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A Spotlight On Benefit Corporations

Posted in Benefit Corporations

Benefit Corporations and other impact-driven corporate entities, such as Delaware Public Benefit Corporations and California Social Purpose Corporations, are proliferating at a healthy pace. More than 30 states have enacted Benefit Corporation statutes and more than 1,000 companies have incorporated as Benefit Corporations or similar entities. With the number of impact-driven companies increasing rapidly, it is only a matter of time before the management of an impact-driven company decides to scale its impact through an initial public offering.

There are not currently any separate or additional SEC disclosure or other requirements applicable solely to benefit corporations or similar impact-driven companies. However, a registration statement must contain all material information necessary for investors to make their investment decision. The SEC has not established a definition of “material”, but the term has been elucidated through informal SEC guidance and federal court decisions. The leading U.S. Supreme Court decisions on the subject established that a fact about an issue is “material” if the fact would alter the total mix of information available to investors or a reasonable investor would consider the information important in making an investment decision.

Because the enabling statutes for impact-driven companies typically require such a company to provide an annual or biennial report describing its impact objectives and assessing its progress in promoting such objectives against internally established or third party standards, it would be prudent for an impact-driven company to include information about its objectives, standards and assessments of its progress during the periods for which financial statements are required (two or three years) in the registration statement and prospectus since the information is likely to be considered material to investors in such a company.

The Sustainability Accounting Standards Board has developed sustainability accounting standards comprising disclosure guidance and accounting standards on sustainability topics for use by US and foreign public companies in their annual filings with the SEC. These standards vary by industry and identify topics that may constitute material information for companies within each industry. Although designed to support the disclosure of financial sustainability information, that is, financial information regarding environmental impacts caused and incurred, by public companies in required annual and periodic filings (on Forms 10-K, 20-F, and 10-Q), these standards could be easily adapted for use in IPO registration statements for companies with sustainability objectives.

The Global Impact Investing Network’s Impact Reporting and Investment Standards (IRIS) provide a significantly broader set of performance measurement metrics across a very broad set of very specific social, environmental and other public benefit objectives. The metrics in the IRIS library could also be used to articulate public benefit objectives and standards for measuring an impact-driven company’s progress in promoting such objectives in a registration statement to give investors a clear understanding of the company’s success in promoting its impact goals. It is possible that the SEC may eventually adopt rules requiring impact-driven companies to state their objectives, standards for measuring progress and self-assessment of success in meeting the stated objectives as part of the disclosure requirements for such companies, although given the breadth and distinctness of possible impact missions it is unlikely the SEC will seek to establish specific standards that must be measured and disclosed.

Benefit Corporations, Public Benefit Corporations and their counterparts in other states reflect investors’ and managements’ increasing appreciation of social impact and other values beyond the maximization of strictly financial stockholder value. As these types of corporations eventually become listed reporting companies, we can expect rule making by the SEC, as well as accounting standards boards, to provide guidance on the kinds of new material information needed for these kinds of corporate entities to fulfill their unique duties.

Following the Wisdom of the Crowd? A Look at the SEC’s Final Crowdfunding Rules

Posted in Crowdfunding, JOBS Act News

In our latest client alert, we provide a detailed overview of the final rules, Regulation Crowdfunding, which will be applicable to crowdfunding offerings conducted in reliance on Section 4(a)(6) of the Securities Act of 1933 as amended (the “Securities Act”), which was added by Title III of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), as well as to those intermediaries participating in such offerings.  We do not address the proposed FINRA framework applicable to funding portals, which will be covered in a separate alert.  All rule references, unless otherwise noted, refer to rules under Regulation Crowdfunding.

To read our client alert, click here.

SEC Final Crowdfunding Rules and Proposed Amendments to Rule 147 and Rule 504

Posted in Crowdfunding, SEC News

The SEC has published the Final Crowdfunding Rules following their earlier meeting wherein the rules were adopted. The final rules can be found here: http://www.sec.gov/rules/final/2015/33-9974.pdf.

Additionally, the SEC has posted the proposed amendments to Rule 147 and Rule 504, available here: http://www.sec.gov/rules/proposed/2015/33-9973.pdf.

Regulation Crowdfunding

Posted in Crowdfunding, Exchange Act Registration Thresholds, SEC News

Today, the SEC voted to adopt final rules permitting crowdfunding.  Regulation Crowdfunding allows issuers to engage in securities-based crowdfunding through the internet pursuant to Section 4(a)(6) of the Securities Act.  The final rules reflect an effort to address some of the concerns raised during the comment process, and appear to provide some greater flexibility for issuers.

As required by statute, the Regulation allows an issuer to raise up to $1 million in any 12-month period.  An individual who invests in crowdfunded offerings is subject to an investment limitation; if the individual’s annual income or net worth is less than $100,000, then the greater of $2000 or 5% of the lesser of their annual income or net worth, but not to exceed $100,000.   If both annual income and net worth are over $100,000, then 10% of the lesser of the individual’s annual income or net worth.  This limit applies to crowdfunded offerings generally, not a specific crowdfunded offering.

An issuer is required to use an intermediary, which is registered as either a broker-dealer or a funding portal, as discussed below.

As noted above, although the final rules are quite complex, the final rules do appear to have taken into account some of the issues raised by commenters.  An issuer must prepare certain disclosures in connection with any crowdfunded offering.  There will be a new optional Q&A option for disclosure requirements, which may help reduce costs for an issuer and perhaps may be easier to navigate for a first-time issuer.

The final rules also appear to provide some relief with respect to the financial statement requirement, which had been a concern raised by commenters.  The final rules would require financial statements prepared in accordance with US GAAP for the issuer’s two most recently completed fiscal years (assuming the issuer has been in operation for such period).  The financial statement requirements are phased depending on the amount being raised.  If the issuer proposes to offer $100,000 or less, then the financial statements must be reviewed and certified by the issuer’s chief financial officer.  If the issuer is raising more than $100,000 and less than $500,000, the financial statements must be reviewed by an independent accountant.  For amounts in excess of $500,000, financial statements must be audited.  There will also be an accommodation for first-time issuers allowing financial statements to be reviewed rather than audited (unless audited statements are otherwise available).  The financial statement requirement for the annual report also appears to have been revised from the proposed rule.

The final rules also appear to provide some relief in relation to the requirement to file annual reports following the completion of a crowdfunded offering.

The securities sold in a crowdfunded offering will be transfer-restricted for one year and will be exempt from the Exchange Act 12(g) threshold provided that the issuer satisfies certain conditions, including, among other things, a requirement to retain a registered transfer agent and not exceed $25 million in assets.

Final rules also are adopted relating to the registration and regulation of intermediaries.  A funding portal must file a Form Funding Portal with the SEC and become a FINRA member firm.  Our earlier post discussed FINRA’s rule filing for the final rules regulating funding portals.  The intermediary in a crowdfunded offering serves an important gatekeeper and educational function.  An intermediary must, among other things, open an account for each investor before an investor makes an investment commitment, provide educational materials to prospective investors, make issuer information available throughout offering period and for the required 21-day public offering period, and obtain information from each investor sufficient to provide a reasonable basis for compliance with the individual investor investment limitation.

Effective date:  the new rules and the forms will become effective 180 days following Federal Register publication.  Forms permitting registration with the SEC by funding portals will be effective January 29, 2016.

We will be supplementing this very preliminary summary with the materials released by the SEC, as well as by a detailed client alert detailing and analyzing the final rules.

Chair Mary Jo White’s statement may be accessed here:

Commissioner Stein’s remarks on the proposed amendments to Rule 147 and Rule 504:

Commissioner Stein’s statement on final crowdfunding rules:

Commissioner Aguilar’s comments on final crowdfunding rules and on the proposed amendments to Rule 147 and Rule 504:

“Building a Dynamic Framework for Offering Reform”

Posted in JOBS Act News

At today’s PLI Securities Regulation Institute conference, SEC Chair White delivered the keynote address. In her speech (see link: https://www.sec.gov/news/speech/building-dynamic-framework-for-offering-reform.html), Chair White addressed a broad range of topics. She noted the successes of securities offering reform as an important initiative undertaken by the Commission that balanced access to capital formation with investor protection concerns. As cited in her speech, over the three-year period that ended on September 30, 2014, WKSIs undertook more than 1,500 equity offerings, almost three per issuer, with gross proceeds totaling about $523 billion. Over the same period, WKSIs also undertook more than 2,700 debt offerings, more than three per issuer, with gross proceeds totaling about $1.4 trillion. She also cited a number of studies that have assessed the quality and frequency of company disclosures. As a cautionary note, Chair White observed that concerns have been expressed by certain investor groups regarding the speed of issuance for shelf take-downs, which have caused the Staff to consider whether “speed bump” measures would be appropriate. This would be a very significant change in market practice.

Chair White addressed some preliminary “impacts” associated with the JOBS Act. She noted that since the JOBS Act became effective, nearly 1,000 EGCs have confidentially submitted draft registration statements for IPOs, and EGCs represent about 85% of the IPOs that have gone effective since the JOBS Act was enacted. The Chair noted that “under Rule 506(c), issuers are taking advantage of general solicitation and advertising, but at a lower rate than issuers using the traditional exemption in Rule 506(b) that does not allow such activity. A record amount, $1.3 trillion, was reported as raised through Rule 506 offerings in the last completed calendar year 2014. But only a small fraction of issuers claimed the new exemption permitting general solicitation.” She noted that there were some enforcement inquiries open relating to companies’ failure to take reasonable steps to verify the status of investors, sales to unaccredited investors, unregistered broker-dealer activity, and some instances of possible fraud.

Guidance for IPO Issuers

Posted in IPO On-Ramp, JOBS Act News

At today’s Practising Law Institute program, the Securities Regulation Institute, the Director of the Division of Corporation Finance of the Securities and Exchange Commission joined a panel discussion on capital markets related developments.  The Director provided brief remarks.  Mr. Higgins noted that IPO issuers are taking advantage of the ability to make confidential submissions and noted that since the enactment of the JOBS Act about 1,000 confidential submissions have been made.

Mr. Higgins focused his remarks on a number of the areas on which the Staff of the Division of Corporation Finance is focused in the context of its disclosure reviews.  In this regard, Mr. Higgins highlighted the following issues, among others:

Predecessor issuer accounting issues:  he noted that questions continue to arise in the context of IPOs as to which financial statements should be included in an IPO registration statement in instances where there has been a spin-off or a discontinue business or similar type of transaction.  He noted that it is often difficult to parse the definition of “predecessor issuer” and recommended that counsel consider a pre-filing conference with the Office of Chief Accountant where there is a lack of clarity on the requirements.

Metrics:  he noted that the Staff is focused on how companies present their financial and operating results and that an IPO is the first time that a company is developing its key performance indicators.  He noted that the Staff in its review focuses on ensuring that the company is clearly defining metrics, the limitations associated with those metrics, any assumptions that are used by the company in its calculations of these metrics, whether the metrics used by the company differ significantly from those used by companies in similar businesses, and the rationale for using the particular metrics.

Non-GAAP Measures:  he noted that generally the use of non-GAAP measures has not posed any recent disclosure issues, but, that, of course, a company’s disclosures must be clear and complete and provide an explanation of how and why the non-GAAP measures are used.

Recent financial results (“flash numbers”):  he noted that the SEC Staff will look carefully at any preliminary financial results that are presented in order to ensure that the presentation is balanced and does not omit information that would make the presentation misleading.

Trend information:  he noted that the Staff places significant emphasis on trend related disclosures in the MD&A, including appropriate forward-looking statements.

Issuer websites:  he noted that the SEC Staff reviews issuer websites when reviewing IPO (and other) filings.

Crowdfunding Nears?

Posted in Crowdfunding

The SEC announced (see: https://www.sec.gov/news/openmeetings/2015/ssamtg103015.htm) that the Commission will hold an open meeting on Friday to consider the final crowdfunding rules, as well as to consider whether to propose amendments to Rule 147 (intrastate crowdfunding) and Rule 504.

As discussed in prior posts, the SEC has received a number of recommendations to modernize Rule 147 and Rule 504.

PLI Seminar: Understanding the Securities Laws Fall 2015

Posted in Crowdfunding, Events, Private Placements, Regulation A+, Regulation D, Rule 144A

PLI’s Understanding the Securities Laws Fall 2015 conference on December 17-18, 2015, will provide an overview and discussion of the basic aspects of the U.S. federal securities laws by leading in-house and law firm practitioners and key SEC representatives. Emphasis will be placed on the interplay among the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act, the Dodd-Frank Act, the JOBS Act and related SEC regulations, and on how securities lawyers can solve practical problems that arise under them in the context of public and private offerings, SEC reporting, mergers and acquisitions and other common corporate transactions.

Morrison & Foerster Partner Anna Pinedo will speak on the “Securities Act Exemptions/Private Placements” panel on Day One of the conference. Topics will include:

• Exempt securities versus exempt transactions;
• Regulation D and Regulation A offerings and changes resulting from the JOBS Act;
• “Crowd funding”;
• Stock option grants and related issues;
• Rule 144A high yield and other offerings; and,
• Regulation S offerings to “non-U.S. persons”.

The conference will be held at the PLI New York Center in New York, New York and is scheduled to begin at 9:00 a.m. EDT.

To register for this conference, or for more information, please click here.

Market Update

Posted in Regulation A+, Rule 506

At today’s Practising Law Institute conference on Private Placements and Hybrid Securities Offerings program, a representative of the SEC Staff shared some statistics on Rule 506 offerings.  Since the September 2013 effective date of the amended Rule 506 rules, based solely on Form D filings there have been approximately 40,000 Rule 506(b) offerings, raising approximately $1.3 trillion in offering proceeds.  During the same period, there have been approximately 3,300 Rule 506(c) deals raising approximately $42 billion in offering proceeds.  There have been roughly 13 times more offerings made pursuant to Rule 506(b) versus Rule 506(c) and over 30 times more dollars raised in Rule 506(b) offerings than Rule 506(c) offerings.  Of course, given that issuers often neglect to file Form Ds, this information may be incomplete.

We also got an update on Regulation A+ offerings.  Since the June 2015 effective date, there have been 34 Form 1-As , which are now in the public stage, of which 16 are Tier 1 offerings and 18 are Tier 2 offerings.  There are another 16 Form 1-As that are in the confidential stage, and, of these, 6 are Tier 1 and 10 are Tier 2 offerings.  Notably, none use broker-dealers.

Sign of Things to Come?

Posted in Crowdfunding, FINRA

FINRA recently filed a proposed rule change with the Securities and Exchange Commission in order to adopt the final rules relating to Title III crowdfunding “funding portals.”  This may signal that indeed the final crowdfunding rules may be released before year-end.

The proposed rules were released at the end of 2013 in Regulatory Notice 13-34.  We described these in our crowdfunding alert in 2013, see http://media.mofo.com/files/Uploads/Images/131115-SEC-FINRA-Crowdfunding.pdf.

The final FINRA rules seem to align closely with the proposed rules, with some notable changes.  For example, FINRA is not requiring a fidelity bond, nor is it requiring that funding portals implement an AML program.

The Funding Portal Rules are comprised of seven rules:  100, 110, 200, 300, 800, 900 and 1200.  In addition, FINRA is adopting Rule 4518 that will apply to broker-dealer members.

See link: http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2015-040.pdf.

The Division of Trading and Markets also must adopt rules relating to funding portals and broker-dealer intermediaries in crowdfunded offerings.