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JOBS Act and Beyond form Hot Topics Seminars


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JOBS Act and Beyond presentation given by John D. Tishler of Sheppard Mullin at the 5th Annual Hot Topics Seminar on October 16, 2012.

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JOBS Act and Beyond form Hot Topics Seminars

  1. 1. New Capital Raising Possibilities JOBS vs. JobsHot Topics 2012John D. Tishler, Esq. © Sheppard Mullin Richter & Hampton LLP 2012
  2. 2. FAQs Where’s the old John? Don’t you stand up here every year and give us bad news about new regulations? What’s in the JOBS Act? How will it help my start-up raise money? I’m late on payroll. How can I crowdfund now? What’s the Investor Visa, and why do I care?
  3. 3. Birth of the JOBS Act Various bills had been introduced addressing limited aspects of the JOBS Act SEC established a task force to evaluate reforms for smaller businesses Stop Online Piracy Act (SOPA) created wedge between Obama administration and Silicon Valley in election year Obama forms Council on Jobs and Competitiveness in January 2012 Council recommended broad deregulatory framework, much of which would not fly But securities law deregulation had political potential
  4. 4. The stone begins to roll . . . Obama includes JOBS Act proposals in State of Union address House majority leader Eric Cantor strings together the various pending bills into the JOBS Act Cantor and House Republicans see opportunity to get something done on “jobs.”
  5. 5. . . . gathers little moss Bill passes House of on March 8, 2012 by 390- 23, despite private opposition by Obama administration to crowdfunding exception Many organizations and SEC oppose the bill But Senate bypasses its normal committee procedure and passes JOBS Act (with revised crowdfunding exemption) on March 22, 2012 by 73-26 House approves modified bill by 380-41 Obama signs April 5, 2012
  6. 6. What’s in the JOBS Act? The IPO on-ramp provisions New private offering flexibility
  7. 7. What was broken? More difficult than ever to raise institutional capital No viable way for companies to take advantage of investment marketing potential of internet No inflationary increases in Rule 504 ($1M) and Regulation A ($5M) limits marginalized those exemptions Many larger private companies were facing mandatory Exchange Act registration from having 500+ stockholders
  8. 8. New private offering flexibility Lifting the ban on general solicitation for offerings to "accredited investors" Relief from “500 shareholder rule” The “crowdfunding exemption” The new “mini-public offering exemption”
  9. 9. Permitting general solicitation Rule 506 amended to lift prohibition on general solicitation if sold only to accredited investors Issuer to take reasonable steps to verify that the purchasers are accredited. Rule 506 has federal pre-emption under NSMIA Does not directly affect offerings under other exemptions afforded by Regulation D or Section 4(2) Proposed Rules – August 29, 2012
  10. 10. Proposed rules? Wasn’t the SEC supposed to get final rules out in 90 days? Significant disagreement amongst the five Commissions – “Just get it done already” • Daniel Gallagher • Troy Parades – “Needs additional investor protections” • Luis Aguilar • Elise Walters – “Let’s gather some more comments on reasonable steps to verify” • Mary Shapiro Comments closed October 5, 2012
  11. 11. What do the Proposed Rules say? No bright line rules Steps that are “reasonable under the facts and circumstances” Merely requiring that the person represent as to their accredited investor status would fail the requirement of taking “reasonable steps” Referred to as anobjective standard
  12. 12. Types of advertising/solicitation At this point, no limits on types of solicitations
  13. 13. Who will benefit from lifting ban on general solicitation?
  14. 14. Who else? Companies with broad consumer identity Companies with “affinity” stories – Green projects – Orphan drug treatments – Faith-based investments Memes
  15. 15. Relief from Exchange Act Registration Section 12(g) of the Exchange Act – Formerly • more than $10 million in assets at fiscal year end; and • more than 500 holders of record of any class of its equity securities – The JOBS Act increased the holder threshold to 2,000 holders • no more than 500 are unaccredited investors • securities held by persons who received them pursuant to employee compensation plans excluded • securities held by persons who purchased them under the crowdfunding exemption excluded
  16. 16. Crowdfunding exemption This was the one section changed by the Senate Changes were significant – made crowdfunding much less appealing Crowdfunding requires implementing rules – SEC required to adopt 270 days after adoption Crowdfunding is new Section 4(6) of Securities Act Crowdfunding will pre-empt state regulation Crowdfunding purchasers exempt from count of 2,000 for state registration
  17. 17. The fine print on crowdfunding Transaction must be conducted through an intermediary that is either a registered broker-dealer or “funding portal”  The issuer must make the following mandatory disclosures to the SEC, the Aggregate proceeds from all investments in the issuer, including amounts intermediary and investors: sold under the crowdfunding exemption during the preceding 12 months, – identifying information about the issuer, including its website must be less than $1,000,000. Aggregate amount invested by any investor in all issuers pursuant to the – the names of officers, directors and 20% shareholders crowdfunding exemption must not exceed a limit determined on a sliding – a description of the business and the anticipated business scale based on net worth or annual income. plan – 5% of net worth or annual income that is less than $100,000 – a description of the financial condition of the issuer, with (or $2,000, if greater than the 5% calculation) scaled requirements depending on the target amount of the – 10% of net worth or annual income that is $100,000 or more. offering. – No investor may invest more than $100,000 in an issuer • For offerings of $100,000 or less, the income tax pursuant to the crowdfunding exemption. return for the last completed year and financial – Equity in a principal residence is excluded from net worth. statements certified by the principal executive officer to be true and correct – Intermediary must take steps to ensure compliance* • For offerings of $100,000 to $499,999, financial Funding portals are not required to register as broker-dealers, but are subject to SEC registration and must be members of a national securities statements reviewed by an independent public association, such as FINRA. accountant Intermediary must provide disclosures • For offerings over $500,000, financial statements – including disclosures related to risks and other investor audited by an independent public accountant education materials* – the intended use of proceeds – intermediary must ensure that investors review investor- – the target offering amount, the deadline to meet the target education information* offering amount, and regular updates regarding the progress Intermediary must ensure that investors answer questions demonstrating that of the issuer toward the target – they understand the risks of investing in startups, including – the price or the method of determining the price, and if the the risk of loss of the entire investment price is not fixed, a reasonable opportunity for the investor to – can afford such loss. rescind its commitment once the price is determined Intermediary must provide the disclosures to the SEC and to investors at – detailed information about the capital structure of the issuer, least 21 days prior to accepting any investments. the securities being offered and the risks associated with The intermediary must take fraud-prevention measures*, including those securities background checks of officers, directors and 20% holders. – how the securities being offered are being valued, and how Intermediary must ensure that proceeds are not released to issuers until a they might be valued in the future in connection with a set target amount is reached corporate transaction – must allow investors to withdraw their commitment*  Issuer may not advertise the terms of the offering Intermediary must ensure privacy of information* – except for notices which direct investors to the intermediary Intermediaries cannot pay finders fees  The issuer may not compensate finders except in accordance with SEC rules Directors, officers and partners of the intermediary may not have a financial that will ensure the recipient clearly discloses such compensation. interest in the issuer  The issuer must file annual reports of results of operations and financial The issuer and its directors, partners, principal executive officer, principal statements with the SEC and provide to investors* financial officers and controller/principal accounting officer will be liable to  No resales are permitted for one year except to the issuer, an accredited investors for any material omissions or misstatements unless they can investor, a member of the investor’s family or pursuant to a registered offering sustain the burden of proof that they did not know, and in the exercise of  The exemption is available only for U.S. issuers that are not investment reasonable care, could not have known, of such untruth or omission. companies and are not subject to periodic reporting under the Exchange Act. * Subject to SEC rules
  18. 18. What does all the fine print mean? Two things: – Transaction costs very high as a percentage of funds raised – Costs incurred in advance of knowing whether funding will be successful Unclear whether crowdfunding will be a viable model for startups to raise capital
  19. 19. Regulation D, Rule 504 Up to $1 million during a 12-month period No mandatory disclosures (except blue sky) No investor qualifications (except blue sky) No limits on individual investments So long as qualified in at least one state  No limit on general solicitation  “Free-trading stock” Integration No state pre-emption Included in 2,000 investor count
  20. 20. Regulation A+ What is Regulation A? – Current exemption from registration • offerings of up to $5 million per year • only for non-reporting companies • requires the submission of a simplified offering document to the SEC -- SEC comments on it • permits “testing the waters” communications • securities sold under Regulation A are not “restricted securities” • no automatic Exchange Act registration • subject to state blue-sky qualification laws Why haven’t I heard of it? – Rarely used because of the low $5 million offering cap and the associated regulatory burdens
  21. 21. What is Regulation A+? Up to $50,000,000 of securities sold in the prior 12 months in reliance on the exemption, subject to SEC-discretionary increases every 2 years. requires issuers availing themselves of the modified exemption to file audited financial statements with the SEC annually allows the SEC to impose additional conditions, including periodic reporting requirements Blue-sky law pre-emption, but only if • offered and sold on a national securities exchange or • offered and sold only to “qualified persons” (to be defined by the SEC) • Offered and sold on national securities exchange would require Exchange Act registration and reporting JOBS Act does not exclude holders of securities sold under this exemption from the count of holders for Exchange Act registration – companies may need to impose contractual trading restrictions to prevent # of holders from exceeding 2,000 May become alternative for reverse mergers and “alternative public offerings” No deadline for SEC implementation of new rules
  22. 22. Overview of the EB-5 program Congress created the EB-5 category in 1990 Series of amendments expanded program Now 10,000 green cards available to foreign nationals each FY Two options under the program: – Direct Investment – Regional Center (RC) Investment 90-95% of EB-5 petitions filed through RCs
  23. 23. Basic principles of EB-5 Foreign national invests $1M or $500,000 (“targeted employment area”) – Equity or debt Creates at least 10 jobs per unit investment Project gets funding Investor gets permanent green card – For himself/herself – Spouse – Children under 21 Maybe even gets investment back – And perhaps a return
  24. 24. Regional Centers Set up to promote economic development of specific region Apply for designation Can count “indirect” jobs in count of 10  Can pool investments for job creation – E.g., $10 million in TEA = 200 jobs Projects can become their own regional center Or, entrepreneurs form regional centers to serve as quarterbacks in fundraising process
  25. 25. Historical UsageFiscal Year Total EB-5 Visas Issued
  26. 26. Choosing an EB-5 Team Law Firm – Immigration – Securities/Corporate Economist EB-5 Business Plan Writer Bank/Escrow Agent Marketing Firm/Commissioned Agent
  27. 27. Successful/Failed projects Successful/Ongoing Failed/Litigation The Charles Condo (NY) - $22M – sold out  El Monte State University of NY/New Paltz Housing - – Transit station $34M – USCIS decertified – sold out Geothermal Power Plant - $15M – Fraud, embezzlement, arrests, – sold out lawsuits SLS Casino (Las Vegas) - $115M  New Orleans – Introduced in July, over 100 have been recruited – Supposed to do hurricane flood Yellowstone Club (DC) - $100M relief – Introduced one month ago, but not formally – Hired agents to raise money launched marketing effort – Lawsuit alleges fraud, – Developer is a PE firm in Boston, upgrade project embezzlement Capital Fire Station (DC) - $65M  Mamtek Knickerbocker Hotel (NY) - $45M – Missouri sucralose factory Aspen Club & Spa - $35M – Bonds floated ahead of EB-5 Green Tech Auto - $25M – EB-5 money never came – sold out – CEO charged with securities fraud
  28. 28. Advantages to project Capital available for projects that cannot get funded any other way Capital available for riskier tranches in cap stack Investors happy with 5-7 yearsbefore exit Below market interest rates/covenants Investors just want – Green card – Principal back (or most of it)
  29. 29. Disadvantages Securities law apply – Despite admonitions to the contrary by most current players “Wild west” mentality Delays in funding – 13 – 20+ months Marketplace more competitive Investors more sophisticated/choosy
  30. 30. Questions? John D. Tishler SheppardMullin12275 El Camino Real, Suite 200 San Diego, CA 92130 (858)-720-8943
  31. 31. JOBS Act Articles markets-at-long-last-a-divided-sec-publishes-proposals- to-enable-general-solicitation-and-advertising-for- regulation-d-and-rule-144a-but-further-delays- effectiveness.html markets-president-obama-signs-jobs-act-landmark- reform-for-small-and-emerging-growth-companies-now- law.html