Tag Archives: RegA+

Interact with FactRight’s Reg A+ Database

According to FactRight’s tracking, the SEC qualified 21 Reg A+ Tier 2 offerings in the second quarter of 2017, maintaining a brisk pace by the standards of Reg A+’s relatively short history. Approximately 45% of the 96 Tier 2 offerings qualified since late 2015 (not later withdrawn or used for merger purposes) have been qualified in just the first half of this year.

 

Three issuers made headlines in June 2017, when each listed common equity (that had been previously issued under Regulation A offerings) on a national securities exchange: Myomo, Inc. (NYSE: MYO), Adomani, Inc. (Nasdaq: ADOM), and ShiftPixy, Inc. (Nasdaq: PIXY). In the wake of successful public listings, it will be interesting to see whether a growing proportion of issuers will seek to use Regulation A as a stepping stone to becoming a fully public company.

Interact with FactRight’s database through the charts below to glean additional insights about the state of the Regulation A space through the second quarter of 2017. The charts below are dynamic; if you click on a single data point in any chart, it will filter the data displayed on the sidebar at left and in the remaining charts. (For instance, if you click on the bar for Tier 2 offerings qualified in the second quarter of 2017, all of the refreshed data in the sidebar and throughout the charts will only pertain to offerings qualified in the second quarter.) Hover your cursor over a chart for additional information.

 

Trump victory: a bumpy ride or financial opportunities?

CrowdFund Beat  Special Report, 

Trump winning the U.S. presidency is a bigger deal than Brexit, expect enormous volatility, but also important financial opportunities, affirms the boss of one of the world’s largest independent financial advisory organizations.

The observation from Nigel Green, founder and CEO of deVere, comes as multibillionaire real estate mogul and reality TV star Donald Trump wins the race to the White House to become America’s 45th president.

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Mr Green comments: “Buckle up for a bumpy ride in the global markets.  Whether President Trump will, in fact, do what he has said he will do throughout his campaign, or whether it was just soaring rhetoric to whip up his support base, for now, Trump winning is sending shockwaves across the world.  As such, enormous volatility can be expected in the markets.

“The Brexit result was a real shock and created instability in the UK.  But this is a far bigger deal as this creates instability on a much wider, international scale.

“The markets’ main concerns include Trump’s protectionist policies, focusing on potential trade wars with China – America’s largest trading partner – and with Mexico, it’s third largest.

“In addition, with Trump having said certain countries are ‘cheating’ due to their undervalued currencies, currency tensions should also be expected.”

He continues: “Whilst some people are put-off investing because of volatility, many of the most successful investors welcome it.  This is because major buying opportunities are always found where there are fluctuations.

“Fluctuations can cause panic-selling and mis-pricing. High quality equities can then, for example, become cheaper, meaning investors can top up their portfolios and/or take advantage of lower entry points. This all, in turn, means greater potential returns.

“A professional fund manager will help investors take advantage of the opportunities that volatility brings and mitigate potential risks as and when they are presented.

“Anyone serious about enhancing their finances should be using this somewhat unexpected turn of events to create, maximise and protect their wealth.”

Mr Green concludes: “As ever, the best way to benefit from the inevitable key opportunities and sidesteps risks is through real diversification – this includes across asset classes, sectors and geographical regions.”

Yesterday, the deVere CEO said: “With a Trump win we can expect in the immediate aftermath a double whammy negative impact on the market.

“This is because the likely sell-offs will be compounded by the markets having priced in a Clinton victory and were wrong.”

SEC Adopts Final Expanded Intrastate Crowdfunding Rules

By Samuel S. Guzik, CrowdFundBeat special guest editor,  Guzik & Associate

Today the SEC unanimously adopted amendments to Rule 147 and Rule 504, and adopted a new Rule 147A, intended to modernize and facilitate local offerings by companies in their home state.  The final rules are much improved from the proposed rules issued in October 2015, in response to virtually unanimous views of rule commentors.

The only fly in the ointment is that most states will need to update their legislation in order to be able to take advantage on the new, relaxed rules allowing broad internet solicitation. However, sales are still limited to investors in the company’s state.

The new rules will generally take effect in April 2017.

Here is a link to the SEC’s Final Rules Release: https://www.sec.gov/rules/final/2016/33-10238.pdf

Following is the SEC Press Release announcing the adoption of the final rules and a brief summary of the key provisions:

US-SEC-gov

 

SEC Adopts Final Rules to Facilitate Intrastate and Regional Securities Offerings

Rules Provide More Options for Companies to Raise Money While Maintaining Investor Protections

FOR IMMEDIATE RELEASE
2016-226

Washington D.C., Oct. 26, 2016 —The Securities and Exchange Commission today adopted final rules that modernize how companies can raise money to fund their businesses through intrastate and small offerings while maintaining investor protections.

“These final rules, while continuing to provide investor protections, update and expand the capital raising avenues for smaller companies, allowing them to more fully take advantage of changes in technology and business practices,” said SEC Chair Mary Jo White.

The final rules amend Securities Act Rule 147 to modernize the safe harbor under Section 3(a)(11) of the Securities Act, so issuers may continue to use state law exemptions that are conditioned upon compliance with both Section 3(a)(11) and Rule 147.  The final rules also establish a new intrastate offering exemption, Securities Act Rule 147A, that further accommodates offers accessible to out-of-state residents and companies that are incorporated or organized out-of-state.

To facilitate capital formation through regional offerings, the final rules amend Rule 504 of Regulation D under the Securities Act to increase the aggregate amount of securities that may be offered and sold from $1 million to $5 million.  The rules also apply bad actor disqualifications to Rule 504 offerings to provide additional investor protection, consistent with other rules in Regulation D.  In light of the changes to Rule 504, the final rules repeal Rule 505 of Regulation D.

Amended Rule 147 and new Rule 147A will be effective 150 days after publication in the Federal Register.  Amended Rule 504 will be effective 60 days after publication in the Federal Register.  The repeal of Rule 505 will be effective 180 days after publication in the Federal Register.

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FACT SHEET

Exemptions to Facilitate Intrastate and Regional Securities Offerings

SEC Open Meeting
Oct. 26, 2016

Action

The Securities and Exchange Commission is considering whether to adopt new and amended rules that would update and modernize how companies can raise money from investors through intrastate and small offerings.  The rules are part of the Commission’s efforts to assist smaller companies with capital formation while maintaining investor protections.

Highlights of the Final Rules

New Rule 147A and Amendments to Rule 147

The adoption of new Rule 147A and the amendments to Securities Act Rule 147 would update and modernize the existing intrastate offering framework that permits companies to raise money from investors within their state without concurrently registering the offers and sales at the federal level.

Amended Rule 147 would remain a safe harbor under Section 3(a)(11) of the Securities Act, so that issuers may continue to use the rule for securities offerings relying on current state law exemptions.  New Rule 147A would be substantially identical to Rule 147 except that it would allow offers to be accessible to out-of-state residents and for companies to be incorporated or organized out-of-state.

Both new Rule 147A and amended Rule 147 would include the following provisions:

  • A requirement that the issuer has its “principal place of business” in-state and satisfies at least one “doing business” requirement that would demonstrate the in-state nature of the issuer’s business
  • A new “reasonable belief” standard for issuers to rely on in determining the residence of the purchaser at the time of the sale of securities
  • A requirement that issuers obtain a written representation from each purchaser as to residency
  • A limit on resales to persons residing within the state or territory of the offering for a period of six months from the date of the sale by the issuer to the purchaser
  • An integration safe harbor that would include any prior offers or sales of securities by the issuer made under another provision, as well as certain subsequent offers or sales of securities by the issuer occurring after the completion of the offering
  • Legend requirements to offerees and purchasers about the limits on resales

Amendments to Rule 504 and Repeal of Rule 505

Rule 504 of Regulation D is an exemption from registration under the Securities Act for offers and sales of up to $1 million of securities in a 12-month period, provided that the issuer is not an Exchange Act reporting company, investment company, or blank check company.  The rule also imposes certain conditions on the offers and sales, with limited exceptions made for offers and sales made in accordance with specified types of state registration provisions and exemptions.  The amendments to Rule 504 would retain the existing framework, while increasing the aggregate amount of securities that may be offered and sold under Rule 504 in any 12-month period from $1 million to $5 million and disqualifying certain bad actors from participation in Rule 504 offerings.  The final rules also would repeal Rule 505, which permits offerings of up to $5 million annually that must be sold solely to accredited investors or no more than 35 non-accredited investors.

Background

The Commission adopted Rule 147 in 1974 as a safe harbor to a statutory intrastate exemption, Section 3(a)(11), which was included in the Securities Act upon its adoption in 1933.  Commenters, market participants and state regulators have indicated that the combined effect of the statutory limitation on offers to persons residing in the same state or territory as the issuer and the prescriptive eligibility requirements of Rule 147 limit the availability of the exemption for companies that would otherwise conduct intrastate offerings.

The $1 million aggregate offering limit in Rule 504 has been in place since 1988.

Effective Date

Amended Rule 147 and new Rule 147A would become effective 150 days after publication in the Federal Register.  Amended Rule 504 would become effective 60 days after publication in the Federal Register.  The repeal of Rule 505 would become effective 180 days after publication in the Federal Register.

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NASAA and Members of Congress Come Together on the Need for the SEC to Expand Intrastate Crowdfunding Rules

By Samuel S. Guzik, CrowdFundBeat special guest editor,  Guzik & Associate

It is rare that I am able to find agreement with the publicly stated positions of the North American Securities Administrators Association (NASAA). Equally rare – members of Congress who are traditionally strong advocates for “smart” regulatory reform of capital formation by SME’s to find themselves on the same page as NASAA.  However, there appears to be a growing, even overwhelming, consensus that the SEC’s proposed rules to modify current federal restrictions on the intrastate sale of securities – are on the one hand a step in the right direction.  But on the other hand, the SEC’s rule, as proposed, does not go far enough, and places unnecessary restrictions on the ability of states to decide what is in the best interests of their constituents – free of interference from the SEC.

By way of background, on October 30, 2015, the same day that the Commission announced final investment crowdfunding rules in furtherance of Title III of the JOBS Act of 2012 to implement investment crowdfunding on a national level – it also issued for comment a proposed rule, primarily intended to facilitate investment crowdfunding at the state level – Rule 147A. Significantly, the proposed rule would allow companies to advertise their offering on the Internet, something which the SEC Staff has stated is prohibited under current Rule 147 – and much to the consternation of state regulators and securities lawyers  alike.  In doing so, the SEC proposed to limit the amount that a state could authorize under its laws to $5 million. And it also proposed to eliminate the existing rule, Rule 147, in its entirety.

On October 7, 2016, a bi-partisan group of 15 members of Congress, many members of the House Financial Services Committee, signed a letter addressed to the SEC, encouraging the Commission to finalize its rulemaking, but with some important modifications. In particular, as proposed by the Commission, the existing “safe harbor” rule, Rule 147, which would allow states to regulate offerings occurring entirely within their state, would be scrapped in its entirety, and replaced by a new rule, Rule 147A, under the Commission’s general rulemaking powers.  This approach, if adopted in the final rules, has at least two untoward effects, as regards the ability of states to fashion their own rules for intrastate offering, including intrastate investment crowdfunding.

First, of the 35 or so states which have enacted their own investment crowdfunding statutes, adoption of the Rule, as proposed, would in effect, terminate these exemptions in many of the states which enacted their exemptions based entirely upon the current rule – proposed to be eliminated – bringing intrastate crowdfunding to a halt.  Comment letters to date have almost universally requested the SEC to clarify and expand the existing Rule 147, but to retain the existing rule.  Though a technicality of sorts, failure to fix this glitch would require the large majority of states authorizing intrastate investment crowdfunding to go back to their state legislatures to incorporate any new rule which replaces the current Rule 147. And until then, intrastate crowdfunding would be shut down.

Second, though the SEC’s proposed rule makes necessary improvements, it comes with some conditions which many find unpalatable – and unnecessary. In particular, the SEC rule, as proposed, would limit the ceiling under this proposed exemption to $5 million.  Opposition to this condition has been strong, simply because this is a matter which ought to be determined by each state – on a state by state basis.

The latest missive by 15 members of the House Financial Services Committee includes Congressman and Deputy Whip Patrick McHenry, a leading proponent of the JOBS Act of 2012 and subsequent legislation, and Congressman John Carney, the original sponsor of a Bill which passed the House this year which if enacted would create a new, independent office at the SEC – Office of Small Business Advocate – and would report to the full Commission and to Congress.  Undoubtedly, their letter will signal to the SEC the need to approval final rules as expeditiously as possible nearly a year after originally proposed. So look for good things to come from the Commission in this area in the coming months.

For those who want to dig a little deeper, I am providing links to my Comment Letter to the SEC as well as the Comment Letter submitted by NASAA, both back in January 2016.

Samuel S. Guzik has more than 35 years of experience as a corporate and securities attorney and business advisor in private practice in New York and Los Angeles, including as an associate at Willkie Farr and Gallagher, a major New York based international law firm, a partner at the law firm of Ervin, Cohen and Jessup, in Los Angeles, and in the firm he founded in 1993, Guzik & Associates.

 

samuel guzik

Samuel S. Guzik has more than 35 years of experience as a corporate and securities attorney and business advisor in private practice in New York and Los Angeles, including as an associate at Willkie Farr and Gallagher, a major New York based international law firm, a partner at the law firm of Ervin, Cohen and Jessup, in Los Angeles, and in the firm he founded in 1993, Guzik & Associates.

Mr. Guzik has represented public and privately held companies and entrepreneurs on a broad range of business and financing transactions, both public and private. Mr. Guzik has also successfully represented clients in federal securities litigation and SEC enforcement proceedings. Guzik has represented businesses in a diverse range of industries, including digital media, apparel, health care and numerous high technology based businesses.
Guzik is a recognized authority and thought leader on matters relating to the JOBS Act of 2012 and the ongoing SEC rulemaking, including Regulation D Rule 506 private placements, Regulation A+, and investment crowdfunding. He has been consulted by Congressional members, state legislators and the U.S. Small Business Administration Office of Advocacy on matters relating to the JOBS Act and state securities matters.

Guzik & Associates

1875 Century Park East, Suite 700

Los Angeles, CA 90067

Telephone: 310-914-8600

www.guziklaw.com

www.corporatesecuritieslawyerblog.com

@SamuelGuzik1

REPORT: Equity Crowdfunding – Risks and liabilities as the industry matures

 

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BY Ronald Kleverlaan Crowdfunding strategy, CrowdfundingHub, advisor European Commission, co-founder European Crowdfunding Network

Within the rapidly-expanding alternative finance industry, equity crowdfunding is emerging as a popular method of growth finance. Equity crowdfunding is a mechanism by which a broad group of investors can fund start-up companies and small businesses in return for equity.

In collaboration with UK insurance company AIG, the researchers of CrowdfundingHub worked together with leading European experts from SyndicateRoom, Seedrs, AIG, CrowdCube, Invesdor, Twintangibles and Legal Alternative to create a state-of-the-art overview of the Equity Crowdfunding industry.

Summary of report

Introduction: The rise and rise of equity crowdfunding

Overview of the growth of the equity crowdfunding industry globally and in Europa.

Chapter 1: Latest developments in equity crowdfunding

Secondary markets, business angels and equity crowdfunding, growth in deal sizes, serial crowdfunding and DIY crowdfunding campaigns.

Chapter 2: Striking the right regulatory balance

Investor protection versus access to finance for companies. Do regulations help or hinder the growth of the equity crowdfunding industry? What will be the impact of Brexit on the equity crowdfunding industry.

Chapter 3: Tackling investor protection

Direct shareholder versus nominee structure, due diligence and cross-border considerations

Chapter 4: Mind the gap: Risks and liabilities associated with crowdfunding platforms

Risks and liabilities associated with crowdfunding platforms, insurance as mechanism for sustainable growth of platforms and fraud risk case studies.

Download free report:

The full report can be downloaded here: Equity Crowdfunding – Considering potential risks and liabilities as the industry grows and matures.

Busted!  SEC Targets Reg A+ Marijuana Company, Med-X, in Administrative Proceeding.

By Samuel S. Guzik, CrowdFundBeat special guest editor,  Guzik & Associate

The Regulation A+ industry was buzzing this week – not with excitement, but with a healthy dose of trepidation.  One of the first, high (no pun intended) profile Regulation A+ offerings, launched in November 2015, after a seemingly successful “Testing the Waters” campaign, was for a company called Med-X, a startup formed to participate in the newly burgeoning marijuana industry – the so called “Green Rush.”

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But this month’s headline for Med-X was a bit more sanguine, enough to counteract even the most potent dosage of THC:  “REGULATION A EXEMPTION OF MED-X, INC. TEMPORARILY SUSPENDED.”  The story that followed was not the kind of publicity any company is looking for – especially when it is in the throes of raising money under Reg A+. Actually, it was not a story. Rather, it was an Administrative Order issued by the SEC on September 16, 2016, temporarily suspending the exemption of Med-X under Regulation A+.

Why? Well, it seems that this company failed to notice, or at least heed, the requirement that Reg A+ issuers file periodic informational reports as a condition of maintaining their status as Reg A+ issues. The basic requirement calls for a company, at the least, to file a semi-annual and annual report with the SEC following the “qualification” of the offering.  Seems that Med-X failed to file its annual report, which would include audited financial statements, when due back in the Spring of 2016.

Some have speculated that the SEC was targeting a disfavored industry – marijuana. I doubt it. The SEC  has approved the registered sale of other companies in this industry long before Regulation A+ was adopted.

Others have speculated that this action reflects an uneven hand towards Regulation A+ issuers. After all, this type of swift action is rare for fully reporting companies which are delinquent in their filings. One more time: I think not.

The Staff at the SEC has been remarkably supportive of the rollout of Regulation A+, as measured anecdotally in terms of the efficiency in which it has been processing the review of Regulation A+ offerings.

Rather, I think back to one of the more notable sound bytes I coined in a Webinar back in April 2015: “Regulation A+ is not your daughter’s Kickstarter campaign.”  Raising capital from outside investors is serious, heavily regulated business.  And as indicated by some of the early Regulation A+ participants, the level of sophistication of the management of some of these issuers has hardly met the bar required to file and prosecute a Regulation A+ offering.

Yes, Regulation A+ is a little more complex than the pipedream: filling out a form, waiting for SEC approval, and then crowdfunding your way to $50 million.  Apart from detailed disclosure rules, including audited financial statements, and the always difficult task of raising capital – especially for early stage companies – there is an ongoing SEC reporting requirement. Yes, the requirement is lighter than a fully reporting public company, to be sure, but enough to quickly overload an early stage company, with limited financial and human resources.

So if nothing else, this is one SEC enforcement action can be expected to inject a dose of reality into the Regulation A+ capital raising process.  As our President might say, “A Teachable Moment.”

samuel guzik

Samuel S. Guzik has more than 35 years of experience as a corporate and securities attorney and business advisor in private practice in New York and Los Angeles, including as an associate at Willkie Farr and Gallagher, a major New York based international law firm, a partner at the law firm of Ervin, Cohen and Jessup, in Los Angeles, and in the firm he founded in 1993, Guzik & Associates.

Mr. Guzik has represented public and privately held companies and entrepreneurs on a broad range of business and financing transactions, both public and private. Mr. Guzik has also successfully represented clients in federal securities litigation and SEC enforcement proceedings. Guzik has represented businesses in a diverse range of industries, including digital media, apparel, health care and numerous high technology based businesses.
Guzik is a recognized authority and thought leader on matters relating to the JOBS Act of 2012 and the ongoing SEC rulemaking, including Regulation D Rule 506 private placements, Regulation A+, and investment crowdfunding. He has been consulted by Congressional members, state legislators and the U.S. Small Business Administration Office of Advocacy on matters relating to the JOBS Act and state securities matters.

Guzik & Associates

1875 Century Park East, Suite 700

Los Angeles, CA 90067

Telephone: 310-914-8600

www.guziklaw.com

www.corporatesecuritieslawyerblog.com

@SamuelGuzik1

 

IS THE SEC’S ACCREDITED INVESTOR DEFINITION UN – CONSTITUTIONAL?

By Samuel S. Guzik, CrowdFundBeat special guest editor,  Guzik & Associate

Many have railed against what can be argued is the irrationality of protecting non-accredited investors from themselves, i.e. the accredited investor definition.   The definition was crafted by the SEC back in the early 1980’s as the centerpiece of what has been the most utilized method for companies to raise capital in an offering not registered with the SEC, Regulation D.

In simple terms, if a company wishes to raise capital without registering its offering with the SEC, it can utilize the Regulation D “safe harbor” created by the SEC to sell securities to both accredited and unaccredited investors alike. In practice, however, most issuers have excluded non-accredited investors from their Regulation D offerings. Why? Once an issuer includes even a single non-accredited investor in the offering, stringent (as in onerous) disclosure requirements kick in.

In 2011, courtesy of a 2,000 page bill known as the Dodd-Frank Act, Congress threw more gasoline on the fire of the oft perceived inequality of treating non-accredited investors differently. It altered the definition of accredited investor – raising the bar even higher. Previously, an individual with an income of $200,000 ($300,000 with spouse) or a net worth of more than $1 million would qualify.  Then along came Dodd-Frank: now mandating that the SEC must exclude the equity in an individual’s principal residence in calculating net worth eligibility.  Simple math tells us that this can only shrink the pool of accredited investors even further, adding to the legions of non-accredited investors.

Then Title II of the JOBS Act came along in 2012, allowing issuers to publicly solicit their “private placements” under Rule 506 of Regulation D, but with a catch: no non-accredited investors could participate – disclosure or no disclosure – and investors would need to prove up their accredited investor credentials before they could invest.

And finally, Dodd-Frank also requires the SEC to periodically review the “accredited investor” definition, a process currently in progress and subject to comment by the public.

The result has been an ongoing and increasingly raging controversy over both the definition of “accredited investor” itself, as well as the wisdom of even having such a concept. I, for the most part, have stayed outside the fray, given both the voluminous number of opinions, and advocates, on both sides of the issue and the somewhat “lose-lose” nature of the issue. In fact it’s been more than two years since I weighed in on this issue publicly – in Crowdfund Insider.

Why “lose-lose”? You see, from my perspective, as both an American and a securities lawyer, it makes great sense to expand the pool of accredited investors. This will both increase the available pool of capital to small and emerging businesses, and allow the average American, regardless of income or net worth, to carry a more diversified investment portfolio.

In my view, this leaves but two regulatory choices. One, expand the accredited investor definition. But each time you draw new lines, those who do not fall within the new line will undoubtedly feel aggrieved – many of them rightly so. Two, throw out the definition entirely.  Some have argued for this. But now, one brave soul, a newly minted lawyer no less, has taken his case to Federal court, filing a lawsuit against the SEC and its Chair, Mary Jo White in June 2016.

The case is styled Morello v. White (2:cv-04440), launched in the Central District of California. The Plaintiff, Chase Morello, according to public records, is a second year associate at a reputable corporate law firm in Southern California. Mr. Morello has launched this on his own, as both the Plaintiff and his own lawyer.   His firm’s name nowhere appears on the pleading. That’s probably a good thing, if nothing else given the unfortunate misspelling of the lead defendant’s name, SEC Chair White (misspelled Mary Joe White), not exactly a good start out of the gate.   The lawsuit seeks to have the accredited investor definition declared unconstitutional, on a number of independent grounds, and seeks to have the lawsuit certified as a class action.  The SEC’s response is due in early October – undoubtedly a lengthy motion seeking to dismiss the Complaint at the pleading stage.

My educated guess is that this lawsuit will go nowhere – fast.  But this is now in the hands of a Federal judge in Los Angeles.

So get the popcorn out, but don’t invest in a big supply. In my view, better to work this issue through the SEC rulemaking process and – where appropriate – through the legislative process.  Yes, it is slow going, to be sure, but after all, it took over 80 years of legislation and rulemaking to get us here.

More often than not, slow and steady wins the race.

P.S. – For those of you who sympathize with Mr. Morello, but wish to participate in a more subdued manner, you may want to sign the Petition he filed with the White House last week to declare the accredited investor definition unconstitutional.

samuelguzik

 

 

 

 

Samuel S. Guzik

Guzik & Associates

1875 Century Park East, Suite 700

Los Angeles, CA  90067

Telephone: 310-914-8600

www.guziklaw.com

www.corporatesecuritieslawyerblog.com

@SamuelGuzik1

 

 

Using Regulation A+ as Platform for Staging Strategic Exits

By Jonathan B. Wilson CrowdFundBeat Sr. Guest Editor, Partner, Taylor English Duma LLP 

 

As part of the Jumpstart Our Business Start-ups Act of 2012 (the “JOBS Act”) Congress mandated that the Securities and Exchange Commission (the “SEC”) amend its rules for exempt transactions under Regulation A so that certain qualifying issuers would be able to issue up to $50 million in securities under Regulation A in a 12 month period. From its name, Congress and many industry participants thought that this change to Regulation A would make it easier for start-ups to raise funds. Now that the SEC has issued its new rules under Regulation A (now called “Regulation A+”) it seems more likely that those rules will provide a better platform for more established small and medium-sized businesses (“SMBs”) to raise capital than it will for start-ups.

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The mechanics of Regulation A+ have been widely publicized and don’t need to be summarized here. The thrust of Regulation A+ is that a privately-held company may file a prospectus with the SEC on Form 1-A. The prospectus must describe the securities being offered (which may be either debt or equity securities) and provide certain mandatory disclosures. If the issuer intends to raise less than $20 million, the issuer does not need audited financial statements and the rules applicable to its offering (i.e., a “Tier 1” offering) will be generally the same as the rules that applied prior to the SEC’s June 2015 publication of Regulation A+. On the other hand, if the issuer intends to raise more than $20 million (up to the annual cap of $50 million, called a “Tier 2” offering) the issuer must have audited financial statements going back at least two years.

Before the JOBS Act, Regulation A was little-used. Its $5 million cap made it relatively useless. A small, private company looking to raise less than $5 million would find it easier to have a private offering to accredited investors under Regulation D. The relatively high transactional cost of filing a prospectus would not be justified by the size of the offering. In addition, until the year 2000, growing private companies looking to raise up to $50 million in growth capital often looked towards an IPO as the platform to raise equity in that amount.

The Sarbanes-Oxley Act of 2002, however, with its extensive requirements and high compliance costs, has made it uneconomical for companies with a market cap of less than $500 million to go public. One SEC-sponsored survey of officers at pubic companies in 2008 estimated that the annual cost of compliance (resulting mostly from accounting and legal fees) was approximately $2.3 million. Such high compliance costs have virtually eliminated IPOs for companies with market valuations of less than $500 million. For example, from 1991 to 2000 there were more than 50 IPOs each year of companies with less than $50 million in sales. During the decade that followed there was not a single year in which there were more than 50 IPOs of that same size.

So, for SMBs that are established and profitable, looking for growth capital, and with annual sales of $50 million or less, how can Regulation A+ serve as a platform for a strategic exit? I believe there are several alternatives.

The Public Option

One alternative is for the growing SMB to raise growth capital through Regulation A+. The offering could be structured as common or preferred stock, but the investment thesis is to show investors that they can achieve better-than-market returns. After a successful offering, the issuer can list its shares for resale on the OTC bulletin board or another secondary marketplace. Doing so will provide investors with liquidity and creates a public forum for communications about the company. If the company is able to grow with the funds it raises through the offering, the company will be well-situated for a true underwritten IPO in a relatively short period of time. Regulation A+ requires its Tier 2 issuers to publish semi-annual and annual reports on financial results (similar to a “light” Form 10-Q and Form 10-K). Developing the internal procedures and discipline to publish financial results regularly will help the growing SMB get ready to become a public company.

The Merger Option

Using Regulation A+ as a means of developing growth capital can also help an SMB publicize its success as a precursor for being acquired. Finding a merger partner for a private company can be an expensive and time-consuming effort. Many investment banks eschew private companies with valuations of less than $100 million and those that work in this space often require significant upfront fees and sizeable success fees (sometimes ranging from 2% to 10% of the sale price).

A profitable and growing SMB that raises growth capital through Regulation A+, however, creates a platform to publicize its business and will inevitably attract attention from possible suitors. That publicity effect will be enhanced if the issuer causes its shares to be available for resale on the OTC bulletin board or another secondary exchange. Using a Regulation A+ offering to generate publicity may speed the SMB towards an acquisition in a way that bypasses some of the inevitable investment banking fees.

Options for Real Estate

Since the market crash of 2008, real estate developers have looked for alternatives to traditional bank financing to fund both commercial and residential real estate investments. In some states, intrastate crowdfunding has made it possible for developers to raise relatively small sums (generally less than $1 million) from non-accredited investors within the state. Regulation A+ may also play a role.

GroundFloor recently became the first real estate company to use Regulation A+ as a platform for issuing asset-specific notes to finance real estate projects under the rule. GroundFloor’s approach is to amend its prospectus from time to time in order to qualify “limited recourse obligations” or “LROs” for sale under Regulation A+. Each LRO represents a debt security that will pay principal and interest to the holder based upon the financial outcome of a specific real estate investment. Using this structure allows GroundFloor to raise funds under Regulation A+ without become an investment holding company that would be prohibited from utilizing Regulation A+.

Other options may also be possible for other types of real estate developers. For example, an aggregator of residential real estate, using more expensive bank financing to acquire and rehab its properties, might create a holding company to purchase the portfolio (once the properties are rehabilitated and rented), financing all or some of the purchase price through a Regulation A+ offering.

In a similar vein, a developer of commercial properties might also use more expensive bank financing or private equity, to acquire and renovate one or more commercial properties. The developer could thereafter create its own purchaser to buy the portfolio of completed assets, using a Regulation A+ offering to fund all or a portion of the purchase price.

In both alternatives, the developer would be able to complete a strategic exit more quickly than through a sale to a strategic purchaser or in a private sale. Completing the strategic exit with greater speed will allow the developer to increase its returns by allowing it to re-commit its capital more quickly.

Conclusion

The SEC’s Regulation A+ rules have been effective for less than a year and it remains to be seen how the marketplace will receive them. The initial news appears to be positive, but it will take time for the marketplace to truly understand how well Regulation A+ will work. Until then, advisors to SMBs should consider how they can use these new rules to develop strategic transactions with greater speed and certainty.

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Meet Jonathan Wilson  “Speaker  at REG Plus Master Class Conference October 26th Las Vegas “

About the Author
Jonathan B. Wilson is a partner in the Atlanta business law firm of Taylor English Duma. He has practiced as an attorney for nearly 25 years and has served as the in-house general counsel for two public companies. He represents Fortune 100, middle-market and start-up companies in matters involving securities, corporate finance and governance, mergers and acquisitions, and intellectual property. He is a frequent speaker and writer on the JOBS Act, crowdfunding and Regulation A+.

JOBS Act has created unprecedented opportunity for financial advisors – don’t get left out in the cold

By: Steve Sadler, CEO, Allegiancy, CrowdFundBeat  Sr. contributing guest,

Last week I spoke at FinFair 2015, a retail alternatives event hosted by Dara Albright in New York, about, “How Financial Advisors and Registered Investment Advisors (RIAs) can Capitalize on Reg A.”

The conference sought to bridge the gap between the Wall Street establishment and today’s financial innovators. I sought to bridge that gap by encouraging financial leaders to “brainstorm in the firestorm” created by the 2012 Jumpstart our Business Startups (JOBS) Act’s new Reg A.

finance

 

 

 

 

Here were my key messages for today’s financial innovators:

The 2012 JOBS Act is bringing big massive change to Wall Street, and the value of your expertise is at a premium.

The democratization of capital is here, and it is moving faster by the day. Financial advisors, nowis your chance to get in position to ride the wave.

The path back to dynamism in America is in front of you, and there is both danger in ignoring it, and enormous opportunity in embracing it.

Now, anyone can be an investment banker, and everyone can be a private equity investor. So how will investors differentiate between great deals, good deals, and truly horrible ones? This is where good advisors can earn their keep.

In the post-JOBS Act world, engaged, knowledgeable, experienced financial professionals can add value as never before. The expertise of the licensed RIA, financial advisor, or rep is the first line of defense – not only for protecting the client/investor, but also for protecting the enormous potential of these changes to drive growth in the American economy.

Billions in fees can be earned by the financial industry, not to mention the trillions in new wealth and GDP growth created by this opportunity.

So financial advisors, get focused and establish your expertise. Not only will your clients be investors in these JOBs Act deals, your clients will be raising capital and bringing these deals to market.

Don’t think it will be only the other guy that gets cut out. If you are not adding tangible, measurable, and meaningful value, it will be you who gets left out in the cold.

There are tremendous pressures to reduce costs and improve investor returns — from both institutional and individual investors. In this environment, complacency kills, as does disintermediation.   It’s time to choose: Who do you want to be in this new world?

Behold your new client.

Your client has a company and wants to grow. He decides to raise $30 million and pull $5 million off the table. You introduce him to the right people and help him do a Reg A+ deal. You earn a 1 percent fee, or $300,000.

Then of course, your client needs to invest those proceeds. Perhaps you could help with that? $5 million assets under management (AUM) at 1 percent = $50,000 per year for you.

Maybe your client wants to diversify into other growth companies like his, and you get paid 3 to 5 percent for your counsel? Another $50,000.

See why embracing Reg A deals is an easy call?

Call to Action: the time is now.

For the first time in living memory, the regulatory nanny state is receding. The barriers separating entrepreneurs from investors are being lowered. Every investor needs a great wingman, and the faster things change, the more true this becomes.

Don’t be fooled by the naysayers and fear-mongers: Be one of the proven, reputable, bright financial players who’s leading the way.

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PLEASE NOTE:

The foregoing does not constitute an offer to sell or a solicitation of an offer to buy securities, and no money or other consideration is being solicited hereby, nor will be accepted. An offer to purchase or a solicitation of an offer to buy the securities can only be made or received and accepted once an offering statement is qualified by the Securities and Exchange Commission as exempt from the registration requirements of the Securities Act of 1933 (the “Act”), as amended, pursuant to Section 3(b)(2) of the Act.   Any such offer to purchase securities may be withdrawn or revoked, without obligation or commitment of any kind, at any time before notice of its acceptance given after the qualification date of the offering related thereto, and any indication of interest to purchase securities involves no obligation or commitment of any kind.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are based upon the Allegiancy, LLC’s (the “Company”) present expectations, but these statements are not guaranteed to occur. Furthermore, the Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. Investors should not place undue reliance upon forward-looking statements. For further discussion of the factors that could affect outcomes, please refer to the “Risk Factors” section of the offering circular dated January 14, 2014, and filed by the Company with the U.S. Securities and Exchange Commission on January 15, 2014.  The offering circular, and any supplements or updates thereto, is available on the EDGAR system located on www.sec.gov.

Steve-Sadler

Steve Sadler, is Chief Executive Officer, Allegiancy,  He is the impetus behind the formation and strategic direction of Allegiancy, contributing essential skill sets, institutional relationships, and experience to the team after spending nearly twenty years in financial services and the investment banking field. He began pursuing investment banking projects in commercial real estate while part of Signet Bank’s Capital Markets Group, now known as Wells Fargo & Company. With public market securities and private placement transactions under his belt valued at more than $1 billion, Steve has been involved in a wide range of asset classes and financing structures and has proven commercial real estate performance and significant turnaround experience. He graduated from Florida State University with a BA in East Asian Studies/Economics and holds the Chartered Financial Analyst designation.

Meet Steve Sadler at:

2015 GCCB LOGO

4th Annual GCCB Conference – REGULATION A PLUS MASTER CLASS October 26, 2015

– See more at: http://www.crowdfundingroadmap.com/bootcamp/?speaker=stevens-sadler#sthash.17S6Xo8C.dpuf

 

REG A+ : June 19 marks the beginning of a new era

By Samuel S. Guzik, CrowdFundBeat special guest editor,  Guzik & Associate

“June 19 marks the beginning of a new era for small business capital formation. Any company willing to spend $100,000 or so, including fees to prepare audited financial statements, will have the opportunity to sell securities to the general public under this new regulation – allowing a private company to complete a “Mini IPO” and operate as a public company at a much reduced cost, both in terms of management time and dollars. The real challenge will be finding investors willing to invest in these companies. Many are expected to attempt an IPO without the assistance of a broker or investment banker, relying on Internet solicitation and social media –  the large majority of these companies going it alone will face a difficult time achieving their funding goals – especially those with little or no track record.

However, for those companies who are uncertain as to whether there will be sufficient investor interest to justify the time and expense of filing a Regulation A+ offering with the SEC, they will now be able to “test the waters” – publicly solicit non-binding indications of interest, before making any filings with the SEC.

And perhaps most exciting: statistically a large percentage of IPO offering proceeds is immediately put to use for new hires – a huge benefit to this country’s economy that no one can quarrel with.”

Watch Sam at Crowdfunding USA 2015 at National Press Club, Washington DC

Also :

Regulation A+ CBS Podcast with Jay Abraham and Sam Guzik

samuelguzik

 

 

 

Samuel S. Guzik

Guzik & Associates

1875 Century Park East, Suite 700

Los Angeles, CA  90067

Telephone: 310-914-8600

www.guziklaw.com

www.corporatesecuritieslawyerblog.com

@SamuelGuzik1

 

OTC Markets Group Introduces Regulation A+ “On-Ramp” to its Marketplaces

CrowdFundBeat News Wire,

NEW YORK, June 12, 2015  — OTC Markets Group Inc. (OTCQX: OTCM), operator of Open, Transparent and Connected financial marketplaces for 10,000 U.S. and global securities, today announced it has published proposed new rules and standards for companies seeking to use newly adopted “Regulation A+,” a provision of the Jumpstart Our Business Startups (JOBS) Act, to go public and have their securities traded on the OTCQX® Best and OTCQB® Venture Marketplaces.
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The newly proposed OTCQX and OTCQB rules, which were posted this week to www.otcmarkets.com, are designed to support informed and efficient secondary trading for Regulation A+ securities. These rules define the initial and ongoing financial reporting obligations for U.S. companies raising capital under Regulation A+ to have their securities publicly traded on OTCQX and OTCQB, the top tiers of the U.S. unlisted market, and will provide a roadmap for Regulation A+ companies that are committed to providing a transparent and trusted public trading market for their investors. Issuers, advisors and other marketplace participants will have 30 days to comment on the proposed changes before they go into effect.

“Our premium OTCQX Best and OTCQB Venture marketplaces provide an ideal platform for Reg. A+ companies as they offer the trading, transparency and trust of a well-regulated public market with a broker-driven, electronic network-based model that is more suited to the needs of smaller issuers and their investors,” said R. Cromwell Coulson, President and CEO of OTC Markets Group. “Companies that raise capital under Reg. A+ will benefit from our SEC regulated ATS trading platform to build visibility for their companies, provide liquidity to their investors, broaden their shareholder base and build a robust, transparent public market for their investors as they grow and mature their businesses.

“We look forward to welcoming more new companies to our markets under Reg. A+, which will further expand the universe of opportunities available to investors,” continued Coulson.

OTCQX and OTCQB Regulation A+ Eligibility Requirements

The OTCQX Best Marketplace offers informed and efficient trading for established, investor-focused U.S. and international companies. Under the proposed new OTCQX rules, a company may use its required disclosure under Regulation A+ Tier 2 to help meet its initial and ongoing disclosure requirements. In addition to required Regulation A+ disclosure, an OTCQX company must file quarterly financial reports, make timely disclosures of material news events and meet a PCAOB audit standard on an ongoing basis. Canadian companies raising capital under Regulation A+ must be listed on a qualified foreign stock exchange such as the Toronto Stock Exchange to qualify for OTCQX.

There are more than 350 companies traded on the OTCQX marketplace, representing an aggregate $1.4 trillion in market capitalization. These top tier companies range from global, blue-chip leaders like Adidas, Heineken, Roche and Volkswagen to investor-focused U.S. community banks to established and growing U.S. and international companies.

The OTCQB Venture Marketplace offers transparent trading for entrepreneurial and development stage U.S. and international companies. Under the proposed new OTCQB standards, a company that meets the existing OTCQB eligibility criteria can use its required Regulation A+ Tier 2 reporting to fully meet its initial and ongoing OTCQB disclosure requirements. Canadian companies raising capital under Regulation A+ must be listed on a qualified foreign stock exchange such as the TSX Venture Exchange to qualify for OTCQB.

More than 900 companies are traded on the OTCQB marketplace, representing a combined $73.1 billion in market capitalization.

For details about OTC Markets Group’s OTCQX rule proposals, visit http://www.otcmarkets.com/content/doc/qx/Rules/Release/9.pdf

For details about OTC Markets Group’s OTCQB rule proposals, visit http://www.otcmarkets.com/content/doc/OTCQB/release2.pdf.

About OTC Markets Group Inc.
OTC Markets Group Inc. (OTCQX: OTCM) operates Open, Transparent and Connected financial marketplaces for 10,000 U.S. and global securities. Through our OTC Link® ATS, we directly link a diverse network of broker-dealers that provide liquidity and execution services for a wide spectrum of securities. We organize these securities into marketplaces to inform investors of opportunities and risks: the OTCQX® Best Marketplace; the OTCQB® Venture Marketplace; and the OTC Pink® Open Marketplace. Our data-driven platform enables investors to easily trade through the broker of their choice at the best possible price and empowers a broad range of companies to improve the quality and availability of information for their investors. To learn more about how we create better informed and more efficient financial marketplaces, visit www.otcmarkets.com.

OTC Link ATS is operated by OTC Link LLC, member FINRA/SIPC and SEC regulated ATS.

SOURCE OTC Markets Group Inc.

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