The Wall Street Journal reported recently on the Transactional LawMeet, which is basically the equivalent of a moot court competition for law students, but for transactional law. The impetus for this sort of program is the sense that the law school curriculum has always been more focused on training litigators, while transactional attorneys have to learn most of their craft on the job after graduation. I think this overstates it a bit. My first year “Lawyering” class at NYU Law included a mock negotiation. (I totally botched it, as my counterpart could see my notepad, indicating the final number I was willing to accept in the negotiation.) Also, most law schools have classes in the substantive law that’s most relevant to transactional work, e.g., Contracts, Corporations, Securities Regulation and Secured Transactions.
The Wall Street Journal recently profiled the increasing proliferation of “family offices,” investment firms set up by, and under the sole control of, very wealthy families. Family offices also provide services other than investment advice – accounting, legal, household management, etc. They have been around at least since one was set up by the Rockefeller family but have become commonplace in recent years. The staggering growth in wealth that has fed the growth of family offices is, of course, the subject of much political debate about causes and what if anything to do about it, but for purposes of this post I’ll steer clear of that minefield.
The Journal article cites privacy as one of the main rationales for using a family office, as the entity will typically not have to make public disclosures. However, assuming the alternative to a family office is investing one’s fortune with funds (hedge, private equity, venture capital), there wouldn’t be much of a privacy issue there, as a fund’s limited partners (investors) can expect to have their confidentiality respected. (Of course, there’s no reason why even the super-wealthy need to employ alternative investments like this. Warren Buffett has made a good case recently that because of funds’ fee structure, investors would be better off with simple index funds.)
The SEC’s Division of Economic and Risk Analysis (DERA) recently issued a paper about over-the-counter stocks, i.e., stocks of publicly traded companies that are not listed on a national securities exchange like the New York Stock Exchange or Nasdaq. While the main subject of the paper is on the inadvisability of individual investors purchasing OTC stocks, my focus here, briefly addressed in the paper, is on whether the companies themselves should consider transactions that result in them having OTC stock. For example, companies that are not in a position to complete a traditional IPO may be able to go public via a backdoor method such as merger with a SPAC or a reverse merger.
For these companies, the usual plan is not to remain an OTC company forever, with thinly traded stock and low institutional ownership. Rather, the hope is that, with the capital usually raised concurrently with the transaction that made the company public, it can successfully execute its business plan such that it can meet the listing standards for admission on the NYSE or Nasdaq at a later date. However, this scenario rarely plays out in practice. Studies cited in the DERA paper find that, over a nine-year period, less than 9% of OTC companies became listed on an exchange, and even those that do have a poor average investment return.
Accordingly, any company planning to go public by alternative means has to consider the possibility of remaining in OTC status indefinitely. There are some advantages to being public. It may be easier to attract employees with equity compensation packages, since there is an easier path to eventually selling shares than would be the case with a private company. Also, public company stock can be used to acquire other companies (though a target company may be skeptical about receiving OTC stock). Finally, there are forms of financing like PIPEs that are available only to public companies (though the terms of those transactions are not necessarily any more company-favorable than investments that private companies can secure). [Read more…]
If you are a regular reader of my blog posts (Hi, Mom!), you’ve noted that I address several substantive topics of interest in corporate and securities law to my clients and other attorneys, along with “softer” topics about the business of law practice, dealing with clients, etc. The substantive posts are, by design, short and to-the-point, unlike a big firm’s detailed summary of the latest 500-page rule release from the SEC (because there’s no need to duplicate those law firm memos, which are freely available to all, and also, more importantly, because I don’t want to write long memos). But hopefully, these posts have some value to my readers.
I thought it would be helpful to list these posts (through January 2017) in one handy place for easy reference, with links, in reverse chronological order within each category:
Financing Transactions/Securities Offerings
- Recent Trends in Financing Startups
- The Shark Tank Approach to Startup Investing
- Regulation A+ – An Improved Way for Smaller Companies to Go Public
- Regulation A+ – How It Fits into the System
- The Latest on Possible Tweaks to the Accredited Investor Definition
- Should You Be Making Blue Sky Filings in New York?
- Streamlining of Blue Sky Filings
- Using Self-Directed IRAs for Friends and Family Financings
- SAFE Equity as an Alternative to Convertible Notes
- Equity as an “Expensive” Form of Financing
- SEC Advisory Committee Report on Accredited Investor Definition
- SEC Crackdown on Undisclosed Unregistered Offerings
- The SEC’s Guide to Avoiding Investor Scams
- Reverse Mergers
- The Latest from the SEC on Private Offering Regulation
- Limiting Investment Risk for Non-Accredited Investors
- When to Use PPMs
- Further Thoughts on JOBS Act and Investor Fraud
- Regulation A+ Proposed Rules
- Bridge Loans
- The Arian Foster IPO
- Verification of Accredited Investor Status
- Use of General Solicitation and Advertising in Rule 506 Offerings
- Use of Finders in Securities Offerings
SEC Disclosure Matters
- The SEC Proposes Expanding the Pool of Smaller Reporting Companies
- The SEC’s Discussion of Risk Factors
- Congress Acts on Forward Incorporation by Reference
- The Pay Ratio Rule and the Effect of Disclosure
- Get That Form 4 Filed!
- Regulation FD
- Risk Factor Gone Viral
Of the many times that I’ve worked on a corporate deal – not a simple agreement, but a transaction of some complexity involving multiple documents and perhaps multiple parties – it is extremely rare that the transaction got done early, in advance of the target closing date set at the beginning of the process. This is not necessarily the fault of anyone involved, but it’s a matter of deal-making being a process with a lot of moving parts that takes time. This causes some frustration, usually among the principals more than the attorneys. Although there’s no magic bullet that will cause deals to get done instantaneously, the following are some tips that will expedite the process in a manner that doesn’t cause unnecessary stress and hard feelings:
- Follow up, nicely. While job number one for you is ensuring that you are pushing out paper without much delay, once that’s done, if you’re waiting on something that’s in someone else’s hands, and it’s taken longer than expected, ping that person with a polite email, asking for an ETA.
- Schedule check-in calls. Particularly if there is a large working group, it can be helpful to have periodic conference calls where the participants go through a closing checklist or otherwise get themselves on the same page. Having the call on the calendar has the side benefit of prodding people to attend to their to-do list before the call, to avoid having to admit on the call that the work is not done. But these calls shouldn’t be done too frequently, which causes frustration, with everyone thinking they’d rather be left alone to do the work.
- Don’t showboat about off-hours work. Particularly when the transaction (inevitably) falls behind the unrealistic schedule, you’ll start to see behavior like someone emailing the group late at night or on a weekend, implying that they are sacrificing free time to work on this and wondering why everyone else isn’t as committed. Ultimately, it is unknowable what other people’s workload is and whether they’re doing as much as they can on your deal. Instead, treat everyone else as a professional, and if there are timing considerations, discuss them respectfully.
- Don’t set fake deadlines. Deal principals will often announce that a deal needs to close by a particular date, without much explanation. If, as is often the case, it’s a BS deadline that was set to short-circuit the process and perhaps limit transaction costs, it will backfire when the deadline inevitably passes because of factors that may be outside anyone’s control. At that point, the deadline-setter has lost credibility.
- Create a transaction timetable. In my experience, certain types of transactions (IPOs, for example) have a detailed weekly timetable, while others, like M&A, are less likely to have one, probably because they are too unpredictable. If it makes sense in a particular transaction, it’s good to try to impose a broad framework like this if it builds in buffer time and is more realistic than just “close by Friday.”