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Moderator Ron Orol Senior Editor The Deal
Expert Panel: Marianne HudsonExecutive DirectorAngel Capital Association
Expert Panel: Gregory J. NowakPartnerPepper Hamilton LLP
Expert Panel: Brian S. KornOf CounselPepper Hamilton LLP
JOBS Act Overview • Crowdfunding – online fundraising…but there’s a catch • Regulation A+ - from $5mm to $50 mm • Private Placement Reforms • General Solicitation relaxed – effective Sept. 23 • Enhanced verification of Accredited Investors if Soliciting • “Go Public” Shareholder Thresholds Increased • IPO On-Ramp and Emerging Growth Companies • Relaxation on Research Restrictions • Decimalization – move to $.09 tick increments? • Prospective Issuer Outreach • Signed into law April 5, 2012 “To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.”
The IPO On-Ramp • Title I of the JOBS Act – Reopening American Capital Markets to Emerging Growth Companies • Intended to make capital raising easier • The lengthy exhaustive IPO process was perceived as impeding capital raising by smaller companies • Costs and difficulties of going public, listing on an exchange and being a public reporting company are high
Emerging Growth Company • New category of issuer: “Emerging Growth Company” • Total annual revenues of less than $1 billion (indexed for CPI every 5 years) • Has not issued more than $1 billion of non-convertible debt over the previous 3 years • Issuer is not a “large accelerated filer” under Securities Exchange Act Rule 12b-2; a large accelerated filer meets all of the following: • $700 million worldwide public float (excludes affiliates) • Has been subject to reporting requirements for one year • Has filed at least one 10-K/20-F • EGC status carries a 5 year maximum – last day of fiscal year containing 5th anniversary of first public equity offering • Electing EGC status is optional
Benefits of EGC Status – IPO Process • Confidential Submissions of Registration Statement to SEC Staff until 21 days prior to launch of roadshow • Electronic EDGAR-only submission not visible to the public until S-1 is publicly filed • Can clear comments, but letters and responses will become public upon public filing of the Registration Statements • “Testing the Waters” meetings (oral or written communications) are permitted with QIBs and Accredited Investors pre- or post-filing • Issuers or persons authorized by issuers • Exempt from Section 5, but still liable for statements
Benefits of EGC Status - Disclosure • Reduced Disclosure • Excused from Sarbanes Oxley 404(b) • Executive Compensation • No CD&A • No mean compensation data • No CEO vs. median employee pay multiple data • No Say on Pay, Say When on Pay and Say on Golden Parachutes Votes (which are non-binding anyway) • Audited financials- 2 years permitted instead of 3 • Selected financials – need not show more than audited years presented (2 years instead of 5) • Need not comply with new financial accounting standards (must declare at outset and cannot cherrypick or switch back and forth)
Private Placements – Former Law • Former Private Placement Rules (Reg. D) prohibited general solicitation and general advertising • Rule 504: Up to $1 million • Rule 505: Up to $5 million, not including “bad boys” • Rule 506: Unlimited amount, limited to accredited investors or financially sophisticated investors • Blue Sky Laws • Preempted only for Rule 506 offerings • Individual states exempt sales to “institutional buyers”
Regulation D Rule 506 now has two alternatives: (b) and (c) 506(b) is the traditional rule no general solicitation or advertising permitted offers and sales must be to either accredited or financially sophisticated investors up to 35 non-accredited investors permitted information requirements for non-accredited investors unlimited accredited investors permitted unlimited dollar amount of offering 506(c) is the new rule general solicitation or advertising is permitted sales must be to accredited investors only unlimited accredited investors permitted unlimited dollar amount of offering New Structure of Rule 506
The proposed new rules require the issuer to take “reasonable steps to verify” that the purchasers of the securities are accredited investors, considering the following factors: nature of purchaser / category of accredited investor amount and type of information issuer has concerning the purchaser nature of offering manner in which purchaser was solicited term of the offering minimum investment amount, if any Observations: Online activities have burden of demonstrating they are not advertising Professional verification firms are cropping up (eg, Accredify) Verification of Accredited Status
Public Crowdfunding Background • Comprises Title III of the JOBS Act • Originated from two perceived needs: • that smaller retail investors did not have access to early stage investment opportunities • that start-up companies did not have adequate access to available capital, particularly online capital raising • Adds exemption from SEC registration for crowdfunding transactions in the form of new Section 4(6) of the Securities Act • Capital • Raising • Online • While • Deterring • Fraud and • Unethical • Non- • Disclosure
Issuers Not Eligible to Crowdfund • Non-US companies • Public reporting companies (only required filers are excluded, not “voluntary filers”) • Investment companies, including companies excluded from the definition of Investment Company by 3(b) or 3(c) of the Investment Company Act of 1940, including: • Mutual Funds • Private Equity Funds • Asset Management Vehicles • Business Development Companies
Crowdfunding Requirements • Investment limitations (per trailing 12 month period) • Company: Can receive up to $1 million • Investor: • Less than $100K: greater of $2,000 or 5% of annual income or net worth • $100K or more: 10% of annual income or net worth • Must be conducted through broker or “funding portal” • Must file with the SEC and provide to broker/funding portal and investors extensive disclosure, including tax returns ($100K or less), reviewed financial statements ($100K-$500K) or audited financial statement (>$500K)
Crowdfunding Requirements • Must not advertise except to direct investors to broker/portal • Must not pay promoters except as SEC allows • Must file annual or more frequent reports with the SEC • Prospectus liability for disclosures with knowledge out • 1 year holding period on shares sold except to issuer, accredited investor, family member or through registered offering • Crowdfunded shares do not count towards the 2,000 shareholder rule to force a company public, but see above re SEC reporting
Peer-to-Peer Lending • What is Peer-to-Peer Lending? • Is it legal? • What are the risks for borrowers, lenders? • What is the legal status of the loans? • Can the loans be resold? • Is this a form of crowdfunding? • Why aren’t big banks intervening? • Institutional vs. Retail Investors
Neither LendingClub nor Prosper are banks Peer-to-peer lending sites facilitate loans to consumers from WebBank, a Utah-chartered state industrial bank WebBank allows interest rate to be “portable” WebBank sets credit terms, extends credit and holds loan for 1 day Both LC and Prosper have been in business over 5 years Battles have been waged in each state to arrive at this point Platforms retain servicing rights and service loan $$ is not FDIC or SIPC insured Bank regulatory “lite” applies – Platforms must comply with consumer finance credit, privacy and auto-deduction laws, but…… Exempt from 23A and 23B affiliate rules* Exempt from regulatory capital rules* Exempt from too big to fail, living wills, Volcker Will big banks start to care at some point, and then what happens? Borrower may not pay and Lender cannot sue Borrower Lender has limited ability compared to traditional lending Limited recourse to enforce loan Collection fees will exceed recovery Top Legal issues in Peer-to-Peer