Corporate

Amending the Definition of “Accredited Investor”
Employee in office

Photo Credit: istock.com/shironosov

By Arina Shulga

The definition of an “accredited investor” is the cornerstone of Regulation D that provides a safe harbor exemption for private placements of securities by startups and more mature companies. Only in 2018, $1.7 trillion was invested into the startup sector by means of Regulation D offerings, out of which $228 billion was raised by companies rather than investment funds. Nearly all of the investors in such offerings were accredited. Now, the definition of an accredited investor may be changing to include new categories of people. This will open the extremely risky but yet extremely lucrative startup investment opportunities to more participants.

This blog focuses on certain proposed changes to the definition as it relates to natural persons.

The definition of “accredited investor” came about in 1982 together with the adoption of Regulation D (although the concept of an “accredited person” was first introduced by Rule 242 in 1980). The following categories of natural persons are deemed to be accredited: (more…)

Legal Perspective on Running a Successful Crowdfunding Campaign
Flat design style web banner for investments in knowledge, student loans, scholarships

Photo Credit: istock.com/Varijanta

By Arina Shulga

Although Regulation Crowdfunding (or Reg CF in short) is a great way to get funding for companies that otherwise would have been overlooked by angel or VC investors, running a successful and compliant Reg CF campaign is not an easy undertaking. Based on experience working with Reg CF issuers, in this blog I describe and discuss three key legal challenges that all Reg CF issuers should know about: restriction on advertising, hiring promoters, and putting together a complete and accurate Form C.

First, the issuer cannot generally solicit and advertise its Reg CF offering. All communications must be done through the portal. According to Rule 204 of Reg CF, the issuer can make factual statements and then direct potential investors to its page on the portal. Such factual statements are limited to the following information: the fact that the issuer is conducting a Reg CF offering; the terms of the offering (amount, nature of securities, price, and closing date), and factual business information about the issuer. While the first two categories are straight forward, issues can arise when talking about the factual business information. Such information cannot include predictions or opinions and must be limited only to facts, such as name, address, website of the issuer and a brief factual description of its business. (more…)

Unlimited Liability for New York Business Owners
People crossing the street in Manhattan New York City

Photo Credit: istock.com/deberarr

By Arina Shulga

One of the main benefits afforded to a corporate structure is the limited liability protection for its owners. This means that the corporation and its shareholders are treated as separate legal entities and it is the corporation’s assets, and not the assets of its individual shareholders, that are available to pay for judgments and claims of creditors.

In certain limited circumstances such as fraud, disregard for corporate formalities, and inadequate capitalization, the limited liability shield can be “pierced” by the courts to hold the corporation’s shareholders personally liable for the corporation’s debts and other obligations. Such “piercing” of the corporate limited liability shield is a prevalent practice in most if not all states. (more…)

Test the Waters, but Don’t Make Waves

SEC Adopts New Rule Allowing All Issuers to Test the Waters in Registered Offerings

Large group of people forming blue water drop symbol in social media and community concept on white background. 3d sign of crowd illustration from above gathered together

Photo Credit: istock.com/tampatra

By Latore Price and Nimish Patel

On September 26, 2019, the SEC announced that all issuers —including non-reporting issuers and investment companies (including registered investment companies and business development companies) will soon be able to “test-the-waters” in initial public offerings and other registered securities offerings. Under the newly adopted Rule 163B, any issuer will be able to engage in “test-the-waters” communications with qualified institutional buyers and institutional accredited investors.

Previously, under the Jumpstart Our Business Startups Act, only emerging growth companies were permitted to engage in “test-the-waters” communications. Rule 163B provides relief from the from restrictions imposed by Section 5 of the Securities Act on written and oral offers prior to, or after filing, a registration statement for issuers who do not qualify as emerging growth companies. This will give all issuers “flexibility in determining whether to proceed with a registered public offering while maintaining appropriate investor protections.”

Once in effect, communications made under Rule 163B will: (more…)

SEC Issues First Cryptocurrency No-Action Letter – Where’s the Action?
Diagonal chain, a blockchain concept, gray closeup

Photo credit: iStock.com/ismagilov

By Mark Hiraide

On April 2, 2019, the Division of Corporation Finance of the Securities and Exchange Commission issued a no-action letter to TurnKey Jet, Inc. in connection with a proposed sale of tokens in the United States. It was the first no-action letter relating to cryptocurrencies and was widely heralded as a watershed event (e.g., “SEC Issues First ‘No-Action’ Letter Clearing ICO to Sell Tokens in US”) (see here).

But what does the SEC’s no-action letter really mean? First, a no-action letter is the SEC’s staff response to a request that the SEC not take enforcement action against the requestor based on the specific facts and circumstances set forth in the request. In most cases, the staff will not permit parties other than the requester to rely on the no-action letter. As was the case here, the staff’s response often is based in part on the legal opinion rendered by the requester’s lawyer that the proposed conduct is not a violation of the federal securities laws. (more…)

FAST Act Update: SEC Adopts Amendments to Modernize and Simplify Public Disclosure
Businessman looking at complicated street sign

Photo credit: iStock.com/z_wei

By Blake Baron and Nimish Patel

 What Happened?

On March 20, 2019, the SEC adopted amendments to modernize and simplify disclosure requirements for public companies. Specifically, the SEC adopted amendments to modernize its disclosure requirements for public filings in a way that the SEC believes will minimize the costs and burdens on public companies while continuing to provide all material information to investors.

Why It Matters

Investors will benefit from these new amendments as they eliminate out-of-date, repetitive and unnecessary disclosure, and should simplify the process by which they assess material information. The SEC hopes investors will benefit from its work to improve disclosure, as they focus on modernizing their disclosure system to meet the expectations of today’s investors while eliminating unnecessary costs and burdens. (more…)

Will Semiannual Reporting Soon Be a Reality for Public Companies?
Adult banking analyst in eyeglasses working at sunny office on laptop while sitting at wooden table.Businessman analyze document in his hands.Graphs and diagramm on notebook screen.Blurred background.

Photo credit: iStock.com/Pinkypills

By Blake Baron & David Gordon

Last week, the President said that in his discussions with the business community on ways to improve the business ecosystem, one particular idea was raised as a means to bolster business: move to a six-month financial reporting calendar from the current quarterly one.

Now, there is an argument to be made for such a move. One could say this would help deter “short-termism,” seeing as how companies would no longer need to focus on meeting analyst expectations on a quarterly basis at the expense of longer term thinking (not to mention this would save businesses time and money). In addition, some executives view quarterly reporting as one of the hindrances to going public and/or maintaining public company status and, as a result, have already been advocating for changes to be made to the current reporting schedule. (more…)

New Federal Act Amending Dodd-Frank Also Seeks to Help Startups
business concept money of glass and growht small tree

Photo credit: iStock.com/lovelyday12

By Mark Hiraide & David Gordon

In late May, President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act. Although the president and many Republican members of Congress had threatened to repeal and replace Dodd-Frank, the new law’s actual changes are relatively minor. The new law rolls back some of the post-financial crisis legislation enacted in 2010, particularly for smaller community banks and credit unions. But it largely leaves intact the core framework of Dodd-Frank.

Less publicized but worthy of attention is the new law’s Title V—Encouraging Capital Formation, which amends the Securities Act of 1933 and Investment Company Act of 1940 with regard to early stage companies. Like the amendment to Dodd-Frank, the new law’s amendments to the federal securities laws are modest.  (more…)

Premerger Notifications and Interlocking Directorates: FTC Increases Thresholds
Isolated Dollar Chart

Photo credit: iStock.com/ImagePixel

By Melanie Figueroa & David Gordon

On January 26, the Federal Trade Commission (FTC) announced their annual update to the size-of-transaction thresholds for both premerger notifications and interlocking directorates. The FTC revises these thresholds annually based on changes in gross national product. This year’s update included significant increases.

Changes to Premerger Notification Thresholds

Under the Hart-Scott-Rodino Act (HSR), transactions that meet the following three tests are required to file premerger notifications with the FTC and the Antitrust Division of the Justice Department: (more…)

Modernizing and Simplifying Disclosure with the FAST Act Mandate
Low angle side view of car

Photo credit: iStock.com/jamesteohart

By Blake Baron

Under the FAST Act mandate, the U.S. Securities and Exchange Commission (SEC) voted on October 11, 2017 to propose amendments to Regulation S-K and related rules and forms aimed at modernizing and simplifying the current disclosure requirements for investment companies, public companies, and investment advisers.

What are the Proposed Amendments?

If adopted, the amendments would:

  • Revise rules or forms to update, streamline or otherwise improve the Commission’s disclosure framework by eliminating the risk factor examples listed in the disclosure requirement and revising the description of property requirement to emphasize the materiality threshold;
  • Update rules to account for developments since their adoption or last amendment by eliminating certain requirements for undertakings in registration statements;
  • Simplify disclosure or the disclosure process, including proposed changes to exhibit filing requirements and the related process for confidential treatment requests and changes to Management’s Discussion and Analysis that would allow for flexibility in discussing historical periods; and
  • Incorporate technology to improve access to information by requiring data tagging for items on the cover page of certain filings and the use of hyperlinks for information that is incorporated by reference and available on EDGAR.

(more…)