Continuing its implementation of rules mandated by the JOBS Act, the SEC has proposed rules for the expansion of offerings under Regulation A. Here is the SEC’s handy press release and fact sheet. Commentators have dubbed the new rules “Regulation A+” because of the greatly increased maximum offering amount under the new rules (and not as a reference to the average grade at Harvard). As with the recent crowdfunding proposal, these rules are not effective until after the SEC issues final rules following a comment period. [Read more…]
I focused in my last post about breaking up M&A transactions into stages, where a potential acquirer can start by purchasing a minority interest in a company, followed by a purchase of the remainder of the company later. The same approach of breaking a transaction up into bite-sized pieces can be taken with investments that are never intended to be full acquisitions of a company. Equity financing transactions can be structured as a multi-stage process, e.g., an investor purchases a 10% interest and then is obligated to purchase another 10% in the future if the company hits a certain milestone.
But I wanted to focus here on the very common “bridge loan” transaction. The scenario here is that the company wants to (or needs to) put off a significant financing transaction for some period of time – perhaps because it has to develop its business in some manner that would be required to attract the investment – but it needs temporary funds to allow it to do that developing. Rather than negotiating a full-fledged VC-style equity investment, the solution is to structure a bridge investment as a convertible note. The note will automatically convert into equity when the company completes its equity offering over a threshold amount. A selective list of issues to think about in structuring the bridge loan transaction:
The most buzz-inducing SEC filing last week (this is a relative statement, of course) was this Form S-1 filed by Fantex, Inc., seeking to register what has become known as the “Arian Foster IPO.” Foster is an accomplished running back for the NFL’s Houston Texans. The deal, in essence, is that investors will (through Fantex) be paying Foster $10 million now in exchange for 20% of his NFL-related earnings, including endorsements, coaching and broadcasting, going forward for his lifetime. So, based on those numbers, if and when Foster’s aggregate earnings from now on exceed $50 million, investors will make a profit on the investment. Fantex views this as the first of several athlete-related offerings. There has been some ridicule about the concept in the popular press, with much focus on the risks (not helped by Foster’s hamstring pull in the first game after the S-1 filing), though like most investments in individual stocks, it’s a high risk, high reward proposition.
In my earlier post on the liberalization of general solicitation and advertising in Rule 506 offerings (to be effective September 23, 2013), I briefly mentioned the more stringent requirement, when general solicitation or advertising is used, for verifying each investor’s status as an “accredited investor.” I’d like to get into more detail about what that entails.
Current practice is for companies conducting Rule 506 offerings to have prospective investors check a box on a simple accredited investor questionnaire, and that is generally sufficient to establish the investor’s accredited investor status without further investigation by the company. Going forward, Rule 506 offerings that are not accompanied by general solicitation or advertising will continue to operate in the same manner. However, when general solicitation or advertising is used, the company must take “reasonable steps” to verify each investor’s accredited investor status. This is a “principles-based” standard that is dependent on the facts and circumstances of the investors and the offering, but clearly a checked box on a questionnaire will not suffice.
Generally, the terms “public offering” and “private offering” have the meanings that the words imply: a public offering of securities is made to hundreds or thousands of investors who may have no connection to the company, and a private offering is made to a select group of investors known to the company or its broker. Historically, private offerings made under widely-used SEC Rule 506 (part of Regulation D) were required to be completed without the use of any “general solicitation or general advertising.” However, a provision of the federal JOBS Act, enacted in 2012, blurred the lines between private and public offerings by permitting general solicitation or advertising in Rule 506 offerings, subject to conditions imposed by the SEC. The SEC has now done its imposing, establishing rules to become effective in September 2013.