PUBLIC AND PRIVATE OFFERINGS UNDER THE JOBS ACT

GEORGE LEE LEE & STONE LLP June 25, 2012 copyright 2012 Lee & Stone LLP

Presenter Info

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 George Lee is a founding partner of Lee & Stone LLP, a boutique law firm representing the investment management community in transactional, securities and regulatory matters. Previously, he served as General Counsel of Greenway Capital, a Texas registered investment adviser and worked in private practice at major international law firms in New York, Dallas, and Houston. Mr. Lee graduated from the University of Texas School of Law in 1987, and received his BA in 1983 from Carleton College. He is a member of the Texas and New York bars. Mr. Lee is also a member of the College of the State Bar of Texas and is active in the Texas and Dallas Bar Association Securities Sections, The Securities Law Committee of the Texas Business Law Section and the Dallas Fort Worth Compliance Roundtable.

Jumpstart Our Business Startups Act

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  Primarily designed to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies Seven Titles, including  “IPO On Ramp” for emerging growth companies  Allowing public solicitation in certain private offerings  Crowdfunding  Increasing dollar limits for Regulation A  Increasing thresholds for ‘34 Act registration

JOBS Act & Timing

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   Signed into law April 5, 2012 Many provisions are self-executing –    Facilitating IPOs for emerging growth companies (“EGCs”) Relaxing reporting requirements for EGCs; and Public Company Registration Thresholds Many require SEC rulemaking:     Private Offerings due by July 4, 2012 Study on Blue Sky Laws impact on Regulation A offerings due byJuly 5, 2012 Crowdfunding due by December 31, 2012 Regulation A, mandatory but no deadline

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What is an Emerging Growth Company?

   An EGC is a company with gross annual revenues of less than $1 billion A company remains an EGC until the earliest of:  Gross revenues of $1 billion or more  Fifth anniversary of its IPO  Issuance of $1 billion in non-convertible debt during the previous three years  Public float is $700 million or more A company does not qualify as an EGC if it conducted its IPO on or before December 8, 2011

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Reporting and Other Requirements Reduced for EGCs

    Two years (not three years) of audited financial statements in IPO registration statement Exempt from certain proxy rules    "say-on-pay" shareholder vote shareholder vote on golden parachute compensation Certain executive comp. disclosures Exempt from the auditor attestation requirements with respect to internal controls Permitted to delay application of new public company financial accounting standards until they become mandatory for private companies

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Communications Prior to and During a Securities Offering

 EGCs can “test the waters”  Can communicate with qualified institutional buyers (QIBs) and institutional accredited investors (“IAIs”) before and after the filing of registration statement  Includes communications by underwriters  Oral and written communications to QIBs and IAIs remain subject to potential liability under Section 12 of the Securities Act for any material misstatement or omission

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Confidential Submission of IPO Registration Statements

 Permitted to submit any IPO registration statement and subsequent amendments confidentially  IPO registration statement and amendments required to be publicly filed with the SEC no later than 21 days before a road show  If an EGC submits its IPO registration statement to the SEC confidentially, management of the EGC may be limited in its ability to communicate with QIBs and IAIs to gauge their interest in the potential offering for 21day quiet period

Analyst Research Reports

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 Publication of research on EGCs by Investment Banks is not considered an offer or a prospectus, even if the bank is participating or will participate in the offering  Applies to equity offerings including IPOs  Reports no longer subject to liability under Section 12 of the Securities Act for material misstatements or omissions  Still subject to other securities law liability  Neither the SEC nor FINRA may adopt or maintain quiet periods for equity research reports for EGCs

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Research Analysts’ Communications and Meetings

 Prohibits the SEC and FINRA from adopting or maintaining rules or regulations in connection with an IPO of an EGC that restrict:  who at a broker-dealer may arrange for communication between a securities analyst and a potential investor  participation of a securities analyst in meetings with management, even if investment bankers are present

Private Offering Exemptions

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  Elimination of Prohibition against general solicitation and general advertising in Rule 506 Offerings    Requires SEC to amend Rule 506 by July 5 Requires that all purchasers be accredited investors Issuer using public solicitation must take reasonable steps to verify that the purchasers are accredited using methods determined by the SEC SEC to revise Rule 144A to allow general solicitation and general advertising  Seller and any person acting on behalf of the seller must reasonably believe the buyer is a QIB

Private Offering Exemptions

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   Only available to U.S. organized issuers May be available to private funds  New Section 4(b) of “33 Act now provides that general advertising or general solicitation   Not deemed public offering under Federal Securities Laws 3(c)(1) and 3(c)(7) of Investment Company Act  May not be available to Commodity Pools Not available to:    Registered investment companies; Issuers already subject to reporting requirements; and Issuers with “bad boys”

Rule 506 Intermediaries

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 Rule 506 intermediary is not subject to broker dealer registration solely because that person:  Maintains a platform or mechanism that permits the offer, sale, purchase, negotiation, general solicitation, advertisements, or similar activities in connection with the offering;  Co-invests in the securities being offered; or  Provides ancillary services in connection with the offering  State law is not pre-empted for 506 Intermediaries

Rule 506 Intermediaries

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 Rule 506 Intermediary not registered as a broker dealer must:  Receive no compensation in connection with the purchase or sale of securities in the offering (transaction based compensation);  Not be in possession of customer funds or securities in connection with the offering; and  Not be subject to a statutory disqualification under section 3(a)(39) of the Securities Act (No “Bad Boys”)

Crowdfunding

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 Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act  Small offerings seeking small investments from many investors  New Section 4(6) of the Securities Act  $1 million annual limit (debt or equity)  Not effective until SEC rulemaking

Crowdfunding

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 SEC rules due by the end of the year  Investor with net worth or annual income of $100,000 or greater may invest up to 10% of net worth or income, with a ceiling of $100,000  Investor with net worth or annual income of less than $100,000 are limited to greater of $2,000 or 5% of net worth or income  In all crowdfunding offerings, Issuer must verify whether Investor has money in other crowdfunding investments

Crowdfunding

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 “Covered Securities” under Section of the Securities Act  Not subject to state blue sky registration requirements  Still subject to state anti-fraud enforcement  Securities remain restricted  Mandatory one year holding period with certain exceptions

Crowdfunding

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 Certain disclosures required depending on offering  Less than $100K - financials certified by CEO  $100K-$500K - financials reviewed by CPA  Over $500K - audited financials  Issuer Not required to register under ‘34 Act  Still must make annual SEC filings and disclosures to investors as the SEC determines to be appropriate

Crowdfunding

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 Crowdfunding offerings must be conducted through a broker-dealer or through a “funding portal” that does not:      Offer investment advice or recommendations; Solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal; Compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed on its website or portal; Hold manage or possess, or otherwise handle investor funds or securities; or Engage in such other activities as the SEC, by rule determines appropriate

Crowdfunding

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 Funding Portal is required to:  Register as a Funding Portal with the SEC  Obtain membership in a national securities association (FINRA)  Obtain a background and securities regulatory enforcement check for the directors, officers, and holders of more than 20% of the outstanding equity of the issuer  Meet any other requirements that the SEC, or FINRA as the regulator of Funding Portals, prescribes as appropriate

Crowdfunding

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 To prevent fraud by the issuer, the Broker Dealer/Funding Portal must “ensure” that no offering proceeds are distributed to the Issuer until the target offering amount is established  The offering may not be advertised except by directing the investors to the Broker-Dealer or Funding Portal  Broker-Dealer/Funding Portal must also make available to investors and the SEC, at least 21 days before any sale, any disclosures provided by the Issuer

Regulation A

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 ‘33Act registration exemption to be increased from $5 million to $50 million raised in 12 months  Requires SEC rulemaking, but no deadline  Only equity, debt and convertible debt  Securities may be publicly offered and will not be restricted   State law generally pre-empted SEC Rules will require certain annual filings and investor disclosures

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Increased Registration Threshold for Public Company Reporting

 No requirement to register until company reaches 2000 shareholders (or 500 shareholders who are not accredited investors) “of record”  Excludes record holders who receive the securities pursuant to an employee compensation plan exempt from registration under Section 5 of the Securities Act  SEC must exempt securities held by crowdfunding investors

Q&A

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 Any questions?

 [email protected]