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Private Placement Memorandum (PPM) Templates- Why To Beware Most DIY, Discount or Free Forms

Posted by on Jun 3, 2012 in Private Placement Memorandums | 0 comments

A common issue faced by entrepreneurs, founders, start-ups, and other small businesses is how to get documents when they need to raise money for their venture or enter into various agreements, hire employees, or protect their intellectual property.  The cash strapped individuals often look to discount or free services online to help them do things like obtain sample templates, incorporate, or get other form documents they can use.  There are definitely times you can use these sample form templates or online services and there is a link to some document / forms websites, term sheet resources, and sample financing documents on my Top Startup Resources page.  There are private placement memorandum (commonly referred to as PPM) templates online that can give a starting point and I go over what a PPM is, why you need one, and what should be in one on this page. When it comes to do it yourself legal services, you can save money by doing certain things yourself.  Most lawyers don’t create a contract or other document from scratch in most cases, they have sample forms they have used in the past or they get samples through practice guides or other attorneys.  The service you are paying for with the attorney is to tailor the form to your specific needs; however, the additional invaluable service is their guidance and recommendations for other things that you need to consider. For example, if your friend offers to loan your newly formed corporation money, you may find a sample loan or promissory note template and just use that.  However, you may not know about state and federal laws that you could violate by putting in improper terms or failing to file the required securities exemption filings.  This can affect the future of your business and you could end up having to refund the money paid or may be prohibited from offering or selling any security in the future (this includes most forms of raising money, whether loan or sale of stock).  Another example is the online incorporation services that people use.  The founder may not realize that simply filing incorporation papers with the secretary of state.  There are securities law exemption filings usually required and failure to comply with record keeping, corporate governance, and corporate procedures can result in the founder having personal liability for the corporation’s debts or other obligations.  The founders suddenly find themselves losing the limited liability protections of the corporation and may even have to file a personal bankruptcy to avoid the liability. A PPM template could be used, but the disclosure of risks, securities law compliance, and other issues are those things that need to be changed to fit the specifics of the transaction taking place.  In addition, laws change over time and vary by state, so a template may have been fine in one state in 2001, but you have no idea if what you are getting really is the most up to date and local form you could use.  An example is the change recently made by the US Securities and Exchange Commission to the definition of an “accredited investor” which can affect qualifying for securities law exemptions and certain parts of a PPM or the host of related documents (which use usually don’t get with discount DIY services).  You...

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Crowdfunding Update- SEC Adopts New Rules for Investments under Reg A+

Posted by on Mar 27, 2015 in Uncategorized | 0 comments

Crowdfunding is going to continue to explode in the near future. On March 25, 2015, the SEC adopted new rules to implement the provisions of the JOBS Act and Regulation A surrounding raising capital up to $50 million by smaller companies and, most likely, raise that money online on their websites or through social media. (The rules don’t go into effect until 60 days after they are published in the Federal Register and here is a copy of the rules and the SEC Press Release).  The new changes have been called “Regulation A+” and hailed by many as significant improvements in giving smaller companies more access to capital. There are requirements for certain disclosures and filings with the SEC as well as registration of the websites with the SEC as funding portals like a securities “broker-dealer.”  There are also tiers for the companies that depend upon factors like the amount of money raised and state what the requirements will be for each tier.  The end result is that you are going to see much more investment opportunities on the internet and social media geared towards everyday consumers without the requirement that they be classified by higher wealth or income as “accredited investors”, so caveat emptor and let the buyer beware! For those who aren’t sure, what exactly is “Crowdfunding”?  Most of the discussion in this area involves securities laws.  When a company needs to raise money, they may offer an investment in the company by way of stock, LLC units, convertible debt, or other investments.  These are all securities covered by US and State law and regulated primarily by the US Securities and Exchange Commission.  The company does not need to be a publicly traded stock like a Facebook or Microsoft to worry about the SEC and state regulators.  Any company or person offering or selling stock or other “security” can be subject to regulation.  When companies want to raise capital without the expense of registering their stock with the SEC, they rely upon exemptions from registration.  Most of those exemptions limit companies to seeking investors who meet the definition of “accredited investors.”  These are basically people with over a $1 million net worth or whose income is over $200,000.  Smaller investors are often kept out of these investments by rules designed to protect them assuming that they don’t have the financial savvy to protect themselves.  Crowdfunding is an effort to raise money for a company or a cause from a large number of investors each investing a small amount of money.  It was difficult to use crowdfunding to seek investors for a company if you were limited to only finding “accredited investors” and fall under an exemption from registration.  The provisions of the JOBS Act and the rules that the SEC is issuing are meant to expand access to capital for smaller companies.  Part of the provisions of the JOBS Act were to allow and expand the use of crowdfunding.  Instead of a company raising $250,000 by seeking $25,000 each from 10 accredited investors, the company will now try to raise $250 each from 1,000 regular investors. It is hard to know the future impact of crowdfunding and the JOBS Act’s attempts to increase access to capital due to many possible areas for possible fraud or misleading of investors.  It looks...

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Don’t Go Advertising Your Funding Needs Just Yet

Posted by on Jul 23, 2013 in Dodd-Frank, SOX, JOBS, & Legislation, General Securities Law | 0 comments

Anyone who has been watching the regulatory environment for securities and fund raising over the last few years or even months is familiar with the changes coming from the JOBS Act.  On July 10, 2013, the SEC announced that they will implement rules following the JOBS Act requirement that the ban on general solicitation and advertising in private placements be lifted in certain circumstances. Although that sounds like good news, this was what the JOBS Act was intended to do when it was passed and the SEC is just now starting to implement rules based upon existing law.  The process is that the SEC proposes the rules to implement the provisions of the JOBS Act.  There is a public comment period and the rules go into effect 60 days after being published in the Federal Register.   This means the proposed rules are still not yet valid until that time frame has passed. The new rules require a Form D to be filed with the SEC 15 days prior to any general solicitation and materials about the proposed offering need to be provided to the SEC. Just like with crowdfunding, don’t listen to the hype and think that because the JOBS Act passed, people can start relying on crowdfunding exemptions.  The SEC has to fully implement the rules and procedures first. Here is the SEC Fact Sheet on the July 10th, 2013 proposed new rules:   July 10, 2013 Background Current Offering Process Companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Most of the exemptions from registration prohibit companies from engaging in general solicitation or general advertising – that is, advertising in newspapers or on the Internet among other things – in connection with securities offerings. Rule 506 of Regulation D is the most widelyused exemption from registration. In an offering that qualifies for the Rule 506 exemption, an issuer may raise an unlimited amount of capital from an unlimited number of “accredited investors” and up to 35 nonaccredited investors. Under SEC rules, accredited investors are individuals who meet certain minimum income or net worth levels, or certain institutions such as trusts, corporations, or charitable organizations that meet certain minimum asset levels. JOBS Act In April 2012, Congress passed the Jumpstart Our Business Startups Act (JOBS Act). Section 201(a)(1) of the JOBS Act directs the SEC to remove the prohibition on general solicitation or general advertising for securities offerings relying on Rule 506 provided that sales are limited to accredited investors and an issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors. By requiring the SEC to remove this general solicitation restriction, Congress sought to make it easier for companies to find investors and thereby raise capital. While issuers will be able to widely solicit and advertise for potential investors, the JOBS Act required the SEC to adopt rules that “require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.” In other words, there is no restriction on who an issuer can solicit, but an issuer faces restrictions on who is permitted to purchase its securities. Comments on the 2012 Proposal...

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SEC & CFTC Adopt Rules For Definitions of Terms in Derivatives Transactions under Dodd-Frank

Posted by on Apr 18, 2012 in Dodd-Frank, SOX, JOBS, & Legislation | 0 comments

On April18, 2012, the SEC, jointly with the Commodities Futures Trading Commission (CFTC), implemented part of the Dodd-Frank Act by adding definitions for use in interpreting what are swaps-related transactions. The new Rule 3a71-1 under the Securities Exchange Act defines the term “security-based swap dealer” consistent with the criteria set forth in the Dodd-Frank Act as someone who: Holds themselves out as a dealer in security-based swaps. Makes a market in security-based swaps. Regularly enters into security-based swaps with counterparties as an ordinary course of business for their own account. Engages in activity causing them to be commonly known in the trade as a dealer or market maker in security-based swaps. There is an exception for those who are only involved in a de minimis quantity of these transactions to not be held to this rule.  The rule will go into effect 60 days after the rule is published in the Federal Register. You can read the entire release and rule through the SEC’s website at:...

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What Do the JOBS Act, Reg D Change, and Crowdfunding Bills Actually Say? Which bill is right? Read H.R. 3606

Posted by on Apr 2, 2012 in Dodd-Frank, SOX, JOBS, & Legislation | 0 comments

I have noticed quite a bit of confusion in blogs when discussing crowdfunding, the JOBS Act, and other recent legislation regarding small business, startups, and emerging growth companies.  Even respected news organizations don’t get the specifics exactly right about what this legislation actually says, so I thought I would set the record straight. President Obama is set to sign H.R. 3606 this week.  The best way to know exactly what this bill says is to read it, despite the somewhat dense language and references to other parts of U.S. law.  Here is a link to the actual PDF format of H.R. 3606.  This is an easier to read version I put together on my site with hyperlinks to each section.  For an overview and summary of this bill and its history you can read here.  These are links directly to the information provided by Congress.  Some of the confusion has been that the legislative process involves a very confusing system where bills are introduced, amended, and sometimes added to existing bills.  That was the case with the JOBS Act and the crowdfunding provisions.  H.R. 2930 was the original crowdfunding bill that passed the U.S. House and went to the Senate, but did not actually pass the Senate.  After adding and deleting portions from various amended versions similar to H.R. 2930, the crowdfunding and other provisions were all put into one bill called H.R. 3606.  This passed the Senate and then went back to the U.S. House after amendments to be passed.  It has passed and was forwarded to the President for signature on March 27, 2012.  He is expected to sign it this week. Title I of the bill implements reduced reporting and other limited disclosure requirements for emerging growth companies (those with under $1 billion in gross annual revenue and haven’t hit the other limitations to take them out of this classification). It also sets out changes to Regulation S-K and actions to be taken by the SEC within 180 days to ease the burden on these small to middle market companies to register or comply with SEC rules. Title II provides the ability to use general advertising and solicitation by companies of investors if they are relying upon a Reg D Rule 506 exemption for that issuance of securities, but all investors must be accredited.  Rule 506 previously allowed large private fundraising by companies, but the investor would need to meet the definition of accredited investor or what is referred to as a sophisticated investor if they were not accredited (See recent amendment to Accredited Investor definition).  Now, the company can still raise money through non-accredited sophisticated investors; however, if they do this, they cannot use general advertising or solicitation. Title III discusses crowdfunding, defines it, and places certain requirements on the issuer (company issuing the security in exchange for funding) and any intermediary used to assist in the fund raising process, also called a “funding portal.”  Also of note, the funding portal has requirements regarding registering with the SEC and they cannot compensate a so-called finder for bring the investors to the funding portal.  Many people refer to the example of Kickstarter, but with the change that now the website would sell stock instead of a “pledge” or gift to large numbers of investors with small...

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“Emerging Growth Companies”- JOBS Act May Provide Eased Regulations

Posted by on Apr 2, 2012 in Dodd-Frank, SOX, JOBS, & Legislation | 0 comments

With H.R. 3606, or most commonly referred to as the “JOBS” Act (Bill Summary |  Bill Text PDF), likely to be signed into law this week by President Obama, there are some new changes that may be of help to startup and small companies.  In addition to the so-called crowdfunding exemption from securities registration which allows pooling of small amounts from investors to fund a company, the JOBS Act puts in place regulations that carve out a category called “emerging growth companies” which have an intermediate level of reporting obligations with the SEC.  It is between the level of disclosures required for a fully reporting large company and a private, non-reporting company.  This could be a very good help for these small to middle market companies to ease the burden of time and expense in being a fully reporting company. An emerging growth company is defined as a company with less than $1 billion in annual gross revenue; however, the company loses that status upon hitting certain targets related to the amount of debt securities issued, after 5 years of first having sold stock per an effective registration statement, or upon being declared a large accelerated filer under SEC rules. The new rules for an emerging growth company (EGC) is to exclude it from some of the restrictions imposed under the Sarbanes-Oxley Act or Dodd-Frank Act.  EGCs are excluded from the requirements of say-on pay executive compensation disclosures and other proxy disclosures under Dodd-Frank.  EGCs are also not required to comply with the internal controls audit requirements of SOX.  The JOBS Act also requires the SEC to review Regulation S-K and make any changes to make it easier and less costly for companies to register their securities under that regulation.  It is not required to implement those, but the SEC must transmit its recommendations for streamlining registration of EGC securities within 180 days of implementation of the JOBS Act.  An EGC need not provide more than the last 2 years audited financial statements in an IPO registration statement and further reporting obligations do not need to include the selected financial data normally required under Section 229.301 of the Code of Federal Regulations under Regulation S-K.  However, smaller reporting companies were already excluded from this requirement under Section 229.10(f)(1) for those companies that meet the$75 million in public float or $50 million in annual revenue test. It is hard to tell how much actual impact this will have or what the SEC will propose for further ways to reduce the burden on these small to middle-market companies.  The EGCs still have to hire auditors and law firms, even though they may not have to fully comply with all of the SOX or Dodd-Frank requirements at first.  The cost and time to prepare more than 2 years audited financials, disclose compensation ratios, or providing selected financial data may not be a large incremental increase versus standard disclosures and audit requirements.  It will probably end up being a recommended best practice to simply get used to going through those corporate governance motions and disclosures just to be prepared for the future...

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To Stagger or Not to Stagger Your Board of Directors, That is the Question

Posted by on Mar 23, 2012 in Dodd-Frank, SOX, JOBS, & Legislation | 0 comments

One question faced by companies from startup through Fortune 500 status is whether they should stagger or classify their board of directors.  Staggering or classifying occurs when the corporation sets up voting for election of only a minority of members of the board every year, so it often takes several years to replace an entire board.  This is viewed as a good takeover defense and also argued to be good for the corporation because frequent changes of directors can result in corporate policy and corporate governance changing more often or more dramatically. Those against it feel that it doesn’t give shareholders the ability to make major changes when problems arise with the current board’s decisions and it entrenches existing corporate policy and management to not as easily allow for necessary change.  Although some would downplay trying to make this about shareholder rights versus management or existing structure, that is a major factor of the argument. Originally, corporations would implement a simple once a year vote of shareholders for either current or new directors.  These types of corporate governance decisions are put into articles of incorporation, bylaws, or state corporate law, although most commonly in the company’s bylaws.  The idea of staggered boards was implemented within the last several decades as essentially a takeover defense, although they are now common for corporate stability.  There is no right answer at this point, although legislative changes like SOX and Dodd-Frank continue to expand shareholder protections and rights to deal with things like “Too Big to Fail,” the Madoff Scam, and other shakeups. The battle continues with a war of words between Harvard Law’s Shareholders Rights Project and law firm Wachtell, Lipton, Rosen, & Katz.  The firm continues to argue for staggering and that it is not just about takeover defense.  Harvard’s project argues that staggering needs to be eliminated to get rid of low valuations and bad corporate decision-making.  Wachtell says there is no correlation between staggered boards and bad decision-making or lower company valuations.  The project has gotten about a third of the Fortune 500 companies to agree to bring forward proposals to get rid of staggered boards. In addition, Dodd-Frank is implementing shareholders ability to weigh in on corporate governance and ways to provide nominations for the board of directors (instead of current management simply proposing who they recommend you vote for on their annual proxy), so the trend is definitely heading towards shareholder rights. So what should you choose for your board?  I still think staggered boards have a purpose and are not directly correlated to bad decision-making, but they are often used, whether intentionally or indirectly, to entrench current policy and management.  With a startup or emerging growth company, you will be making major changes in the direction of the company on a frequent basis and need to add, remove, or change directors on the fly.  This can be done with provisions in the bylaws that allow for removal or change in directors or adding directors to increase the number on the board, not having to wait for the annual shareholder meeting and proxy process.  Founders should realize that as the company increases in number of shareholders during fund raising and growth that it often becomes more difficult to make major changes in things like how corporate governance...

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Crowdfunding Passed Senate but Reduced By Bill Amendment

Posted by on Mar 22, 2012 in Dodd-Frank, SOX, JOBS, & Legislation | 0 comments

H.R. 2930, one part of the multi-bill JOBS Act being pushed through Congress, was to allow more eased securities regulation of so-called crowdfunding.  Some have argued that sites like Kickstarter or others could change their business model (currently only accepts gifts or donations, called pledges, to raise money) to help companies raise money for companies in exchange for stock in that company.  Currently, that model would be prohibited under securities laws as general advertising and public sales of stock are not allowed, especially through an intermediary, with certain exceptions like using a registered broker-dealer or registering the stock with the SEC. H.R. 2930 passed the U.S. House last year, but was stuck in the Senate until today.  The Senate passed the JOBS Act, including H.R. 2930, but in amended form so that it must go back to the House for another vote.  The prevailing thought is that it will easily pass, even with this amendment, and become law soon. The amendment puts more limitations on how crowdfunding can be used.  Previously, a company could get up to $10,000 per investor to raise a total of $1 million in a 12 month period, or up to $2 million if audited financial statements are provided to investors.  Now the total raised would be capped at $1 million and certain financial disclosures to investors would be required in all cases, such as financial statements certified by the CEO and other descriptions of the business.  Also, intermediaries used to help bring in this money would now need to be registered with the SEC as a broker-dealer or funding portal, as before they would not need to be a registered broker-dealer. The term funding portal will start to be heard much more as it will be used by intermediaries to help raise money and the newly proposed definition is: Definition.–Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended by adding at the end the following: “(80) FUNDING PORTAL.–The term `funding portal’ means any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to section 4(6) of the Securities Act of 1933 (15 U.S.C. 77d(6)), that does not– “(A) offer investment advice or recommendations; “(B) solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal; “(C) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; “(D) hold, manage, possess, or otherwise handle investor funds or securities; or “(E) engage in such other activities as the Commission, by rule, determines appropriate.”. It sounds like funding portal will be a less stringent bar to overcome than registering as a broker-dealer; however, it is a step in the right direction to cut down on the potential for scam artists stepping unregulated in to raising money through websites.  It may reduce the amount of people and situations previously described by Columbia Law Professor Coffey Jr. as “every barroom in America might come to be populated by a character, looking something like Danny DeVito, obnoxiously trying to sell securities to his fellow patrons. He could provide each fellow patron with a business card that noted that the securities carried high...

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Insider Trading Crackdown on Congress- STOCK Act | H.R. 1148 S.1871

Posted by on Mar 22, 2012 in Dodd-Frank, SOX, JOBS, & Legislation | 0 comments

The Stop Trading on Congressional Knowledge Act (STOCK) has now passed both the U.S. House and Senate and should be signed into law by the president very soon. (Actual Text | Bill Summary & Status) H.R. 1148 or Senate Version S.1871 is the bill that seeks to impose heavier restrictions on insider trading that is done by or is connected to members of congress, federal employees, or employees of congress. Insider trading is covered by the Securities Act of 1934 and other related federal legislation and rules by the SEC and CFTC. It occurs when someone uses inside information as a basis to trade in stocks, commodities, or other types of securities. Inside information is defined as material non-public information. An example would be someone who works for a public company, gains information about something about to happen with that company that has not been disclosed to the public (e.g. significantly increased profits, new products about to be launched, etc.), and trades based upon that information. This can also be extended to include what is referred to as “tipper-tippee” insider trading where the insider tells their friend or some other outside person about this inside information for them to use to trade a make a gain. The famous example is Martha Stewart who received insider tips from brokers or other people with knowledge in order to trade and make money before the public knew about the inside information. The point is to level the playing field so that well connected people can’t gain an advantage over the average public to get in prior to news being released. STOCK seeks to extend specifically liability for insider trading to inside information obtained: “(1) knowingly from a Member or employee of Congress, (2) by reason of being a Member or employee of Congress, or (3) from other federal employees and derived from their federal employment.” It also “amends the Code of Official Conduct of the Rules of the House of Representatives to prohibit any Member, officer, or employee of the House from disclosing material nonpublic information relating to any pending or prospective legislative action relating to any publicly-traded company or to any commodity if such person has reason to believe that the information will be used to buy or sell the securities of that publicly traded company or that commodity for future delivery based on such information.” It also extends certain required disclosures regarding lobbying activity under the Lobbying Disclosure Act of 1995 to include more information about legislative contacts and activities. I don’t know that the SEC and the government didn’t already have the tools necessary to indict and prosecute members of Congress under things like “tipper-tippee” liability, but this expands things and makes it clear the intent to crack down on this type of unfair...

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SEC No Action Ruling Re: Shareholder Proxy Material Exclusions

Posted by on Mar 14, 2012 in Dodd-Frank, SOX, JOBS, & Legislation | 0 comments

Good discussion in this link about the implementation of Dodd-Frank when it comes to the SEC ruling on attempts by public companies to limit what they have to do to allow shareholders to add nominations to proxy materials. Click Here (External Link)

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