When I start a new client relationship, the referral source introduces me to the potential client, usually by email, and then I have an initial call or meeting with the potential client. I don’t require that a fee be paid before I agree to proceed with this background consultation. It’s only after the meeting where we make engagement arrangements if there is a need to do so. Many attorneys, however, feel strongly that this is a bad policy and insist that even the initial meeting is on the clock. Of course, attorneys can feel free to set whatever ground rules they want, as long as they’re properly communicated in advance. There may be practice areas where immediate charging makes sense, but for what I do, I think this sort of policy reveals a mindset about the attorney that I try to avoid.
Search Results for: crowdfunding
A recent Wall Street Journal article highlighted how sketchy brokers have been marketing problematic private placements to accredited investors. While the article focused on the brokers, I was struck by the identity of one of the investor victims noted in the article as having lost a lot of money: George Stephanopoulos, the ABC News anchor and former Clinton Administration official. I don’t mean to cause Mr. Stephanopoulos any further embarrassment by highlighting this here (though I’m guessing that the readership of my blog is far less than that of the Journal), but the fact that he was scammed is a useful illustration of the misguidedness of the accredited investor definition and associated rules.
The current definition of “accredited investor” under SEC rules essentially uses wealth as a proxy for sophistication, as an individual can qualify by either having an annual income of $200,000 or a net worth of $1 million not including the value of one’s primary residence. An offering made to all accredited investors does not have an information requirement, meaning the investors do not need to be provided with a similar level of disclosure that would be associated with a registered public offering.
Back when the equity crowdfunding rules were proposed following passage of the JOBS Act, the $1 million offering limit per year for what are now known as Regulation CF offerings was viewed as making this procedure impractical. The amount raised would not be sufficient in light of the legal, accounting and other costs needed to prepare for the offering. However, as crowdfunding is now a reality and companies are giving it a shot, a fix to the dollar limit has evolved: raise funds not just under Regulation CF, but under other exemptions that are not subject to that dollar limit.
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