2014 Nuts & Bolts Seminar Des Moines

Transcription

1 2014 Nuts & Bolts Seminar Des Moines TRANSACTIONAL TRACK Securities 4:00 p.m.- 5:00 p.m. Presented by Joe Leo BrownWinick 666 Grand Avenue, Suite 2000 Des Moines, IA Phone: TUESDAY, OCTOBER 28, 2014

2 2014 NUTS AND BOLTS WHAT YOU NEED TO KNOW BEFORE YOUR CLIENTS RAISE CAPITAL Joe Leo BrownWinick 666 Grand Avenue, Suite 2000 Des Moines, IA Telephone: Facsimile:

3 Introduction April 2012 Congress passes and the President signs the Jumpstart Our Business Startups Act ( JOBS Act ). Intent was to expand capital markets in the United States by liberalizing some of the capital formation rules. For the most part, JOBS Act painted with broad strokes and directed the Securities and Exchange Commission ( SEC ) to fill in the details through regulations. Some regulations have been issued, some have not. JOBS Act changes some of the fundamental rules related to exempt securities offerings.

4 Securities Laws Overview Both State and Federal Securities Laws. State laws are frequently referred to as Blue Sky laws. Federally, most common securities laws are the: Securities Act of 1933 (the Securities Act ) Securities Exchange Act of 1934 (the Exchange Act )

5 Federal Securities Laws Other less common Federal Securities Laws: Investment Company Act 1940 Investment Adviser s Act 1940 Trust Indenture Act 1939 Notice a theme? Anything come to mind about this period of United States history?

6 What is a Security? Broadly defined by the securities laws. Any instrument, transaction or scheme where the investor has: An expectation of profits; From a common enterprise; Predominantly from the efforts of others.

7 General Rule The general rule of selling securities is you must either register the security (both with state regulators and the SEC) or qualify for an exemption from registration. Registration is required in each state where you offer OR sell securities. It is possible for the sale of a security to be exempt at the Federal level but not the State level and vice versa. Due to the expense of registering securities offerings, most securities offerings are conducted in reliance on an exemption.

8 Federal Securities Exemptions At the Federal level, there are both exempt securities and there are exempt securities transactions. Exempt securities can be sold without registration, regardless of the nature of the transaction. Exempt transactions relate to the sale of securities that would require registration under most circumstances, but registration is not required because of some aspect of the underlying transaction that makes it exempt.

9 Exempt Securities Examples of exempt securities found in Section 3 of the Securities Act: Securities issued by the United States or any of its states (government bonds); Securities issued by non-profits; Securities issued by banks and savings and loans; Most importantly, securities which are only offered AND sold to residents of a single state (Section 3(a)(11) of Securities Act); A lot of other securities that are very specialized.

10 Exempt Transactions Examples of exempt transactions found in Section 4 of the Securities Act: Section 4(a)(1) non-issuer transactions by people other than underwriters or dealers; Section 4(a)(2) transactions by an issuer NOT INVOLVING A PUBLIC OFFERING; Section 4(a)(5) Federal accredited investor exemption; Section 4(a)(6) Crowdfunding exemption.

11 Material Provisions of JOBS Act Created a new class of SEC registered companies called emerging growth company. Directed SEC to adopt rules allowing general solicitation and general advertising under Regulation D, Rule 506 for capital raises involving only accredited investors. Directed SEC to implement Crowdfunding Exemption. Changed the thresholds for companies to register with the SEC through the Exchange Act.

12 Regulation D Regulation D was adopted by the SEC to codify some of its interpretive guidance on securities exemptions. Regulation D provides safe harbor rules for issuers to follow to assure that the offering is exempt from registration. Most commonly used exemption is in Regulation D, Rule 506.

13 Important Attributes of 506 Offering Rule 506 offerings most common for several reasons: Preempts state law (states only allowed to require notice filing and filing fee) Most flexible exemption (unlimited amount of capital and unlimited accredited investors) Codifies Section 4(a)(2) of the Securities Act for offerings not involving any public offering.

14 Pre-JOBS Act Exemptions Federal Rule 504, 505 and 506 State Self-Effecting Exemptions Federal Covered Security Exemptions

15 Requirements 506 Offering Pre-JOBS Act General solicitation and general advertising prohibited. Allows sales to unlimited number of accredited investors and up to 35 non-accredited investors. Most common types of accredited investors: $200,000 individual income/$300,000 joint income $1,000,000 or more in assets (excluding equity in primary residence) Directors and officers Investors essentially self-certify as accredited.

16 Self-Certification of Accredited Self-certification is the norm for pre-jobs Act private offerings. This self-certification was accomplished by: A pre-existing business relationship with the investor; and A subscription agreement which included an accredited investor questionnaire. Post JOBS Act, this method may change for some offerings, but it will continue for some.

17 New Rule 506(c) What it does: Allows for general solicitation and advertising if only selling to accredited investors. Requires the issuer to take reasonable steps to verify accredited status of investors. Provides non-exclusive list of methods for issuers to verify accredited investors.

18 Reasonable Steps to Determine Accredited Status Under the old rules, issuers had to reasonably believe that the investors participating were accredited. Investors Questionnaire Pre-existing relationship Under Rule 506(c), these old methods MAY not be enough in all circumstances.

19 Accredited Verification SEC has adopted a principles-based guidance on how verify accredited status. SEC provided a list of factors to be considered: The nature of the purchaser The nature and amount of information about the purchaser The nature of the offering

20 Nature of the Purchaser Certain purchasers require less verification. Certain very wealthy individuals (Warren Buffet clause) Broker-dealers or other financial professionals Investment companies Employee benefit plans Banks Business development companies

21 Nature and Amount of Information About the Purchaser SEC s position is that the more information the issuer has that the purchaser is accredited, the fewer verification steps are required. If the issuer has no information about the potential purchaser, likely require full verification discussed below.

22 Nature of the Offering If the issuer solicits investors more broadly, may require additional verification. For example, if solicitations are sent by websites, social media or , the SEC may look for a higher level of verification.

23 Non-Exclusive List of Verification Procedures Not the only way to accomplish the verification. High minimum investment Grandfather provision Other factors Cannot luck into the correct determination Various categories of accredited investors not covered. New services to provide verification for a fee.

24 Non-Exclusive List of Verification Methods Verification of Income Requires issuer to review tax returns and certification Verification of Net Worth Requires listing of assets and liabilities Requires a commercial credit check Verification by Third Party Broker-dealer, investment advisor, attorney or CPA Grandfather provision

25 Impact of 506(c) Fundamentally changes one of the longstanding rules of private securities offerings. Limits the ability of the issuer to sell to nonaccredited investors. Additional compliance due to the accredited investor verification. Change strategy for exempt offerings. What it does not do affect the Rule 504 and 505 exemptions and other than the bad actor rules does not affect traditional 506 exemptions.

26 Strategy 506(c) Offerings May not want to start with a 506(c) exemption. Inability to stack other exemptions. Inability to sell to non-accredited investors. Additional compliance burdens. Provides additional cover for 506(b) offerings only to accredited investors. Precludes using certain state exemptions. Additional filing fees.

27 Bad Actor Disqualification Prevents certain bad actors from relying on the Rule 506 exemption. Bad actors are those who have committed certain types of indiscretions which for the most part relate to offering securities or other related businesses. The restriction is applicable to the company issuing securities itself as well as other insiders.

28 Bad Actor Disqualification (cont.) The disqualification provisions apply to the following covered persons : The issuer and any predecessor of the issuer or affiliated issuer; Any director, executive officer, other officer of the issuer participating in the offering process, and any general partner or managing member of the issuer; Any beneficial owner of 20 percent or more of any class of the issuer s voting equity securities, calculated on the basis of voting power;

29 Bad Actor Disqualification (cont.) Any investment manager of an issuer that is a fund and any director, executive officer, officer of such investment manager; Any promoter connected with the issuer in any capacity at the time of the sale; Any person who has been or will be paid, directly or indirectly, remuneration for solicitation of purchasers in a securities offering (a compensated solicitor ); or Any director, executive officer, other officer participating in the offering of any compensated solicitor, and any general partner or managing member of any compensated solicitor.

30 Disqualification Events Rule 506(d) includes the following categories of disqualifying events: Criminal convictions; Court injunctions and restraining orders; Final orders of certain state regulators (such as securities, banking and insurance) and federal regulators; SEC disciplinary orders relating to brokers, dealers, municipal securities dealers, investment advisers, and investment companies and their associated persons; Certain SEC cease-and-desist orders; Suspension or expulsion from membership in, or suspension or barring from association with a member of, a securities self-regulatory organization; SEC stop orders and orders suspending a Regulation A exemption; and U.S. Postal Service false representation orders.

31 Disqualification Effective Date Infractions that occur after effective date lead to disqualification. Infractions that occur before effective date have to be disclosed. There is an appeal process where the SEC can waive the disqualification in certain circumstances.

32 What Issuers Need to Do Insiders and others involved in offering need to complete disqualification questionnaires. Issuer needs to use reasonable care to determine whether a disqualification exists. No strict liability for issuer.

33 Crowdfunding Exemption JOBS Act created a radically different exemption from securities registration. Intent to leverage the Kickstarter model for equity investments. Allows the use of social media and the internet to raise capital from a large number of investors in relatively small amounts. NOT YET LEGAL BUT COMING SOON...

34 Proposed Crowdfunding Rules New Section 4(6) under the Securities Act Offering limits for issuers: $1 million every 12 months (includes amounts sold per crowdfunding and using other exemptions)

35 Investor Limits Investor limits are for a 12 month period. Individuals who have annual income or net worth of less than $100,000 can invest: Greater of $2,000 or 5% of their annual income or net worth. Individuals who have annual income or net worth of more than $100,000 can invest: Greater of 10% of annual income, or 10% of net worth, not to exceed $100,000. These limits will be reviewed by the SEC once every 5 years.

36 Funding Portals Crowdfunding investments must be made through SEC registered portals. These portals are designed to be third-party intermediaries to provide investor protection. Likely ready to go pending the final SEC regulations.

37 Crowdfunding Disclosures Companies raising capital through Crowdfunding will be required to provide disclosures. Less than full registration disclosures. Provide standardized information about the investment.

38 QUESTIONS?

39 Website: Toll Free Phone Number: OFFICE LOCATIONS: 666 Grand Avenue, Suite 2000 Des Moines, Iowa Telephone: (515) Facsimile: (515) Franklin Place Pella, Iowa Telephone: (641) Facsimile: (641) DISCLAIMER: No oral or written statement made by BrownWinick attorneys should be interpreted by the recipient as suggesting a need to obtain legal counsel from BrownWinick or any other firm, nor as suggesting a need to take legal action. Do not attempt to solve individual problems upon the basis of general information provided by any BrownWinick attorney, as slight changes in fact situations may cause a material change in legal result.

40 2014 NUTS AND BOLTS WHAT YOU NEED TO KNOW BEFORE YOUR CLIENTS RAISE CAPITAL Joe Leo BrownWinick 666 Grand Avenue, Suite 2000 Des Moines, IA Telephone: Facsimile: Introduction April 2012 Congress passes and the President signs the Jumpstart Our Business Startups Act ( JOBS Act ). Intent was to expand capital markets in the United States by liberalizing some of the capital formation rules. For the most part, JOBS Act painted with broad strokes and directed the Securities and Exchange Commission ( SEC ) to fill in the details through regulations. Some regulations have been issued, some have not. JOBS Act changes some of the fundamental rules related to exempt securities offerings. Securities Laws Overview Both State and Federal Securities Laws. State laws are frequently referred to as Blue Sky laws. Federally, most common securities laws are the: Securities Act of 1933 (the Securities Act ) Securities Exchange Act of 1934 (the Exchange Act ) 1

41 Federal Securities Laws Other less common Federal Securities Laws: Investment Company Act 1940 Investment Adviser s Act 1940 Trust Indenture Act 1939 Notice a theme? Anything come to mind about this period of United States history? What is a Security? Broadly defined by the securities laws. Any instrument, transaction or scheme where the investor has: An expectation of profits; From a common enterprise; Predominantly from the efforts of others. General Rule The general rule of selling securities is you must either register the security (both with state regulators and the SEC) or qualify for an exemption from registration. Registration is required in each state where you offer OR sell securities. It is possible for the sale of a security to be exempt at the Federal level but not the State level and vice versa. Due to the expense of registering securities offerings, most securities offerings are conducted in reliance on an exemption. 2

42 Federal Securities Exemptions At the Federal level, there are both exempt securities and there are exempt securities transactions. Exempt securities can be sold without registration, regardless of the nature of the transaction. Exempt transactions relate to the sale of securities that would require registration under most circumstances, but registration is not required because of some aspect of the underlying transaction that makes it exempt. Exempt Securities Examples of exempt securities found in Section 3 of the Securities Act: Securities issued by the United States or any of its states (government bonds); Securities issued by non-profits; Securities issued by banks and savings and loans; Most importantly, securities which are only offered AND sold to residents of a single state (Section 3(a)(11) of Securities Act); A lot of other securities that are very specialized. Exempt Transactions Examples of exempt transactions found in Section 4 of the Securities Act: Section 4(a)(1) non-issuer transactions by people other than underwriters or dealers; Section 4(a)(2) transactions by an issuer NOT INVOLVING A PUBLIC OFFERING; Section 4(a)(5) Federal accredited investor exemption; Section 4(a)(6) Crowdfunding exemption. 3

43 Material Provisions of JOBS Act Created a new class of SEC registered companies called emerging growth company. Directed SEC to adopt rules allowing general solicitation and general advertising under Regulation D, Rule 506 for capital raises involving only accredited investors. Directed SEC to implement Crowdfunding Exemption. Changed the thresholds for companies to register with the SEC through the Exchange Act. Regulation D Regulation D was adopted by the SEC to codify some of its interpretive guidance on securities exemptions. Regulation D provides safe harbor rules for issuers to follow to assure that the offering is exempt from registration. Most commonly used exemption is in Regulation D, Rule 506. Important Attributes of 506 Offering Rule 506 offerings most common for several reasons: Preempts state law (states only allowed to require notice filing and filing fee) Most flexible exemption (unlimited amount of capital and unlimited accredited investors) Codifies Section 4(a)(2) of the Securities Act for offerings not involving any public offering. 4

44 Pre-JOBS Act Exemptions Federal Rule 504, 505 and 506 State Self-Effecting Exemptions Federal Covered Security Exemptions Requirements 506 Offering Pre-JOBS Act General solicitation and general advertising prohibited. Allows sales to unlimited number of accredited investors and up to 35 non-accredited investors. Most common types of accredited investors: $200,000 individual income/$300,000 joint income $1,000,000 or more in assets (excluding equity in primary residence) Directors and officers Investors essentially self-certify as accredited. Self-Certification of Accredited Self-certification is the norm for pre-jobs Act private offerings. This self-certification was accomplished by: A pre-existing business relationship with the investor; and A subscription agreement which included an accredited investor questionnaire. Post JOBS Act, this method may change for some offerings, but it will continue for some. 5

45 New Rule 506(c) What it does: Allows for general solicitation and advertising if only selling to accredited investors. Requires the issuer to take reasonable steps to verify accredited status of investors. Provides non-exclusive list of methods for issuers to verify accredited investors. Reasonable Steps to Determine Accredited Status Under the old rules, issuers had to reasonably believe that the investors participating were accredited. Investors Questionnaire Pre-existing relationship Under Rule 506(c), these old methods MAY not be enough in all circumstances. Accredited Verification SEC has adopted a principles-based guidance on how verify accredited status. SEC provided a list of factors to be considered: The nature of the purchaser The nature and amount of information about the purchaser The nature of the offering 6

46 Nature of the Purchaser Certain purchasers require less verification. Certain very wealthy individuals (Warren Buffet clause) Broker-dealers or other financial professionals Investment companies Employee benefit plans Banks Business development companies Nature and Amount of Information About the Purchaser SEC s position is that the more information the issuer has that the purchaser is accredited, the fewer verification steps are required. If the issuer has no information about the potential purchaser, likely require full verification discussed below. Nature of the Offering If the issuer solicits investors more broadly, may require additional verification. For example, if solicitations are sent by websites, social media or , the SEC may look for a higher level of verification. 7

47 Non-Exclusive List of Verification Procedures Not the only way to accomplish the verification. High minimum investment Grandfather provision Other factors Cannot luck into the correct determination Various categories of accredited investors not covered. New services to provide verification for a fee. Non-Exclusive List of Verification Methods Verification of Income Requires issuer to review tax returns and certification Verification of Net Worth Requires listing of assets and liabilities Requires a commercial credit check Verification by Third Party Broker-dealer, investment advisor, attorney or CPA Grandfather provision Impact of 506(c) Fundamentally changes one of the longstanding rules of private securities offerings. Limits the ability of the issuer to sell to nonaccredited investors. Additional compliance due to the accredited investor verification. Change strategy for exempt offerings. What it does not do affect the Rule 504 and 505 exemptions and other than the bad actor rules does not affect traditional 506 exemptions. 8

48 Strategy 506(c) Offerings May not want to start with a 506(c) exemption. Inability to stack other exemptions. Inability to sell to non-accredited investors. Additional compliance burdens. Provides additional cover for 506(b) offerings only to accredited investors. Precludes using certain state exemptions. Additional filing fees. Bad Actor Disqualification Prevents certain bad actors from relying on the Rule 506 exemption. Bad actors are those who have committed certain types of indiscretions which for the most part relate to offering securities or other related businesses. The restriction is applicable to the company issuing securities itself as well as other insiders. Bad Actor Disqualification (cont.) The disqualification provisions apply to the following covered persons : The issuer and any predecessor of the issuer or affiliated issuer; Any director, executive officer, other officer of the issuer participating in the offering process, and any general partner or managing member of the issuer; Any beneficial owner of 20 percent or more of any class of the issuer s voting equity securities, calculated on the basis of voting power; 9

49 Bad Actor Disqualification (cont.) Any investment manager of an issuer that is a fund and any director, executive officer, officer of such investment manager; Any promoter connected with the issuer in any capacity at the time of the sale; Any person who has been or will be paid, directly or indirectly, remuneration for solicitation of purchasers in a securities offering (a compensated solicitor ); or Any director, executive officer, other officer participating in the offering of any compensated solicitor, and any general partner or managing member of any compensated solicitor. Disqualification Events Rule 506(d) includes the following categories of disqualifying events: Criminal convictions; Court injunctions and restraining orders; Final orders of certain state regulators (such as securities, banking and insurance) and federal regulators; SEC disciplinary orders relating to brokers, dealers, municipal securities dealers, investment advisers, and investment companies and their associated persons; Certain SEC cease-and-desist orders; Suspension or expulsion from membership in, or suspension or barring from association with a member of, a securities self-regulatory organization; SEC stop orders and orders suspending a Regulation A exemption; and U.S. Postal Service false representation orders. Disqualification Effective Date Infractions that occur after effective date lead to disqualification. Infractions that occur before effective date have to be disclosed. There is an appeal process where the SEC can waive the disqualification in certain circumstances. 10

50 What Issuers Need to Do Insiders and others involved in offering need to complete disqualification questionnaires. Issuer needs to use reasonable care to determine whether a disqualification exists. No strict liability for issuer. Crowdfunding Exemption JOBS Act created a radically different exemption from securities registration. Intent to leverage the Kickstarter model for equity investments. Allows the use of social media and the internet to raise capital from a large number of investors in relatively small amounts. NOT YET LEGAL BUT COMING SOON... Proposed Crowdfunding Rules New Section 4(6) under the Securities Act Offering limits for issuers: $1 million every 12 months (includes amounts sold per crowdfunding and using other exemptions) 11

51 Investor Limits Investor limits are for a 12 month period. Individuals who have annual income or net worth of less than $100,000 can invest: Greater of $2,000 or 5% of their annual income or net worth. Individuals who have annual income or net worth of more than $100,000 can invest: Greater of 10% of annual income, or 10% of net worth, not to exceed $100,000. These limits will be reviewed by the SEC once every 5 years. Funding Portals Crowdfunding investments must be made through SEC registered portals. These portals are designed to be third-party intermediaries to provide investor protection. Likely ready to go pending the final SEC regulations. Crowdfunding Disclosures Companies raising capital through Crowdfunding will be required to provide disclosures. Less than full registration disclosures. Provide standardized information about the investment. 12

52 QUESTIONS? Website: Toll Free Phone Number: OFFICE LOCATIONS: 666 Grand Avenue, Suite 2000 Des Moines, Iowa Telephone: (515) Facsimile: (515) Franklin Place Pella, Iowa Telephone: (641) Facsimile: (641) DISCLAIMER: No oral or written statement made by BrownWinick attorneys should be interpreted by the recipient as suggesting a need to obtain legal counsel from BrownWinick or any other firm, nor as suggesting a need to take legal action. Do not attempt to solve individual problems upon the basis of general information provided by any BrownWinick attorney, as slight changes in fact situations may cause a material change in legal result. 13