeds • Analysis of Current Balance Sheet • Development and Analysis of Forecast and Growth Projects • Needs Analysis/Timetable (Openness to Staging)© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 43 3072451
    • Key Strategic Questions Regarding Capital Formation(Cont’d)• Before exploring the different type of financing available, you should thoroughly understand the fundamentals of developing a capital formation and business growth strategy because regardless of what kind of capital you’re raising—or how– any lender, underwriter, venture capitalist, or private investor will expect you and your management team to be able to prepare a meaningful business plan. The capital formation strategy will have to address specific financial questions, such as: • What market problems and financial opportunities have you identified? • What services, products and projects are planned to exploit these opportunities or solve these problems? • How much capital will you need to obtain the resources necessary to bring these projects to fruition? • Exactly how will you allocate the capital? How will this infusion of capital increase sales, profits and the overall value of the company?© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 44 3072451
    • Key Strategic Questions Regarding Capital Formation (Cont’d) • How will you meet your debt service obligations and provide a meaningful return on investment to your investors and lenders? • How much equity in the company are you offering to investors? How is it being valued? • What “exit strategies” will be available to the equity investors?© Copyright 2012. Andrew J. Sherman. All Rights Reserved. 45 3072451
    • © Copyright 2012. Andrew J. Sherman. All Rights Reserved. 46 3072451
    • © Copyright 2012. Andrew J. Sherman. All Rights Reserved. 47 3072451