Big Changes Are Coming

I’ve been practicing securities law for 19 years this year (phew!) and for the first time in my career I am excited about changes, big changes, on the horizon for small businesses.  I’m talking about the JOBS Act and its ground breaking crowdfunding bill which has now been signed into law.

A Whole New Exemption

Over the years I have consistently received calls from potential clients that wish to use the exemptions provided for in Regulation D to raise money for small or start up ventures.  Many of these individuals believe, mistakenly, that Regulation D provides them with a method to raise money.  It does not.  Regulation D only lays out rules to follow to utilize an exemption from the registration requirements in the Securities Act of 1933.  These rules include such items as limitations on the dollar amount raised; who you can raise money from, how you can raise money, prohibitions on advertising and solicitation, disclosure documents required, etc…  All of these rules are necessary and serve a function, but the rules do not provide any insight on how to actually go about raising the money.  For the first time in history, or at least my history, the government may fashion a system that not only sets out an exemption from registration, but provides the “how to raise the money” aspect as well.

Ok, so the JOBS Act doesn’t result in “pick your check up here” but it will allow entrepreneurs, innovators, job creators, and the world of small business to access capital markets in a way never before possible.  The crowdfunding bill provides for SEC regulations that will allow companies to utilize the internet to raise funds from a large number of smaller investors.  The bill removes SEC regulations prohibiting advertising and solicitation for private placements.

In short, companies will be able to raise small amounts of money either directly off their own website or using intermediaries set up for the purpose.  The exemption will likely be codified as a new and separate exemption under Regulation D and will include an overhaul of the current general provisions of Regulation D found in Rules 501-503.  The exemption will be limited to $1 million in any twelve (12) month period.

Crowdfunding Exemption

The exemption is really designed for start-ups and smaller companies that need seed capital.  Since the amount raised is per twelve months, companies need to plan accordingly.  Moreover, since a Company could end up with a couple hundred shareholders to raise $1mill, they will likely need a transfer agent to maintain shareholder records.   At a couple hundred shareholders per round of financing, this is not a route that a company will want to tap more than once or twice.  If a Company will need $30 mil in the next 2-4 years, crowdfunding is not viable, but if they need $2 mil in the same time frame, it is a workable option.

Attorneys for crowdfunding clients should make sure that the insiders maintain shareholder voting control under their state of incorporation to avoid problems getting shareholder approval for future financings or going public transactions.  Attorneys should carefully discuss future plans with their clients.  It is uncertain how venture capital firms, investment bankers and wall street in general will respond to companies that start off with a large shareholder base.  There will definitely be a learning curve, so companies that foresee the need to go the traditional IPO or wall street route within a few years should be cautious.  That doesn’t mean that they shouldn’t partake in the crowdfunding though.  I firmly believe that the markets will quickly adjust and find ways to move these companies up the food chain, where the product, revenues and interest exist.

Other than this brief statement, I will not devote time in this blog to the naysayers because I see too much positive potential and too much of a serious need for this bill to dilute with the negative.   The naysayers are concerned that the changes open the door to additional fraud and scams in the investment world.  There has always been and will likely always be financial crimes committed by the unscrupulous, and opportunistic fraudsters will always find a way to commit their crimes using our capital markets.   Part of progress is dealing with that reality, not ceasing progression.

I’ll discuss more on that in the next blog.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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