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The JOBS Act Implementation Update
1. Monthly
Webinar
Series
presents
The
JOBS
Act
Implementation
Update
October
11,
2012
Panelists
David
Weild,
Grant
Thornton,
CMA
Partners
John
D.
Hogoboom,
Lowenstein
Sandler
Tim
Keating,
Keating
Capital
Moderator
Brett
Goetschius,
Growth
Capital
Investor
2. Thank
you
for
participating
in
“The
JOBS
Act
Implementation
Update.”
This
manual
contains
information
you
will
need
to
prepare
for
this
webinar.
CONFERENCE
MANUAL
This
manual
contains:
•Dial-‐in/log-‐on
instructions.
Speaker
bio
and
contact
information.
•Tips
for
submitting
questions.
•Pertinent
information
from
the
pages
of
Growth
Capital
Investor.
CONFERENCE
DETAILS
The
webinar
is
scheduled
for
Thursday,
October
11,
2012
at
2:00
p.m.
EDT,
1:00
p.m.
CDT,
12:00
p.m.
MDT,
and
11:00
a.m.
PDT.
It
will
last
110
minutes.
HOW
TO
JOIN
THE
WEBINAR
Online
With
Streaming
Audio
•Go
to
http://web.beaconlive.com
•On
the
“Join
a
Meeting”
side
of
the
login
page,
enter
meeting
room:
mnm2
•Enter
your
unique
PIN
(same
as
the
audio
PIN
you
received).
•Click
on
“Join
Meeting”
to
access
the
presentation.
Optional
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you
have
trouble
streaming
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please
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instructions
to
listen
by
phone:
•Dial
1-‐
866-‐953-‐3919
about
5-‐10
minutes
before
the
start
of
the
conference.
•Enter
your
unique
PIN
(sent
in
your
e-‐
mail
confirmation).
•You
will
hear
music
on
hold
until
the
conference
has
started
or
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connected
directly
if
it
has
already
begun.
•If
you
have
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stay
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•If
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put
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on
MUTE
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•If
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are
disconnected
at
any
point,
just
repeat
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processes
above.
PLEASE
NOTE:
Only
one
dial
in
and
one
log
on
per
PIN
are
allowed.
If
you
have
problems
accessing
the
webinar,
please
call
877-‐297-‐2901.
HOW
TO
SUBMIT
QUESTIONS
Questions
may
be
submitted
at
any
time
during
the
call
using
the
chat
function
on
the
web
interface
in
the
lower
left
corner
of
your
screen.
Just
type
in
your
question
and
send
it
to
“Q&A
session”
in
the
drop-‐
down
menu.
Conference Manual Page 1
3. SPEAKER
BIOS
AND
CONTACT
INFORMATION
David
Weild
IV
is
Chairman
and
CEO
of
Capital
Markets
Advisory
Partners
and
heads
Capital
Markets
at
Grant
Thornton.
He
was
a
former
Vice
Chairman
and
executive
committee
member
of
The
NASDAQ
Stock
Market.
David
is
an
expert
on
how
stock
market
structure
impacts
capital
formation
and
job
creation.
Together
with
Ed
Kim,
their
work
created
the
rationale
that
gave
rise
to
The
JOBS
Act.
David
and
co-‐
author
Ed
Kim’s
written
work
was
the
first
to
identify
how
changes
in
stock
market
structure
are
harming
capital
formation
and
job
growth
in
the
United
States.
He
was
also
a
member
of
the
NYSE
and
NVCA’s
(National
Venture
Capital
Association)
Blue
Ribbon
Panel
to
restore
liquidity
in
the
US
venture
capital
industry
and
his
work
was
cited
in
the
NVCA’s
final
report.
CONTACT
David
Weild
IV
Chairman
and
CEO
Capital
Markets
Advisory
Partners
david.weild@us.gt.com
david.weild@cmapartners.com
212-‐542-‐9979
Conference Manual Page 2
11.
John
D.
Hogoboom
is
a
founding
member
of
the
Lowenstein
Sandler
Specialty
Finance
Group
and
is
co-‐chair
of
the
Life
Sciences
group.
He
specializes
in
representing
clients
in
the
life
sciences
and
other
industries
in
mergers
and
acquisitions,
public
and
private
securities
offerings,
private
equity
investments
and
general
corporate
and
securities
law.
John
is
listed
among
The
Best
Lawyers
in
America
in
the
2007-‐2012
editions
of
the
publication
in
both
the
corporate
law
and
securities
law
categories.
CONTACT
John
D.
Hogoboom
Founding
Member
Lowenstein
Sandler
Specialty
Finance
Group
973-‐597-‐2382
jhogoboom@lowenstein.com
Conference Manual Page 10
13. JOBS Act – General Solicitation
Section 201(a) of the JOBS Act required the SEC to adopt final rules on or
before July 4, 2012 permitting widespread advertising and other forms of
“general solicitation” in private offerings in reliance on Rule 506 under
Regulation D or Rule 144A so long as all of the actual purchasers of the
securities were “accredited investors” (in the case of Regulation D) or “qualified
institutional buyers” (in the case of Rule 144A).
SEC failed to meet the required deadline.
On August 29, 2012, the SEC proposed amendments to Rule 506 of
Regulation D and Rule 144A to implement the requirements of Section 201(a).
Comments on the proposed rules were due by October 5, 2012. Expect final
rules to be issued shortly.
Conference Manual Page 12
14. Summary of Proposed Rules
Rule 506 would be amended to add paragraph (c), providing a new
and separate exemption under the Rule that would permit an issuer to
use general solicitation and general advertising to offer securities,
provided that the issuer takes reasonable steps to verify that all
purchasers of the securities are accredited investors.
The proposed rules would continue to apply the “reasonable belief”
standard to the condition that all purchasers are accredited investors.
Whether the steps taken by the issuer to verify the accredited investor
status of the purchasers are “reasonable” would be an objective
determination, based on the particular facts and circumstances of each
offering and investor. The proposed rules do not prescribe particular
verification procedures.
Conference Manual Page 13
15. Effects on Other Requirements
The SEC confirmed in the proposing release that:
– Consistent with the historical treatment of concurrent Regulation S
and Rule 144A/Rule 506 offerings, concurrent offshore offerings that
are conducted in compliance with Regulation S would not be
integrated with domestic unregistered offerings that are conducted in
compliance with Rule 506 or Rule 144A, as proposed to be
amended.
– Privately offered funds would be permitted to make a general
solicitation under amended Rule 506 without losing the ability to rely
on Sections 3(c)(1) and 3(c)(7) of the Investment Company Act,
which provide commonly used exclusions from the definition of
“investment company”.
Conference Manual Page 14
16. Proposed Rule 506(c)
Under proposed Rule 506(c), an issuer (and any selling agents) would
be permitted to use general solicitation and general advertising to offer
and sell securities, provided that the following conditions are satisfied:
– The issuer must take reasonable steps to verify that all purchasers of the
securities are accredited investors.
– All purchasers of the securities must be accredited investors, either because
they come within one of the enumerated categories of persons that qualify
as accredited investors or because the issuer reasonably believes that they
do, at the time of the sale of the securities, in each case as defined under
existing Rule 501 of Regulation D.
– All terms and conditions of existing Rules 501 (definitions), 502(a)
(integration restriction) and 502(d) (resale limitations) of Regulation D must
be satisfied. Existing Rule 502(c), prohibiting general solicitation and
general advertising, would not apply.
Conference Manual Page 15
17. Verification Requirement
In the proposing release, the SEC did not propose specific verification methods.
Objective test determining the reasonableness of the verification steps
The issuer must consider the facts and circumstances of the transaction, including, among other
things:
– The nature of the purchaser and the type of accredited investor that the purchaser claims to be.
§ For example, more may be required to verify information about an individual using the net worth test than about an institutional
investor.
– The amount and type of information that the issuer has about the purchaser.
§ The more information an issuer has, the fewer steps would be required to verify the purchaser’s status.
- Publicly available filings
- Third-party evidence such as W-2s
- Third-party verification (including by broker-dealers) so long as issuer has a reasonable basis to rely on the verification
- If issuer has pre-existing, substantive relationship with proposed investor, may not be required to verify the investor’s status
– The nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering,
and the terms of the offering, such as a minimum investment amount.
§ Require more to verify an unknown purchaser solicited through general advertisement
§ Not sufficient to check a box or sign a form absent other information
§ Higher the minimum investment amount, less likely that a non-accredited investor would be able to purchase
Issuers must maintain adequate records documenting the verification process.
Many existing practices may satisfy the new verification requirements.
Exemption continues to be based on reasonable belief. Presence of a non-accredited investor not
fatal as long as the issuer had a reasonable belief that the investor was accredited.
Conference Manual Page 16
18. No impact on existing Rule 506
New verification requirement would only apply to offerings
of securities conducted pursuant to the new Rule 506(c).
Other offerings conducted pursuant to existing Rule 506(b)
that do not involve general solicitation or general
advertising will not be subject to the verification
requirement.
506(c) not likely to benefit existing public companies who
have other compelling reasons to maintain confidentiality of
offering process.
Conference Manual Page 17
19. Impact on other requirements
Proposed Amendments to Rule 144A
– Under the proposed amendments to Rule 144A, securities sold pursuant to Rule 144A may be
offered to persons other than “qualified institutional buyers”, including by means of general
solicitation or general advertising, provided that the securities are sold only to persons that the
seller and any person acting on behalf of the seller reasonably believe is a qualified institutional
buyer.
Impact on Concurrent Regulation S Offerings
– Regulation S provides a safe harbor for offers and sales of securities outside the United States,
provided that the securities are sold in an offshore transaction and the issuer has not engaged in
any “directed selling efforts” in the United States. In the proposing release, the SEC confirmed that
concurrent offshore offerings that are conducted in compliance with Regulation S would not be
integrated with domestic unregistered offerings that are conducted in compliance with Rule 506 or
Rule 144A, as proposed to be amended.
Investment Company Act Exclusion for Private Funds
– Privately offered funds, such as hedge funds, venture capital funds and private equity funds,
generally rely on exclusions in the Investment Company Act that are not available if the fund
makes a public offering of securities. In the proposing release, the SEC affirmed its belief that
Section 201(b) of the JOBS Act, which provides that offers and sales exempt under Rule 506 of
Regulation D (as revised pursuant to the JOBS Act) “shall not be deemed public offerings under
the Federal securities laws as a result of general advertising or general solicitation”, permits
privately offered funds to make a general solicitation under proposed new Rule 506(c) without
losing the benefit of the exclusions under the Investment Company Act.
Conference Manual Page 18
20. SEC Monitoring Potential Abuse
The SEC has noted that the proposed rules are narrowly focused on
implementing the statutory mandate under Section 201(a) of the JOBS
Act and that the SEC and its staff will continue to monitor the private
placement market as a whole to analyze the impact, including any
unintended consequences, of the proposed rules on investors, issuers
and the markets.
The SEC also noted that that the Dodd-Frank Act requires ongoing
evaluations of the definition of “accredited investor” that would give the
SEC flexibility to combat abusive practices.
Pursuant to the Dodd-Frank Act, the SEC has proposed rules
disqualifying felons and other “bad actors” from relying on the Rule 506
exemption to offer and sell securities.
Conference Manual Page 19
21. Other Considerations
Unclear what the impact of proposed Rule 506(c) will be on state
securities regulations, many of which condition exemptions on the lack
of general solicitation.
Will the SEC acknowledge that rules permitting general solicitation
mean that public and “private” deals now can be done side-by-side.
Will issuers use third-party verification services?
Conference Manual Page 20
22. JOBS Act – Analyst Provisions
Section 105 of the JOBS Act contains provisions
allowing greater analyst participation in initial
public offerings for “emerging growth companies”.
Conference Manual Page 21
23. Summary of Analyst Provisions
Section 105 of the JOBS Act:
§ Permits a broker or dealer to publish research on an emerging growth company that is the
subject of a proposed public offering at any time even if the broker or dealer is participating in
the offering (not limited to IPOs);
§ Permits publication of research on an emerging growth company after its IPO without
complying with any waiting period or waiting for the expiration of any lock-up agreement;
§ Prohibits the SEC or any national securities association from adopting or maintaining any rule
restricting, based on functional role, which associated persons of a broker, dealer, or member
of a national securities association, may arrange for communications between a securities
analyst and a potential investor in an IPO of an emerging growth company; and
§ Prohibits the SEC or any national securities association from adopting or maintaining any rule
restricting a securities analyst from participating in any communications with the management
of an emerging growth company that is also attended by any other non-research employee.
Conference Manual Page 22
24. Staff FAQs
On August 22, 2012, the Staff of the SEC issued a series of “frequently asked questions”
relating to the analyst provisions in the JOBS Act.
The provisions of the JOBS Act do not amend or modify the Global Research Settlement
(the "Settlement"). Any firm subject to the Settlement would have to petition the court for
a modification of the Settlement in order to take advantage of the JOBS Act provisions.
The "test the waters" provisions of the JOBS Act allow underwriters to seek nonbinding
indications of interest but not to ask for a purchase commitment from customers.
The JOBS Act does not address communications where investors are present together
with company management, analysts and investment banking personnel. Accordingly,
analysts remain prohibited from participating in road shows or otherwise engaging in
communications with customers about a transaction while in the presence of investment
bankers or company management.
The Staff indicates that further updates to these FAQs may be provided.
Conference Manual Page 23
25. Continuing Analyst Prohibitions
The Staff believes that, consistent with current SEC and SRO rules, analysts may attend meetings
with management of an emerging-growth company and investment banking personnel.
Analysts continue to be subject to existing restrictions, such as:
– prohibitions on soliciting investment banking business,
– changing a recommendation in exchange for investment banking business,
– exchanging favorable recommendations for investment banking business, and
– publishing research with which the analyst personally disagrees.
Investment banking personnel may not direct an analyst to engage in sales and marketing efforts
relating to a proposed offering.
Analysts continue to be prohibited from participating in roadshows or otherwise engaging in
communications with customers about an investment banking transaction in the presence of
investment bankers or the company’s management.
SRO rules regarding supervision, compensation or evaluation of analysts have not changed.
Firms are cautioned to ensure that they institute and enforce appropriate controls to ensure that
analysts are not engaging in prohibited conduct, including solicitations, at meetings that are also
attended by investment banking personnel.
Conference Manual Page 24
26. Permissible Analyst Activities
Prior to engagement, at meetings with management and investment banking personnel, analysts at
firms not subject to the Settlement can
– introduce themselves,
– outline their research program and the types of factors that the analyst would consider in his or her analysis, and
– ask follow-up questions to better understand factual statements made by company management.
After engagement, such analysts can
– participate in presentations by management of an emerging-growth company to sales forces (but only to avoid the
need to make separate presentations to the analysts),
– discuss industry trends,
– provide information obtained from investing customers and
– communicate their views.
Investment bankers can forward a list of clients to an analyst for the analyst to contact.
An analyst may provide a list of potential clients he or she intends to contact for investment banking
personnel "to facilitate scheduling.“
Bankers can also arrange, but may not participate in, calls analysts have with clients.
Deemed not to be directing an analyst to engage in sales or marketing efforts in violation of FINRA
and NYSE rules.
Conference Manual Page 25
27. Free-Writing
The Staff believes that, consistent with the intent of the JOBS Act, research reports
should be allowed to be published with respect to an emerging-growth company during
all quiet periods — whether before or after the expiration, termination or waiver of a
lockup period or whether the lockup relates to an IPO or a secondary offering of the
company's securities.
On September 28, FINRA filed a notice of proposed rule change with the SEC to
conform applicable NASD rules to the FAQs. The notice indicates that FINRA intends to
eliminate the following quiet periods:
– 40-day period for manager or co-manager of an IPO
– 25-day period for other IPO participants
– 15-day period applicable to manager or co-manager of an IPO prior to expiration, waiver or
termination of a lock-up agreement.
– 10-day quiet period on manager or co-manager of a secondary offering
– All quiet periods applicable after the expiration, termination or waiver of a lock-up agreement.
FINRA is seeking SEC approval for these changes prior to the end of the normal 30-pay
post publication period and that the approval be retroactive to April 5, 2012 (the date of
enactment of the JOBS Act).
Conference Manual Page 26
28. Summary of Proposed Rules
Rule 506 would be amended to add paragraph (c), providing a new
and separate exemption under the Rule that would permit an issuer to
use general solicitation and general advertising to offer securities,
provided that the issuer takes reasonable steps to verify that all
purchasers of the securities are accredited investors.
The proposed rules would continue to apply the “reasonable belief”
standard to the condition that all purchasers are accredited investors.
Whether the steps taken by the issuer to verify the accredited investor
status of the purchasers are “reasonable” would be an objective
determination, based on the particular facts and circumstances of each
offering and investor. The proposed rules do not prescribe particular
verification procedures.
Conference Manual Page 27
29. Effects on Other Requirements
The SEC confirmed in the proposing release that:
– Consistent with the historical treatment of concurrent Regulation S
and Rule 144A/Rule 506 offerings, concurrent offshore offerings that
are conducted in compliance with Regulation S would not be
integrated with domestic unregistered offerings that are conducted in
compliance with Rule 506 or Rule 144A, as proposed to be
amended.
– Privately offered funds would be permitted to make a general
solicitation under amended Rule 506 without losing the ability to rely
on Sections 3(c)(1) and 3(c)(7) of the Investment Company Act,
which provide commonly used exclusions from the definition of
“investment company”.
Conference Manual Page 28
30. Proposed Rule 506(c)
Under proposed Rule 506(c), an issuer (and any selling agents) would
be permitted to use general solicitation and general advertising to offer
and sell securities, provided that the following conditions are satisfied:
– The issuer must take reasonable steps to verify that all purchasers of the
securities are accredited investors.
– All purchasers of the securities must be accredited investors, either because
they come within one of the enumerated categories of persons that qualify
as accredited investors or because the issuer reasonably believes that they
do, at the time of the sale of the securities, in each case as defined under
existing Rule 501 of Regulation D.
– All terms and conditions of existing Rules 501 (definitions), 502(a)
(integration restriction) and 502(d) (resale limitations) of Regulation D must
be satisfied. Existing Rule 502(c), prohibiting general solicitation and
general advertising, would not apply.
Conference Manual Page 29
31. Verification Requirement
In the proposing release, the SEC did not propose specific verification methods.
Objective test determining the reasonableness of the verification steps
The issuer must consider the facts and circumstances of the transaction, including, among other
things:
– The nature of the purchaser and the type of accredited investor that the purchaser claims to be.
§ For example, more may be required to verify information about an individual using the net worth test than about an institutional
investor.
– The amount and type of information that the issuer has about the purchaser.
§ The more information an issuer has, the fewer steps would be required to verify the purchaser’s status.
- Publicly available filings
- Third-party evidence such as W-2s
- Third-party verification (including by broker-dealers) so long as issuer has a reasonable basis to rely on the verification
- If issuer has pre-existing, substantive relationship with proposed investor, may not be required to verify the investor’s status
– The nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering,
and the terms of the offering, such as a minimum investment amount.
§ Require more to verify an unknown purchaser solicited through general advertisement
§ Not sufficient to check a box or sign a form absent other information
§ Higher the minimum investment amount, less likely that a non-accredited investor would be able to purchase
Issuers must maintain adequate records documenting the verification process.
Many existing practices may satisfy the new verification requirements.
Exemption continues to be based on reasonable belief. Presence of a non-accredited investor not
fatal as long as the issuer had a reasonable belief that the investor was accredited.
Conference Manual Page 30
32. No impact on existing Rule 506
New verification requirement would only apply to offerings of securities
conducted pursuant to the new Rule 506(c). Other offerings conducted
pursuant to existing Rule 506(b) that do not involve general solicitation or
general advertising will not be subject to the verification requirement.
506(c) not likely to benefit existing public companies who have other
compelling reasons to maintain confidentiality of offering process.
Conference Manual Page 31
33. Impact on other requirements
Proposed Amendments to Rule 144A
– Under the proposed amendments to Rule 144A, securities sold pursuant to Rule 144A may be
offered to persons other than “qualified institutional buyers”, including by means of general
solicitation or general advertising, provided that the securities are sold only to persons that the
seller and any person acting on behalf of the seller reasonably believe is a qualified institutional
buyer.
Impact on Concurrent Regulation S Offerings
– Regulation S provides a safe harbor for offers and sales of securities outside the United States,
provided that the securities are sold in an offshore transaction and the issuer has not engaged in
any “directed selling efforts” in the United States. In the proposing release, the SEC confirmed that
concurrent offshore offerings that are conducted in compliance with Regulation S would not be
integrated with domestic unregistered offerings that are conducted in compliance with Rule 506 or
Rule 144A, as proposed to be amended.
Investment Company Act Exclusion for Private Funds
– Privately offered funds, such as hedge funds, venture capital funds and private equity funds,
generally rely on exclusions in the Investment Company Act that are not available if the fund
makes a public offering of securities. In the proposing release, the SEC affirmed its belief that
Section 201(b) of the JOBS Act, which provides that offers and sales exempt under Rule 506 of
Regulation D (as revised pursuant to the JOBS Act) “shall not be deemed public offerings under
the Federal securities laws as a result of general advertising or general solicitation”, permits
privately offered funds to make a general solicitation under proposed new Rule 506(c) without
losing the benefit of the exclusions under the Investment Company Act.
Conference Manual Page 32
34. SEC Monitoring Potential Abuse
The SEC has noted that the proposed rules are narrowly focused on
implementing the statutory mandate under Section 201(a) of the JOBS Act and
that the SEC and its staff will continue to monitor the private placement market
as a whole to analyze the impact, including any unintended consequences, of
the proposed rules on investors, issuers and the markets.
The SEC also noted that that the Dodd-Frank Act requires ongoing evaluations
of the definition of “accredited investor” that would give the SEC flexibility to
combat abusive practices.
Pursuant to the Dodd-Frank Act, the SEC has proposed rules disqualifying
felons and other “bad actors” from relying on the Rule 506 exemption to offer
and sell securities.
Conference Manual Page 33
35. Other Considerations
Unclear what the impact of proposed Rule 506(c) will be on state
securities regulations, many of which condition exemptions on the lack
of general solicitation.
Comments on the proposed rules were due by October 5, 2012.
Conference Manual Page 34
36. Legal Disclaimer
Although this presentation may provide information concerning potential
legal issues, it is not a substitute for legal advice from qualified counsel.
The presentation is not created or designed to address the unique facts
of circumstances that may arise in any specific instance, and you should
not and are not authorized to rely on the contents of this presentation as
a source of legal advice and this presentation material does not create
any attorney-client relationship between you and Lowenstein Sandler PC.
Conference Manual Page 35
37.
Tim
Keating
is
the
Chief
Executive
Officer
of
Keating
Capital,
Inc.
(Nasdaq:
KIPO),
a
publicly
traded
business
development
company
that
specializes
in
making
pre-‐IPO
investments
in
innovative,
emerging
growth
companies
that
are
committed
to
and
capable
of
becoming
public.
Previously,
he
held
senior
management
positions
in
the
Equity
and
Equity
Derivatives
departments
of
Bear
Stearns,
Nomura
and
Kidder,
Peabody
in
both
London
and
New
York.
Tim
has
been
widely
quoted
in
the
national
media,
including
publications
such
as
The
Wall
Street
Journal,
Forbes,
SmartMoney
and
the
Venture
Capital
Journal.
Tim
has
also
been
a
guest
contributor
to
Forbes.com
and
InvestmentNews.
CONTACT
Tim
Keating
Chief
Executive
Officer
Keating
Capital,
Inc.
720-‐889-‐0139
tk@KeatingInvestments.com
Conference Manual Page 36
39. The JOBS Act has the Potential to Streamline IPO Process…
JOBS Act
IPO On-Ramp Private Capital Formation
♦ Eases the IPO process and public reporting requirements for
Emerging Growth Companies (“EGCs”), those companies with
annual revenues of less than $1 billion in their most recent fiscal
year1
♦ Permits EGCs to:
Provide two years of audited financial statements in their
registration statement; currently three years required
Submit IPO registration statement and subsequent
amendments on a confidential basis provided a public
filing is made at least 21 days prior to the IPO roadshow
Hold meetings with institutional accredited investors and
qualified institutional buyers prior to filing the registration
statement to “test the waters” without being subject to
current pre-IPO communication restrictions
♦ Allows investment bankers to publish research related to an EGC
around the time of the IPO and the lockup period expiration;
modifies rules relating to research analysts communication
♦ Other disclosure and financial reporting exemptions following IPO,
importantly no SOX 404(b) auditor attestation
♦ Provides a number of reforms aimed at easing the restrictions on
companies seeking to raise capital in private offerings
♦ The JOBS Act:
Permits general solicitations and advertising in certain
private offerings to accredited investors; proposed
regulations issued
Raises the thresholds triggering public company reporting
Facilitates “crowdfunding,” which creates a new registration
exemption allowing a private company to sell $1 million to a
larger number of small investors over a 12-month period
o Companies seeking to raise $100,000 to $500,000
in capital would have to get independent
accountants to review their financial statements
o Audited financial statements required for companies
seeking more than $500,000 in capital
♦ Expands Regulation A to increase the amount of securities that
can be issued over a 12-month period from $5 million to $50
million
… and reduce many of the current disincentives to U.S. IPOs for a broad swath of companies
1A company would retain EGC status, until the earliest of: (i) the first fiscal year after its annual revenues exceed $1 billion, (ii) the first fiscal year after the fifth anniversary of its
IPO, (iii) the date on which the EGC has, during the previous three-year period, issued more than $1billion in non-convertible debt, or (iv) the first fiscal year in which the EGC
achieves “large accelerated filer” status (i.e., $700 million of public equity float that has been reporting for at least one year).
2
Buy Privately, Sell Publicly, Capture the DifferenceTM
Conference Manual Page 38
40. Negative
JOBS Act Report Card: Private Capital Formation
♦ General Solicitation♦ Public Company Reporting
Thresholds♦ Regulation A
♦ Crowdfunding
Neutral
Positive
3
Buy Privately, Sell Publicly, Capture the DifferenceTM
Conference Manual Page 39
41. Negative
JOBS Act Report Card: IPO On-Ramp
♦ Research Reports♦ Securities AnalystCommunications♦ Communications Before and
During the Offering Process
♦ Auditor Attestation onInternal Controls
♦ Financial Information in SEC
Filings
♦ Accounting Standards♦ Auditor Rotation and Other
PCAOB Rules♦ Executive CompensationDisclosure♦ Say on Pay
♦ Confidential Filings
Neutral
Positive
4
Buy Privately, Sell Publicly, Capture the DifferenceTM
Conference Manual Page 40
42. Research Reports and Analyst Communications
Reform Current Rule Under the JOBS Act
Research
Reports/Analyst
Communications
♦ Generally, managing
underwriters in an IPO are
prohibited from: (i) publishing
or distributing research on the
issuer until 40 days after the
IPO, (ii) making any public
appearance for 25 days
following the IPO date, if
participating, (iii) publishing or
distributing any research
report or making any public
appearance during the 15
days before and after the
lockup expiration
♦ Communications by analysts
with EGCs and potential IPO
investors are subject to a
number of conflicts of interest
and other restrictions
♦ Permits the publication and distribution of research reports and public
appearances with respect to securities of EGC any time after IPO (including
quiet periods), even if research reports issued by brokers that are participating or
will participate in the offering
♦ Analysts can attend meetings with EGC’s management and investment bankers
(avoids separate and duplicate management presentations to analysts), but
analysts remain subject to existing conflicts of interest restrictions
♦ Analysts of non-Global Settlement firms can attend pre-engagement meetings,
i.e., pitch meetings, with EGC management and investment bankers to introduce
themselves and to outline their research program and factors that analysts may
consider, and to ask management questions to better understand factual matters,
but still prohibited from soliciting investment banking business
♦ After underwriter engaged, non-Global Settlement firm analysts can participate in
EGC management presentations to sales teams, discuss industry trends and
communicate their views
♦ SRO rules still prohibit analysts from participating in roadshows or
communicating with investors about an IPO in the presence of investment
bankers or EGC’s management (intended to reduce pressure on analyst’s
assessment of the offering and keep analyst from being viewed as part of sales
team)
♦ Bankers can arrange, but not participate in, calls between analysts and investors
Keating
Perspective
♦ Improves communication and transparency before and after IPO
♦ Asymmetry of information available to individual and institutional investors is conceptually highly problematic and
contrary to the intent of Regulation FD (currently permitted oral communications or “whispers” outside prospectus
disclosure to investment bankers clients needs to be corrected)
♦ Bulge bracket firms that are party to Global Settlement are still subject to the terms of that agreement and therefore not
able to avail themselves of all relief that is available to others under the JOBS Act; but middle market firms will also not
avail themselves of this relief for fear of being frozen out of public offerings controlled by the bulge bracket firms
(however, middle market firms may have potential to provide significant value add)
♦ Additional reform is urgently needed in this area to rectify this regulatory anomaly
5
Buy Privately, Sell Publicly, Capture the DifferenceTM
Conference Manual Page 41
43. Communications Before/During the Offering Process
Reform Current Rule Under the JOBS Act
Communications
Before and During
the Offering Process
♦ “Test the waters” communications with respect to
public offering not allowed prior to filing of
registration statement
♦ Limited ability to “test the waters” after registration
statement filed
♦ After filing of registration statement, underwriters
required to provide sales representatives with
preliminary prospectus before soliciting customer
orders
♦ Expand permissible communications to allow
EGCs and their underwriters, both before and
after filing a registration statement, to “test the
waters” by engaging in oral or written
communications with qualified institutional buyers
and institutional accredited investors to determine
interest in an offering
♦ Following the “filing” of registration statement,
“test the waters” communications can continue
without the underwriter making available
preliminary prospectus to its sales
representatives as long as only non-binding
indications of interest and not purchase
commitments are sought from potential investors,
i.e., not soliciting customer order)
♦ Submitting confidential draft registration
statement for SEC review is not considered a
“filing” of a registration statement
Keating Perspective ♦ Improves communication with investors
♦ Extremely important for issuers to be able to determine the viability of a public offering before publicly
disclosing business and financial information, which could affect competitive landscape or harm reputation if
IPO not pursued
♦ Ideally will serve to clear the zombies in the SEC registration queue
6
Buy Privately, Sell Publicly, Capture the DifferenceTM
Conference Manual Page 42
44. Auditor Attestation on Internal Controls
Reform Current Rule Under the JOBS Act
Auditor Attestation
on Internal Controls
♦ Auditor attestation on effectiveness of internal
controls over financial reporting required in second
annual report after IPO
♦ Non-accelerated filers currently not required to
comply
♦ Transition period for compliance up to 5 years,
i.e., for so long as the issuer is deemed to be an
EGC
Keating Perspective ♦ Reduces public company costs
♦ Single most important reform in the JOBS Act
♦ Will provide greater cost relief to EGCs (which represent 90% of all companies that go public) relative to the
costs incurred by large companies
♦ While the cost savings are important, they are dwarfed in comparison to the positive boost in psychology in the
venture capital community
♦ After a decade of “why would any company want to go public?” mentality in Silicon Valley, we're thankfully
getting back to a mindset where the IPO is the ultimate end game
7
Buy Privately, Sell Publicly, Capture the DifferenceTM
Conference Manual Page 43
45. Confidential Submissions of Draft IPO Registration Statements
Reform Current Rule Under the JOBS Act
Confidential
Submissions of Draft
IPO Registration
Statements
♦ Historically only foreign issuers were permitted to
submit confidential draft registration statements with
the SEC
♦ In December 2011, the SEC announced that it would
only review submissions by foreign private issuers
on a confidential basis in specified circumstances;
as a result, many non-U.S. companies submitting
their initial registration statement to the SEC in
connection with a U.S. IPO or listing will have to do
so via a public filing
♦ An EGC is permitted to submit to the SEC a draft
IPO registration statement for confidential review
prior to public filing
♦ However, public filing of any confidential
submission and any amendments must be made
with the SEC not later than 21 days before the
EGC begins its roadshow
Keating Perspective ♦ Worsens communication
♦ Dubious value, if any, to any party especially since the “test the waters” process should ferret out investor
interest
♦ No compelling reasons why EGCs should be given the ability to confidentially assess whether the SEC has
concerns with their financial and business disclosures
♦ Risk of scarce SEC resources being consumed and bandwidth clogged by issuers that are not serious about
taking an IPO to completion
♦ Instead of creating a level playing field for domestic issuers, the better solution would have been for the SEC to
abolish confidential filings for all parties
8
Buy Privately, Sell Publicly, Capture the DifferenceTM
Conference Manual Page 44
58. Growth Capital Investor
Investment ($B) Deals
0
$1
$2
$3
$4 billion
Jan. Feb. Mar. Apr. May June July Aug.
36
51
42
49
48
40 39
44
Growth Capital EPPs 2012
Source: PlacementTracker, a service of Sagient Research
Vol. I Issue 4 The Journal of Emerging Growth Company Finance September 3, 2012
SEC CansAd Ban
on Private Placements
by Joe Gose
I
t’s hard to imagine any one constituent group being overly enthused about the
Securities and Exchange Commission’s effort to write rules that implement
general solicitation in private offerings as mandated by the JOBS Act.
Although the proposal was accepted on a vote of 4-1, lawmakers and some
commissioners voiced displeasure that the SEC failed to meet the law’s proscribed
90-day deadline and that SEC Chairman Mary Schapiro late in the game elected to
issue a proposal and take comments for 30 days instead releasing of an interim final
rule. State regulators and other organizations predicting widespread fraud can’t be
pleased that the proposal didn’t include their suggestions for strict, well-defined
procedures for issuers to follow when verifying that a purchaser is an accredited
investor.
Parties that lobbied to keep the verification process the same as it is today –
largely certification by buyers that they are accredited investors via questionnaires
– may be uncomfortable with the proposed “facts and circumstances” test to es-
tablish a “reasonable belief” that a purchaser is in fact an accredited investor. And
although allowing general solicitation has been a centerpiece of discussion among
market participants over the last several months, practitioners may nevertheless
have a tough time wrapping their minds around the change.
“It’s kind of weird because you can now conduct a private placement and
yet have general solicitation as long as your buyers are OK,” said Dean Hanley, a
SEC Files New Complaint
Against NIR’s Ribotsky,Dworkin
by Paul Springer
T
he Securities and Exchange Commission filed an amended complaint
against NIR Group, its founder Corey Ribotsky, and former analyst
Daryl Dworkin. The document reiterates most of the commission’s al-
legations that Ribotsky engaged in fraudulent accounting, lied to investors and
stole over $1 million from one of his funds, but it also provides new specifics to
the regulator’s claims that Ribotsky profited from management fees from phan-
tom gains and engaged in questionable accounting.
The suit was originally filed last September in Manhattan’s U.S. District
Court.
Funds managed by NIR, which include four AJW entities and New Mil-
lennium Capital Partners II, committed $225 million to 144 PIPEs from 1999
through 2010, according to PlacementTracker data.
INTHIS ISSUE
Shells Brandish Emerging Growth
Company Label
The JOBS Act is fueling a boom in the “emerging
growth company shell”..........................................2
Turmoil at Direct
Markets/Rodman & Renshaw
Disarray, losses, employee exodus, and regulatory
censure take their toll at top PIPE banker................3
Funds Sue DJSP Over
Post-SPAC Disclosure
Two hedge funds are suing a foreclosure processing
business that merged with a SPAC in 2010............4
ALSO INSIDE
Baystar’s Goldfarb Still Fighting Prosecution; Hedge
Funds Say China Medical CEO Tanked Company;
SECSuesE-LionheartforDumpingBillionsofShares;
LuxeYard’s One Luxurious Deal;TJ Management in
Bogus Placements,SEC Says;and other stories......6
EPP, PIPE &APO MARKET DATA
AggregateYear-to-Date MarketActivity................17
Deal Performance – Growth Capital EPPs............18
Growth Capital EPP Candidates...........................20
Growth Capital and PIPE LeagueTables...............21
SPACs and Reverse MergerAPOs.........................24
See Ad Ban on page 25
See Ribotsky on page 26
61. Growth Capital Investor
Investment ($B) Deals
0
$1
$2
$3
$4 billion
Apr. May June July Aug. Sept.
49 48
40 39
44
20
Growth Capital EPPs 2012
Source: PlacementTracker, a service of Sagient Research.
September data thru 9/14/12.
Vol. I Issue 5 The Journal of Emerging Growth Company Finance September 17, 2012
Emerging Growth Issuers Largely
Immune to Broad Market Sentiment
by Joe Gose
F
or all the focus being placed on boosting small business to create jobs and
fuel an economic recovery, emerging growth companies struggling to find
traction in the public markets.
As a group, small issuers that have conducted private placements over the last
several months have generally lagged the stock market’s rise over the last year – the
Dow Jones Industrial Average Index has risen 20% – suggesting that the firms are
less influenced by broad market sentiment.
But exactly how far out of whack is the performance of small private place-
ment issuers with the rest of the market? Growth Capital Investor reviewed equity
private placement (EPP) activity from June 1, 2011 through May 30, 2012, using
Sagient Research’s PlacementTracker database.
The analysis focused on growth equity private placements (GEPPs): unregis-
tered and registered common stock sales, rights offerings, fixed-price convertible
issuances, and non-convertible debt and preferred stock sales, issued at fixed-price
issuance and conversion terms. No placements involving variable-priced securities,
equity lines or at-the-market offerings were included. The issuer parameters fo-
cused on emerging growth companies that had a minimum share price of $1 and
market capitalizations ranging from $10 million to $1 billion.
The goal was to get a snapshot of how companies and a handful of active
sectors performed following the transactions against comparable indices. While
SEC Forgoes Rule Making
andAddresses ResearchAnalyst
Reforms under JOBSAct in FAQ
by Brett Goetschius
W
hile much of the emerging growth capital market was fixated over
the past two weeks on the Securities and Exchange Commission’s
vague proposals lifting the ban on public solicitation for investments
in private placements, the agency issued a FAQ outlining its stance on the JOBS
Act’s repeal of restrictions on sell-side research analysts’ participation in investment
banking activities. While similarly paradigm-shifting in its impact on capital rais-
ing, the release of the interpretative document has received little attention outside
of securities law circles.
The SEC’s Division of Trading and Markets issued the FAQ in late August as
an alternative to new rulemaking vis-à-vis the JOBS Act, which explicitly forbids
INTHIS ISSUE
Muddy Solicitation Proposal Takes
Wind Out of Crowdfunders
The SEC’s proposed rules on general solicitation
of investments draws jeers from the crowd cap-
italists...............................................................2
NIR Group Investors Faced
with 97% Loss
InvestorsinbeleagueredPIPEfundmanagerreceived
harsh news last week.............................................3
PIPE Player Rodman
Closes Banking Business
Thelong-timemostactivebankerinthePIPEmarket
closes its doors........................................................4
ALSO INSIDE
Direct Markets Investor Pared Holdings Ahead of
News; Internal Fixation Accused of Manipulation,
Misleading Reporting; China Hydroelectric Sues
Dissidents inValue Fracas;Fairfax Financial Shorting
CaseTossed;SECSuspendsShellAccountantHatfield;
SECSuesChinaSkyOneforFakeRevenue;andother
stories.....................................................................5
EPP, PIPE &APO MARKET DATA
AggregateYear-to-Date MarketActivity................12
Deal Performance – Growth Capital EPPs............13
Growth Capital EPP Candidates...........................15
See Immune on page 16
See FAQ on page 17
