jobs act presentation1(1)

“The JOBS Act – Generating Jobs or Getting Jobbed?”

Michael Kirwan, Foley & Lardner LLPTim Gillis, Akerman Senterfitt, LLPHamilton Traylor, Fisher, Tousey, Leas & Ball

May 17, 2012

Agenda

I. How the JOBS Act Came To Be – Hamilton Traylor

II. Crowdfunding – Hamilton Traylor

III. General Solicitation for Private Placements and Changes to Reg A – Tim Gillis

IV. Emerging Growth Companies and Revised Shareholder Thresholds for Registration Under the 1934 Act – Michael Kirwan

V. Questions and Answers

• The Jumpstart Our Business Startups Act of 2012 is six initiatives amending the ‘33 Securities, ‘34 Exchange and Sarbanes-Oxley Acts– Title I – Reopening American Capital Markets to Emerging Growth

Companies, which provides the so-called “on ramp” for IPOs

– Title II – Access to Capital for Job Creators, dealing with the changes to the prohibitions on general solicitation

– Title III – Capital Raising Online While Deterring Fraud And Unethical Non-Disclosure Act of 2012, or the CROWDFUND Act

– Title IV – Small Company Capital Formation, an effort to make the Reg. A exemption viable, another topic that Tim will discuss

– Title V – Private Company Flexibility and Growth and Title VI – Capital Expansion, both of which deal with increasing the number of shareholders required for registration under the ’34 Act

What is the JOBS Act?

• Background Environment– Post Dodd-Frank Wall Street Reform pushback

• Issa-Shapiro Letters– Facebook decision to stay “private” by offering to non-US residents only

over concerns regarding

– SOPA (Stop Online Piracy Act) backlash from Silicon Valley

– Obama Administration Initiatives• Treasury Department “IPO Task Force”• President’s Council on Jobs and Competitiveness• SEC Advisory Committee on Small and Emerging

Companies

How the JOBS Act Came To Be

• Timeline– Passage of H.R. 2930, the Entrepreneur Access to

Capital Act in Nov. 2011 by 407-17 vote– Obama “Statement of Administration Policy”

endorsing H.R. 2930– Senate leadership stalls after H.R. 2930 in face of

concerns by institutional groups (SEC and organized labor) over investor protection

– National Venture Capital Association, the Silicon Valley Leadership Group, TechNet, U.S. Chamber of Commerce and a handful of CEOs urge passage of H.R. 2930

The JOBS Act (cont’d)

• Timeline (cont’d)– Behind the scenes bi-partisan lobbying by Steve

Case, co-founder of AOL– House rolls other securities initiatives into H.R. 2930,

which becomes the JOBS Act (H.R. 3606) and passes it 390-23 on March 8, 2012

– Senate takes up H.R. 3606 on March 20 and Merkley-Bennet-Brown amendment passed to address fraud concerns in crowdfunding on March 22, 2012

– Senate leadership sends bill straight to floor where it passes on March 22, 2012 73-26 (passes in House 380-41)

– President Obama signs JOBS Act April 5, 2012

The JOBS Act (cont’d)

Two Views of the JOBS Act“Because of this, start-ups and small business will now have access to a big, new pool of potential investors — namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in,” the president said in a Rose Garden signing ceremony. Finally, Obama said the JOBS Act would make it easier for business owners to take their companies public, noting “that’s a big deal because going public is a major step toward expanding and hiring more workers.”

• It is a bad sequel to a bad movie. It shouldn’t be called the JOBS Act, it should be called the Bring Fraud Back to Wall Street Act. Eliot Spitzer, former New York attorney general

• We should not walk backwards here. Collusive behavior between analysts and bankers cost investors huge sums, shattered confidence in the integrity of research, and damaged the markets themselves. Mary Shapiro, Chairwoman, SEC

• At best, this bill could make it easier for con artists to defraud seniors out of their entire life savings by convincing them to invest in worthless companies. At worst, this bill has the potential to create the next Enron or Arthur Andersen scandal or an even worse financial crisis. Senator Bernie Sanders (D-VT)

• We are disappointed - and angry - that despite warnings from current and former financial markets regulators, law professors, institutional investors and consumer advocates, 73 senators voted for the cynically named “JOBS Act.’”This is a vote against investors in the real economy and for Wall Street speculators. When the next bubble bursts, Americans will know who to blame. Richard Trumka, President, AFL-CIO

Two Views of the JOBS Act

Two Views of the JOBS ActThe “Jumpstart Our Business Startups” Act, the comically forced effort to create a catchy acronym, is the most cynical bill to emerge from a cynical Congress and Administration. It is an exemplar of why Congressional approval ratings are well below those of used car dealers. The JOBS Act is something only a financial scavenger could love. It will create a fraud-friendly and fraud-enhancing environment. It will add to the unprecedented level of financial fraud by our most elite CEOS that has devastated the U.S. and European economies and cost over 20 million people their jobs. Financial fraud is a prime jobs killer. Deregulation was the root of the financial crisis just past, but no one in the administration seems to have gotten the memo. This bill is astonishingly wrong-headed, which means it is par for the course for Team Obama. Bill Black, Associate Professor of Economics and Law, University of Missouri-Kansas City, and author of The Best Way to Rob a Bank is to Own One

• What is “crowdfunding”?– Broadly described as aggregating funds from a broad base towards a

common cause

• Old concept, although term is new– Michael Sullivan, founder of fundvalog, coined the phrase on August 16,

2006

– 1700s, Jonathan Swift launched the Irish Loan Fund, an early micro-finance project to provide credit to the poor of Dublin

– March 1885, publisher Joseph Pulitzer initiated an open-call donation-based campaign in his newspaper The World to help finance the Statue of Liberty’s massive pedestal

– March of Dimes is prototypical example of donation-based crowdfunding

– Barack Obama’s 2008 campaign fundraising approach, accepting smaller than traditional contributions from a broader voter base, probably should be considered a form of microfinance

Title III - Crowdfunding

• New Technology– Similarities between the fundraising campaigns

described above and successful crowdfunding campaigns today — the micro-pledge model, the reward structure, the emotional draw — but there’s one major difference: THE INTERNET

– Because of the web’s global reach, crowdfunded ventures can target much narrower communities than “Americans” in Pulitzer’s fundraising campaign for the Statue of Liberty — say, webcomic fans or iPhone photographers — and still raise a substantial amount of money

Crowdfunding (cont’d)

• Crowdfunding Models– Microfinance

• Microfinance is when contributors align to provide financial services, often seemingly miniscule loans, to low-income clients, particularly where the recipients generally lack access to banking services

• Today’s microfinance model began when Nobel Prize winner Muhammad Yunus began giving microloans in the 1970s to help the poor in his native Bangladesh escape poverty

• Kiva.org is a prominent microfinance platform, having facilitated over $300 million in loans


– Peer-to-Peer Loans• Also known as P2P loans or social lending, peer-to-peer

lending enables individuals to borrow from a group of lenders, without the use of an official financial institution as an intermediary – the theory is that by removing the overhead of banks, borrowers receive lower rates while lenders earn higher returns than expected from savings accounts

• P2P lending grew over 1,200%, from $118 million to $1.555 billion, in outstanding loans between 2005 and 2008

• P2P lending is highly regulated• Leading platforms in this fast growing P2P field are

Prosper.com and Funding Circle


– Donation-Based Crowdfunding (DBC)• DBC has exploded in the past few years, with hundreds of

platforms. DBC campaigns are often creative (movies, music, art), community, or philanthropic projects. They can also be business-oriented, like the Pebble watch that recently broke the record for largest DBC campaign (cut off at $10 million)

• Characteristics of a DBC crowdfunded campaign– no financial return – generally a non-monetary reward related to the

project, like a T-shirt, pre-release CD or video game, etc.

– No financial returns mean DBC campaigns are not impacted by securities laws – have generally been viewed as legal

• The DBC industry nearly quadrupled in 2011, from $32 million to $123 million

• Despite 100’s of platforms, Kickstarter.com dominates DBC. IndieGoGo.com and RocketHub.com are also major sites


– Investment Crowdfunding• With investment crowdfunding, the crowd purchases

securities – equity, debt or some hybrid – in exchange for their contributions

• Investment crowdfunding has been legal in some other jurisdictions, such as the U.K. and Australia, but not in the United States

• Title III of the JOBS Act changes that by establishing a new exemption, Section 4(6) of the Securities Act of 1933, from registration of securities sold via crowdfunding offerings


• Limitation on Size of Offering– no more than $1,000,000 may be raised via

crowdfunding in any 12 month period

• Limitation on Size of Individual Investment– no single investor may invest more than a specified

amount in an offering, namely:• the greater of $2,000 or 5% of the annual income or net

worth of the investor, as applicable, if the investor has annual income or net worth of less than $100,000; or

• 10% of the annual income or net worth of the investor, as applicable, if either the annual income or net worth of the investor is equal to more than $100,000, capped at a max of $100,000 invested

CROWDFUND Act

• Limitation on Means of Offering– Companies must use an intermediary if they want to crowdfund,

and those intermediaries must be registered with the SEC and will also be required to register with the Finance Industry Regulatory Authority (“FINRA”)

– The intermediary must be a registered broker or “funding portal” (a new term created under the JOBS Act)

– Precise registration requirements for funding portals have not yet been determined by the SEC

– The requirement that the offering is conducted through a registered broker or funding portal essentially forbids companies from crowdfunding their own offering on their own websites

CROWDFUND Act

• Obligations of Funding Portals– As evidenced by the requirements placed on

crowdfunding intermediaries, it is clear that Congress does not intend for being a funding portal to be easy

– The main limitations on crowdfunding intermediaries are:

• provide certain disclosures and investor education materials to investors

• ensure that the investor has reviewed educational materials and answers questions indicating that he/she understands the risks involved

• perform certain background checks on the issuer• provide a 21 day review period before any crowdfund

securities are sold

CROWDFUND Act

• Obligations of Funding Portals (cont’d)– ensure that an issuer does not receive investment funds until its target

investment minimum has been reached, and that investors may cancel their commitments to invest as provided by the SEC

– ensure that no investor surpasses the investment limits set forth above in a given 12 month period in the aggregate – i.e. the limits described above with respect to investors

– apply to all crowdfunding investments in a given 12 month period, not just to individual investments, and the burden is on the intermediary to monitor this

– take steps to protect the privacy of investors

– not pay finders’ fees to promoters or lead generators with respect to investors (it appears to be okay to pay finders’ fees for issuer leads)

– not allow the intermediary’s directors, officers or partners to have a financial interest in an issuer using its services

CROWDFUND Act

• Requirements on Issuers– Issuers must disclose any compensation paid by it to

any person promoting its offerings through a broker or funding portal

– Issuers are not allowed to advertise the terms of the offering except for notices that direct investors to the intermediary

– Companies seeking to utilize the crowdfunding exemption must file a substantial disclosure with the SEC, the intermediary and all potential investors, that must include:

CROWDFUND Act

• Requirements on Issuers (cont’d)– name, legal status, address, website, etc.– names of directors, officers, and 20% stockholders– a description of the business of the issuer and the anticipated business plan of

the issuer– prior year tax returns, plus financials (detail depends upon size of offering)– description of intended use of proceeds– target offering amount, deadline, and regular progress updates through the life of

the offering– share price and methodology for determining the price– a description of the ownership and capital structure of the issuer, including detail

about (i) the terms of the securities being sold, as well as any other outstanding securities of the company, (ii) a summary of the differences between them, (iii) disclosures about how the rights of shareholders can be limited, diluted or negatively impacted, (iv) “examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions,” and (v) a disclosure of various risks to investors

CROWDFUND Act

• Financial Disclosures– Companies looking to raise $100,000 or less can provide

financials that are merely certified as true by the officers of the company

– Companies looking to raise between $100,000 and $500,000 must provide “reviewed” financials (by a CPA)

– Companies looking to raise over $500,000 must provide audited financial statements prepared by a CPA

– Every year after a successful crowdfunding offering, issuers must file with the SEC and investors reports of the results of operations and financial statements of the issuer

CROWDFUND Act

• Other Provisions– Crowdfunded shares shall are exempted from the 500

shareholder cap– Crowdfunded securities cannot be transferred or

resold for the first year after purchase, unless transferred to (i) the issuer, (ii) an accredited investor, (iii) as part of a registered offering, or (iv) to family members in some circumstances (i.e. death, divorce)

– Only U.S. offerings are eligible for the crowdfunding exemption

CROWDFUND Act

• Other Provisions (cont’d)– Certain companies such as publicly listed companies,

investment companies, and private equity and hedge funds may not use the 4(6) crowdfunding exemption

– Using the crowdfunding exemption does not preclude the raising of funds through other means – i.e., companies may engage in a crowdfunding round simultaneously with an angel investment or other financing round under Regulation D 506

CROWDFUND Act

• Liability– New Section 4A(c)(2) of the Securities Act provides

that an “issuer” will be subject to liability if it:• by the use of any means or instruments of transportation or communication

in interstate commerce or of the mails, by any means of any written or oral communication, in the offering or sale of a security in a transaction exempted by the provisions of Section 4(a)(6), makes an untrue statement of a material fact or omits to state a material fact required to be stated or necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading, provided that the purchaser did not know of such untruth or omission; and

• does not sustain the burden of proof that such issuer did not know, and in the exercise of reasonable care could not have known, of such untruth or omission

CROWDFUND Act

CROWDFUND Act

• Liability (cont’d)– Investors in crowdfunding offerings may institute

actions for rescission or damages– Defendants can defeat liability if they can

demonstrate an adequate due diligence defense, i.e., that they have conducted a reasonable investigation as has been developed by the federal courts in their interpretation of Section 12(a)(2) of the Securities Act

CROWDFUND Act• Liability (cont’d)

– There is an expansive definition of the term “issuer” for purposes of the liability provisions. The term “issuer” includes any person who:

• is a director or partner of the issuer• is the principal executive officer or officers, the principal

financial officer, and controller or principal accounting officer of the issuer (or who occupies a similar status or performs a similar function) that offers or sells a security in 4(6) exempt offering

• offers or sells the security in such offering

• Liability (cont’d)– As is the case with any securities transaction, crowdfunding

exempt offerings also will be subject to the general anti-fraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder

– Although CROWDFUND preempts state blue sky laws, this amendment does not affect any state’s enforcement authority over an issuer, broker, dealer, or funding portal for fraud or deceit or unlawful conduct in 4(6) offerings or the filing or fee requirements of the securities regulator of the state in which the issuer maintains its principal place of business or in which purchasers of 50% or greater of the aggregate amount of the securities issued are residents

CROWDFUND Act

• Final Thoughts on 4(6) Crowdfunding– The Securities and Exchange Commission has 270 days to write

the rules and establish a new type of intermediary called a “funding portal” so investment crowdfunding will not be viable until Q1 or Q2 of 2013

– The start-up community had hoped for a way of raising money that would avoid complex legal and financial compliance and regulation. It is obvious that crowdfunding transactions will require both the advice of lawyers and accountants. Well they did not get what they wanted and chances are that once the SEC rules are promulgated, the process will be even more arcane and less straight-forward

CROWDFUND Act

General Solicitation for Private Placements and Changes to Reg A

Repeal of Ban on General Solicitation or General Advertising for Rule 506 Offerings

• Title II of the JOBS Act– Not currently effective - Directs the SEC to

amend its rules within 90 days of enactment (July 4, 2012)


• Rule 502 currently prohibits general solicitation or general advertising

• What is general solicitation?

– Advertisement in Wall Street Journal

– In the Matter of Kenman Corp. (SEC 1985)

• Materials sent to several different lists of potential investors (thousands of individuals)

– Executive officers of Fortune 500 companies, physicians in California, etc.

• SEC held that, because no “pre-existing relationship” the offer was general solicitation

– Mineral Lands Research & Marketing Corporation (No-Action Letter, 1985)

• Only pre-existing relationships that allow the issuer to determine the “financial circumstances or sophistication or are otherwise of “some duration and substance”

– Mere prior social relationships do not meet criteria

• “pre-existing relationship” is an important factor (but not only factor)

– “Pre-existing Relationship” test may be met by someone working for the issuer

• Interjects a gatekeeper into the process


• Repeal will allow general solicitation and general advertising in Rule 506 offerings– when sales (not offers) are only to accredited

investors– Issuers must take reasonable steps to “verify” that

investors are accredited (steps to be determined by the SEC)

• Comparable changes to be made to Rule 144A(d)(1)


• Any Rule 506 offering that uses general solicitation or general advertising will not be deemed a “public offering”

• These changes will be available to all issuers


• Pending SEC final rules implementing Title II of the JOBS Act, issuers should continue to comply with existing requirements.


• Broker-Dealer Status– The JOBS Act clarifies that a persons that maintain online

or other platforms to conduct Rule 506 offerings that will use general advertising or general solicitation will not be required to register as a broker-dealer provided:

• No transaction-based compensation;• Does not take possession of customer funds or

securities; and• Is not subject to a 1934 Act statutory disqualification


• Most debate likely to focus on the extent of an issuer’s verification of accredited investor status

• Today – mostly rely on self-certification and representations and warranties

• Waiting for SEC rules, but consequences of even one non-accredited investor would be severe

Exempt Public Offering Process – Reg A+

• Title IV of the JOBS Act• Dubbed Regulation A+ by come commentators• Not currently effective - directs the SEC to

amend its rules (no deadline for adoption)– With current pressure on the SEC related to

Dodd-Frank and other JOBS Act provisions, it may sit on the back-burner as the SEC tries to meet other tight rulemaking deadlines

Exempt Public Offering Process – Reg A

• Holds the most promise for smaller company capital raising

• Issuer will be able to sell up to $50 million in securities within a 12-month period without 1933 Act registration

• Said securities will not be “restricted securities”


• Said securities:– will not be “restricted securities”– can be offered and sold publicly– issuer may “test-the-waters”– Will be considered “covered securities” for MSMIA

purposes (not subject to state securities review) if: (i) offered and sold on a national securities exchange; or (ii) offered or sold only to “qualified purchasers”

– Any person offering or selling has Securities Act 12(a)(2) liability


• SEC may impose other conditions– Requirement that issuer file with the SEC/distribute to prospective

investors and offering statement• Description of issuer’s business and financial condition• Corporate governance principles• Intended use of proceeds• Other appropriate matters

– SEC may require Staff review of materials that are filed– SEC may require filed annual audited financials– SEC may require periodic disclosures

• SEC may either amend existing Reg A or adopt an entirely new exemption


• SEC may either amend existing Reg A or adopt an entirely new exemption

Emerging Growth Companies

• JOBS Act is intended to make it easier for companies to access capital markets by reducing the costs of going public – creates an “on-ramp” for companies to phase into certain of the compliance obligations associated with being a public company. Such companies are called “Emerging Growth Companies.”

• Phase in period lasts for five years or until the company has:– $1 billion in annual revenues;– becomes a large accelerated filer (market value of common

equity held by non-affiliates exceeds $700 million as of the last business day of the company’s most recently completed second quarter); or

– has issued more than $1 billion in non-convertible debt in rolling 3 year period.


• “On Ramp” / Phase In – Auditor attestation for Sec. 404(b) of Sarbanes-Oxley

extended from current transition period of 2 years to up to 5 years

– Prior to registration, only need to provide 2 years of audited financials

– Preempts any effort by PCOAB to require audit firm rotation for emerging growth companies (does not change audit partner rotation)

– Any new rules adopted by PCOAB will not apply to an audit of an emerging growth company unless the SEC determines its in the public interest


• “On Ramp” / Phase In (cont.)– Emerging Growth Companies are exempt

from “Say on Pay”– Exempt from disclosing median employee

comp vs. CEO comp (still waiting on final SEC rules for non-Emerging Growth Companies)

– Issues regarding selective opt in/out


• IPO Process– Research reports now may be issued before or at the same time

as an IPO– Greater ability to gauge interest of investors prior to IPO – can

communicate with QIBs and accredited investors who are institutions prior to filing registration statement

– Registration Statement can be kept confidential with SEC until 21 days before IPO road show begins

– SEC has 90 days to study Decimalization – should Emerging Growth Companies be quoted at prices greater than $0.01 but less than $0.10 per share

– SEC has 180 days to study Reg S-K to update, modernize and simplify the registration process

Revised Shareholder Thresholds for Registration Under the 1934 Act• Old rule – companies with 500 shareholders and $10

million in assets must register under the ’34 Act• New rule (effective April 5, 2012) – shareholder count

raised to 2,000 but no more than 500 can be non-accredited investors

• New rule does not count persons who received securities pursuant to an employee compensation plan in transactions exempt from registration requirements

• New rule exempts crowdfunding investors from shareholder cap (SEC to adopt rules within 270 days)

• Banks and Bank Holding Companies have had thresholds raised to 2,000 shareholders and may de-register if drop to less than 1,200 shareholders

Questions

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