§dealflow report
TRANSCRIPT
§DEALFLOW REPORT NEWS , INFORMATION , AND ANALYSIS OF SMALL CAP EQ!JITY FINANCE VOLUME II , NO. 1
MARKET UPDATE • Small cap financing rebounded in the fourth
quarter as investors sought risk. • Investor verification standards are lax at
many financing websites. • CMA Partners is buying most ofThinkEquity's
banking business .............................................. 2 • Former N.I.R. managers allegedly were part of
a $17M pennystock fraud .............................. .. 3
DATES & DEADLINES • A listing of important events coming
up in the small cap financing market ....... .4
REGULATORY UPDATE • Robert Khuzami is stepping down as head of
enforcement at the SEC.. ................................. 6 • The SEC released an agenda for its
decimalization roundtable .............................. 6 • Geolnvesting accused a Chinese petroleum
products distributor of "brazen" fraud ......... 6 • New rules may require hedge funds to police
money laundering .................................. .......... 7 • Brokers now have to search for stockholders
they've lost contact with ................................. 7 • The SEC won a ruling against the execs in
the Spongetech case ........................................ 8 • Nasdaq delisted Deer Consumer Products .... 8 • A disbarred lawyer was banned by the SEC. 9 • Online-Registries must pay the SEC $223K .. 9 • A gold miner and its CEO settled charges of
fraud and lying ............................................... 1 0 • Bingham's Geoffrey Aronow was appointed
SEC general counsel ....................................... 1 0
DEAlflOW • A software company may do an IPO after
an $8.5M venture round .... ............ .. .. ... 11 • A biotech company raised $5.1 M in a
reverse merger ................ ..................... 11 • Crowdfunder EarlyShares named a former
Wells Fargo fund manager as CEO ......... 11 • A San Francisco Internet company
launched a huge crowdfunding campaign .................... ......................... 12
• Westor Capital is growing its microcap banking business ........ .......................... 12
lEGAl UPDATE • An appellate court ruled on the short-
swing profits rule .................................. 13 • GLR Capital principals were indicted on fraud
in connection to a $60M Ponzi scheme ........ 13 • Robert Cohen is joining McDermott Will &
Emery .................................................. 14 • Scott Kline is heading up Lucosky Brookman's
foreign direct investment group ................. 14 • Morrison & Foerster elected 15 lawyers as
partners ............ ................................... 15
SMALL CAP EQUITY FINANCE ACTIVITY ... 21
ISSUER INDEX .... ................................ 34
REPORT.DEAlHOWMEDIA.COM jANUARY 14, 20 13
SMALL CAP FINANCING REBOUNDS IN FOURTH QUARTER AS INVESTORS SEEK MORE RISK
by Dan Lonkevich
The small cap and microcap equity capital financing market rebounded in the fom1h qum1er as unregistered PIPEs, registered directs, confidentially marketed public offerings, initial public and follow-on offerings all rose sharply compared with the year-earlier period's historic lows.
The number of reverse mergers declined 26% and special purpose acquisition company activity was limited to four IPOs and another four that filed to go public.
The latest qum1er's results were buoyed by increased investor appetite for small cap and microcap equities, as well as a strengthening U.S. economy, lower unemployment and less uncertainty about tax and fiscal policy after the presidential election. The moribund fourth quarter of20 11 in contrast, was hampered by festering concerns about the European sovereign debt crisis and how it might migrate across the Atlantic.
"The year until the fourth quarter was a tough one for small cap and microcap
companies and they were giving money away to larger companies," said G. Chri stopher Andersen, founder and pat1ner of investment bank G .C. Andet·sen Pat·tners in New York.
G.C. Andersen had one small cap client looking for a PIPE all year finally get it done in the fout1h quarter, Andersen said. " It wasn't that the rate had changed. Investors came along and moved a little outside of the risk spectrum. There's money flowing in again. We were kind of encouraged in the fourth quarter. If investors are coming along, 2013 could be a pretty good year."
Andersen was not alone in his assessment of investor 's increased tolerance for ri sk in the fourth quarter and what it may mean for 201 3.
"The fourth quarter was much better than last year's fourth quarter, in pat1icular in December, with a real increase in risk appetite for small cap and microcap equities and new issues," said David Bolm, head of
Small Cap continued on page 18
INVESTOR VERIFICATION STANDARDS LAX AT MANY
FINANCING WEBSITES by Joshua Sisco
A staff member of The De a/Flow Report gained access to the financing websites SecondMarket, FundersClub, Circle Up and EarlyShares as an accredited investor, despite not meeting the proper qualifications.
These and other sites that offer opportunities to invest in unregistered securities are only allowed to sell them to accredited investors. All of the sites granted access, however, with requirements no more stringent than checking a box.
As it stands now, that may not teclmically be breaking the law. Currently, under Regulation D of the 1933 Securities Act, a securities issuer
Investor Verification continued on page 16
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Investor Verification contirruedfromjivnt page only needs to have a reasonable belief widely criticized for not providing spethat an investor is accredited, and for c ific enough guidance for how securithe investor to verify that they have a ties issuers should verify that investors net worth of at least $1 million or an are accredited. annual salary of$200,000. The commissio n hasn't scheduled a
Broker-dealers, meanwhile, are subject vote to approve the controversial proposto "know your customer" and suitability al and its fate is uncertain. The politics of requirements, meaning that they have a the SEC are currently in flux, with former responsibility to match their clients with chai rman Mary Schapiro having stepped appropriate investments. down last month and numerous other sen-
The requirements for both issuers and ior staff members resigning. The commis-brokers can be subjective, but under exist- sion is now split between two Democrats ing standards, self-verification by inves- and two Republicans. President Obama tors is all that's required, representatives hasn't yet nominated a fifth commissioner of most of the sites mentioned said. to replace Schapiro.
That could change as the SEC works The proposed rule states that securities to relax the rules around marketing ofpri- issuers should have to take "reasonable vate placements. steps" to assure that only accredited inves-
The Jumpstart Our Business Start- tors buy unregistered securities offered ups Act, which Congress passed and through general solicitation. rt doesn't President Obama signed last year, will say what those reasonable steps should be. end the ban on "general solicitation" or Market players want a safe harbor, set-advertisement to the general pub I ic of ting out a specific standard for investor unregistered securities. The measure is verification that issuers could follow and o ne of several in the JOBS Act meant be reasonably sure that they wouldn ' t be to give growth-stage companies easier legally liable, even if they were misled by access to capital. It will also allow small an unaccredited investor. investors to buy stock in private com-panies through so-called crowdfunding over the Internet.
Checking a Box
But in the meantime, the notion of having a reasonable belief that investors are accredited has evolved into "checking a box," said Mitchell Littman, a securities attorney with the New York law firm of Littman Krooks.
General sol icit.ation of private placement financing hasn't been allowed in the past, o ut of concern that it would target unsophisticated investors who wouldn ' t be ab le to gauge the risks invo lved in the offerings.
However, "The SEC has also said that Under the JOBS Act, actual sales of merely checking a box won't work in a unregistered securities will still mostly be
limited to accredited investors, although very broad solicitation," Littman said. issuers will be able to advertise their SecondMarket spokesman Mark Mur-offerings to anyone. phy said that company's verification pro-
However, the new law requires the cedures are evolving but that " if someone Securities and Exchange Commission to is willing to lie all the way through," then make rules to govern general solicitation. it would be possible for an unaccredited The investment portals and other players person to make investments that they in the small company financing market should be barred from. are waiting to see how that will play out. "] think that it's pretty safe to say that
The SEC issued proposed rules for there wi ll be documentation required," general so licitation last A ugust , for Murphy said of the rules that the SEC will public comment. The proposal was eventually enact
THE DEALFLOW REPORT© 2013 DEALFLOW MEDIA 16
MARKET UPDATE
About two years ago, SecondMarket changed its investor questionnaire so that it no longer stated the minimum thresholds for accred ited status, he said. The questionnaire now simply asks what a person 's net worth and salaty are.
"Check-the-box is fine for now, but it is pretty minimal at the same time," Murphy said.
Current verification practices are a "huge problem," said Tim Sullivan, President and C hief Executive Officer of Austin , Texas-based Micro Ventures. "There is a responsibility to call investors who register and verify their information, risk tolerance, time horizons and other investment interests," which he said Micro Ventures does.
CircleUp Chief Operating Officer Rory Eakin said that his firm uses a third-party verification service as well as proprietary steps including periodic audits.
FINRA May Not be Pleased
That didn't stop The Dea/Fiow Report from gaining access to the CircleUp site as an unaccredited investor.
" We take these issues very seriously and if someone misrepresented themselves to gain access to the site, it is regrettable," Eakin said.
Littman said that it's an aggressive interpretation of the current rules to simply rely on the attestations of an individual, with no follow-up.
In general, "FINRA is likely not pleased," said Su llivan, regarding the Financial Industry Regulat01y Authority, which regulates broker-dealers.
FINRA officials couldn't immediately be reached for comment.
Sullivan suggested that the financing portals may be relatively casual about investor verifi cation because some are headed by technology entrepreneurs rather than executives with backgrounds in finance.
"There is a dislocation between the founder, who may be a tech person,
JANUARY 14, 2013
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and the broker-dealer they are working with," Sullivan said.
EarlyShares Head of Product Development Etienne Maugain said in an emailed statement that its procedure for having investors themselves attest that they are accredited serves only "as a flagging function ."
EarlyShares will contact the investors, if necessary, " upon issuance of the final rules fi·om the SEC," he said. "Reasonable steps will need to be taken to verify that the investor is accredited."
EarlyShares, which bills itself as an equity crowdfunding service, is waiting for equity crowdfunding rules to be enacted by the SEC before it allows investments through its website.
Jack Hogoboom, a securities attorney with the Lowenstein Sandler law firm,
said he would never advise a broker or company client to rely solely on the representations of an investor.
Even though the websites operate as broker-dealers, they "don't have the same type of client relationships that other brokers have," Hogoboom said. They "may not be obligated to follow the suitability rules in the way that a traditional brokerage would be."
FundersClub CEO Alex Mittal said in an emailed statement that the company "manually" verifies self-reported income and net worth.
However, The Dea/Flow Report only had to fill out an onli ne questionnai re to be approved as an accredited investor for the FundersClub site. When this was brought to FundersClub's attention, spokeswoman Christina Chang said the
MARKET UPDATE
account was deleted. In his statement, Mittal also said
that "Offline VC in dustry standards presently call for a check-a-box check." FundersClub exceeds that standard, he said.
"Not only are members administered a multi-question questionnaire prior to registering as a member, each and every time they invest, their accreditation status is reviewed," Mittal said.
Unlike other funding portals, Funders Club isn' t licensed as a broker-dealer. The company is exempt from the licensing requirement because it operates as a traditional venture capital investor, according to Mittal.
Associate Editor Joshua Sisco may be reached at josh@dea(flow. com.
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