In a “first” – and hopefully it’s a “last” – I am hosting two separate webcasts tomorrow. Both of them are biggies.
First is this webcast at noon eastern on CompensationStandards.com: “Doing Your Pay Ratio Homework Now: A Roadmap” – to hear Compensia’s Mark Borges, Deloitte Consulting’s Mike Kesner and Towers Watson’s James Davies, Paul Platten, Steve Seelig and Dave Suchsland get into the nitty gritty of how to do the math in the SEC’s pay ratio proposal. Here’s a set of Course Materials that you should print in advance.
This program will not be an overview of the SEC’s new proposal on pay ratio disclosures–we have posted plenty of memos to get you up-to-speed. Rather, this program will drill down to see where you stand if the proposal was adopted–and to help you decide whether you should consider submitting a comment letter to the SEC using hard facts. So this program will help you evaluate how to choose a compensation definition; how to conduct statistical sampling in this area; how to access the right data and calculate the median.
Then at 2 pm eastern, tune into TheCorporateCounsel.net for the webcast – “Dealing with the Board: Presentations, Etiquette & More” – during which three long-time practitioners who have been before hundreds of boards will discuss how to get hired, what types of presentations work best for boards, how to handle tricky relationship and culture issues and how to handle issues that come from outside the boardroom. Join legends Stasia Kelly of DLA Piper, John Olson of Gibson Dunn and Stewart Landefeld of Perkins Coie for this special event.
Round Two! SEC Renews “Small and Emerging Companies” Advisory Committee
Last week, the SEC renewed the term of its “Small and Emerging Companies” Advisory Committee, which was formed based on a Dodd-Frank mandate in 2011 for a two-year term. The SEC wasn’t required to maintain this advisory committee – but apparently felt it was providing value. There has been a lot of rulemaking lately impacting smaller companies – so it seems like maintaining a sounding board is a good idea.
Delaware Supreme Court Chief Justice Myron Steele to Retire
Here’s something that I recently blogged on my DealLawyers.com Blog: Delaware Supreme Court Chief Justice Myron Steele announced that he would retire effective November 30th, three years ahead of the end of his 12-year term. As noted in this article, Chief Justice Steele has served on the bench in Delaware for 25 years – and as Chief Justice since ’04.
This is a big loss for the Delaware bench. I first met the Chief Justice when we taped a panel about director duties after the Disney case for our “2nd Annual Executive Compensation Conference” in 2005. He was also kind enough to participate in a webcast on this site in ’07 entitled “An M&A Conversation with Chief Justice Myron Steele.” We wish him the best of luck in retirement or whatever he plans to do!
As I blogged last week, the SEC found enough carryover funds from last year’s budget to stay fully operational even though the federal government has shut down – but only has funds to stay open a “few” weeks. Given that a week already has passed since the broader government shutdown began, the SEC posted this notice on Friday:
We understand that the ongoing uncertainty about possible changes in the SEC’s operating status in the event of a prolonged federal government shutdown is raising concerns for registrants that are planning to request acceleration of their registration statements in the near future. If a change in our operating status becomes imminent, we will provide as much advance notice as we can and will consider granting requests for acceleration of the effective date of those pending registration statements.
If the SEC does run out of funds, it has posted this shutdown plan, during which roughly 250 of the SEC’s 4000-plus staffers would keep on working. EDGAR would remain operational – but most core Corp Fin operations would stop including registration statement reviews. More to come as the shutdown grinds on…
Last week, the PCAOB posted an updated standard-setting agenda that outlines milestones on various standard-setting projects.
FINRA: Underwriting Review Procedures Enhanced
Here’s news from Suzanne Rothwell: Last week, FINRA implemented significant enhancements to its review procedures that expedite the issuance of a “no objections” letter in the case of offerings without issues requiring pre-offering staff review or that do not require substantial pre-offering staff review. The enhanced procedures are welcome as they will allow less problematic offerings to move more quickly through the FINRA underwriting review process.
Current Same Day Clearance Process for Shelf Offering: FINRA will continue to operate the Same Day Clearance Process for the review of shelf filings, including shelf filings by well-known seasoned issuers, which provides an automated issuance of a “no objections” letter the same day that a base registration statement and/or shelf takedown are filed with the Department. The Process is available for primary offerings, offerings that list selling security holders or that have equity lines of credit. The Same Day Clearance Process is only intended for filings where there is insufficient time for the full review process and such filings are reviewed by the staff on a post-offering basis.
Immediate Clearance Process: Effective September 30th, FINRA implemented an Immediate Clearance Process for shelf filings, including those of WKSI issuers, enhancing the Same Day Clearance Process. However, filers can still rely on the current Same Day Clearance Process for shelf offerings.
Under the Immediate Clearance Process, filers can receive an immediate “no objections” letter 24 hours a day, 7 days a week, which is issued automatically by FINRA’s Public Offering System once all required information and representations have been provided in the System. For the first time, there is no need for FINRA staff to check if information and representations have been completed in its Public Offering System because the System will not issue a “no objections” letter without the representations and complete information.
FINRA staff will conduct a post-offering review of the filing and representations submitted. In order to receive an immediate “no objections” letter, the filer must provide (in addition to the standard Same Day Clearance Process and WKSI filer representations):
– An undertaking that any information necessary to complete the filing (e.g., the due diligence on FINRA association affiliation of officers, directors and greater than 5% shareholders) will be provided no later than 3 business days following the initial submission; and
– The Fed Wire Number for the submission of the filing fee and the date of that Wire.
FINRA: Limited Review Process for Exchange-Listed Securities
Here’s more news from Suzanne Rothwell: FINRA also implemented a new Limited Review Process for SEC-filed initial and secondary offerings of securities that are or will be listed on a national securities exchange. The filer must request limited review and FINRA staff will determine whether to grant the request. The offering must meet the following requirements to qualify for limited review.
– Securities listed (or to be listed) on a national securities exchange (corporate or investment program).
– Firm commitment or straight best efforts distribution methods.
– Total underwriting compensation within allowable guidelines.
– Securities received as underwriting compensation would make the filing ineligible for the limited review procedure.
– Underwriting arrangements do not include prohibited terms as defined in FINRA Rule 5110(f)(2), such as indeterminate items of value.
– FINRA members are identified in the offering documents and filing system.
– Offering is filed with the SEC.
– Offering does not include a new or novel securities product or pose complex regulatory issues (e.g., an unlisted REIT).
The filing broker-dealer is required to represent at the time of the initial filing that:
– All documents required to be filed pursuant to FINRA Rule 5110, have been or will be submitted no later than 5 business days prior to the member’s participation. Documents required include but are not limited to underwriting or distribution related documents, any engagement letters, letters of intent or any other document entered into by any participating member(s) and the issuer during the 180-days preceding the initial filing with the SEC.
– All representations made at this time are accurate to the best of our knowledge. We undertake to notify the staff, no later than 5 business days prior to the member’s participation of any changes that may affect the staff’s No Objections Letter. We understand that this notification may require a review prior to the member’s participation. If a notification is not made, the information filed herein will be presumed to be accurate at the time of the member’s participation in the offering.
In addition, the filing broker/dealer must provide the four representations set forth below prior to issuance of a “no objections” letter, although these representations can be deferred at the time of initial filing of the offering with FINRA:
– The association or affiliation between any participating member(s) and any officer, director, or beneficial owner of 5% or more of any class of the issuer’s securities is indicated (if applicable) in the filing system.
– The terms and arrangements between the issuer and participating members do not include any prohibited arrangements.
– No participating member(s) has acquired unregistered securities that would be considered underwriting compensation during the 180 day period preceding the initial filing with the SEC through 90 days after the effective date of the filing.
– As applicable, the offering is in compliance with FINRA Rule 5121, including appropriate disclosure of any affiliation between the issuer and any participating member.
The limited review procedure would result in an expedited “no objections” letter once all representations are made to FINRA. However, if any of the four representations are deferred, the staff would issue a “limited review defer” letter. FINRA staff may also change the filing to be reviewed under the full review process if the staff determines that the offering is not eligible for limited review.
Had a blast at our week of conferences last week! The speakers did a great job. Interviewing Congressman Mike Oxley was a career highlight (and luckily, my days as ‘Billy Broc’ Oxley never came up). I’m particularly thankful to Faruqi & Faruqi’s Juan Monteverde for coming and being willing to answer many direct questions about the motivations and nature of his proxy disclosure lawsuits (stay tuned for more from Juan). Juan is a character and definitely added spice to the conference (next year’s conference? Vegas in late September!). Here is a pic of us together:
SEC Provides Additional Guidance on Form 13F Confidential Treatment Requests
In this blog, Leonard Street’s Steve Quinlivan notes:
The SEC Division of Investment Management has issued additional guidance that is meant to assist institutional investment managers that wish to request confidential treatment, or CT requests, for certain information reported on Form 13F. The guidance elaborates on the types of information that the SEC believes might be relevant in evaluating a confidential treatment request for an Ongoing Acquisition/Disposition Program in a Reportable Security.
In 1998 the SEC provided detailed guidance to Form 13F filers that might be making CT Requests for an Ongoing Acquisition/Disposition Program. In particular, the 1998 letter elaborated on five categories of information that Form 13F requires to be provided in a CT Request for an Ongoing Acquisition/Disposition Program in a Reportable Security, in order for the SEC to be able to make an informed decision about whether delaying or preventing public disclosure is necessary or appropriate in the public interest and for the protection of investors or to maintain fair and orderly markets.
In reviewing CT requests for Ongoing Acquisition/Disposition Programs since issuing the 1998 letter, the SEC staff has further identified information, for each of the five categories, that is particularly helpful in reaching an informed decision on the CT requests. The new guidance spells out the additional information in detail.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Ontario Securities Commission Consults on Board Diversity
– Debate Begins on PCAOB’s Audit Report Proposal
– Federal Court: Skeptical Whether Dodd-Frank Extraterritorial Jurisdiction Provision Overturns Morrison in Government Actions
– Notes: ABA’s FINRA Corporate Financing Rules Subcommittee
– Survey: Two-Thirds of CEOs Don’t Receive Outside Leadership Advice – But Nearly All Want It
I have posted the transcript for our recent webcast: “Reg D Offerings: What Is Happening Now.” I continue to post memos on the new rules in our “Regulation D” Practice Area – and the Reg D spreecast has now over 900 views.
In his blog – and in this one too – Steve Quinlivan reports on the first week of permissible general solicitation – flying cars? And MoFo’s Ryan Williams also blogs about the first general solicitations. Meanwhile, Mark Suster blogs about “Is @AngelList Syndicates Really Such a Big Deal?”
PCAOB Planning Outreach to Audit Committees
In this speech, PCAOB member Jay Hanson recently noted that the PCAOB is planning on conducting outreach with audit committees through a number of avenues including holding town-hall-style meetings and reaching out to organizations to increase its participation in conferences. As noted in this article, the PCAOB is even reaching out through audit firms.
Join us on November 12th for the webcast – “Audit Committees in Action: The Latest Developments” – during which PCAOB Board Member Jay Hanson, Morgan Lewis’ Linda Griggs, Home Depot’s Stacy Ingram and Deloitte’s Carol Larson will analyze all the latest developments impacting the audit committee.
Catch Up Now: “PCAOB’s Audit Report Proposals: Sleeper?” Spreecast
On Monday, a lawyers and an accountant – Davis Polk’s Joe Hall & re:theauditor’s Francine McKenna – spent 40 minutes on this spreecast – “PCAOB’s Audit Report Proposals: A Big Sleeper?” – explaining the importance of a proposal whose comment period is 4 months long. This one is a sleeper! The archive is now available – with over 400 views already!
Squeezed in just before the government shutdown – the Federal Register site indicates they are now severely restricting what is being published – the SEC’s pay ratio disclosure proposal was published yesterday in the Fed Reg. So the comment period has officially started – even though a number of comments have already been submitted. It ends in 62 days – on December 2nd.
For recent commentary by SEC Chair White about the status of the other “Four Horsemen” (i.e. outstanding Dodd-Frank governance and exec pay rulemakings), read the entry I just posted on CompensationStandards.com’s “The Advisors Blog.”
Note the SEC has changed the “shutdown” language on its homepage so that it’s no longer confusing by tweaking the sentence that links to its shutdown plan.
Upcoming Webcast: “Doing Your Pay Ratio Homework Now: A Roadmap”
I’ve just put together this CompensationStandards.com webcast for next Wednesday, October 9th (noon eastern) – “Doing Your Pay Ratio Homework Now: A Roadmap” – so you can hear Compensia’s Mark Borges, Deloitte Consulting’s Mike Kesner and Towers Watson’s James Davies, Steve Seelig and Dave Suchsland get into the nitty gritty about how to do the math in the SEC’s pay ratio proposal.
This program will not be an overview of the SEC’s new proposal on pay ratio disclosures–we have posted plenty of memos to get you up-to-speed. Rather, this program will drill down to see where you stand if the proposal was adopted–and to help you decide whether you should consider submitting a comment letter to the SEC using hard facts. So this program will help you evaluate how to choose a compensation definition; how to conduct statistical sampling in this area; how to access the right data and calculate the median.
Then after that webcast ends, join this TheCorporateCounsel.net webcast – “Dealing with the Board: Presentations, Etiquette & More” – at 2 pm eastern on October 9th featuring legends Stasia Kelly of DLA Piper, John Olson of Gibson Dunn and Stewart Landefeld of Perkins Coie.
SEC Pays $14 Million to Whistleblower! Ka-Ching!
Crime doesn’t pay? Whistleblowing sure can! Yesterday, the SEC paid $14 million to a whistleblower. The SEC’s whistleblower awards can range from 10-30% of the money collected in a case.
Kudos to the students in the International Transaction Clinic at the University of Michigan Law School for creating a novel “C-corporation with benefit corporation language” as noted in this Forbes article.
As I blogged yesterday, the SEC is fully operational even though the federal government is shut down. In fact, as noted in this Reuters article, the SEC can stay open – with all Staffers happily working – for a few weeks even if the government remains closed since it has access to some funds that other agencies don’t have (due to “carryover balances”). Dave is quoted in the piece about the potential impact on IPOs if the shutdown drags on for more than a few weeks…
The PCAOB is open. It’s a private sector agency with a December 31 fiscal year-end that is self-funded. Still, you would think they would post a note since some might not know that…
Today’s Webcast: “The Shareholder Proposal Process: Practice Pointers”
Tune in today for the webcast – “The Shareholder Proposal Process: Practice Pointers” – as those that deal with the proposal process most discuss the intricacies of the process including Marty Dunn of O’Melveny & Myers; Beth Ising of Gibson Dunn; Keir Gumbs of Covington & Burling; Paul Neuhauser of the Interfaith Center on Corporate Responsibility and consultant Beth Young.
The topics for this program are:
– From the proponent’s perspective, what factors are considered when deciding to “copy” a form of proposal that has avoided exclusion versus experimenting with a new formulation of proposal?
– From a company’s perspective, what factors are considered in deciding whether to submit a no-action request?
– What are good practices for negotiating over a proposal (including negotiating even before a proposal is received)?
– Under what circumstances does a proponent or company decide it’s not worth trying to negotiate out a proposal?
– From a proponent’s perspective, how does one decide whether to continue pursuing an issue for more than one year?
– On the company side, what type of post-mortem should the board and management conduct after each vote?
– What are good practices for working with the SEC Staff after a no-action request has been submitted?
– What are good practices for working with the other side while a no-action request is pending?
– What are factors to consider in deciding whether to appeal a no-action decision, including deciding to sue?
– What are good practices in drafting a supporting statement? In drafting a statement of opposition?
Our October Eminders is Posted!
We have posted the October issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
On Friday, the SEC posted a notice saying that it “will remain open and operational in the event the federal government undergoes a lapse in appropriations on October 1. Any changes to the SEC’s operational status after October 1 will be announced on this website.” So the SEC’s complete operations – including review and declaring registration statements effective – will continue until further notice (this is what happened during the pair of shutdowns in fiscal ’96, which was the last time the government shut down – see this NY Times article about those). So maybe the answer to my poll about how many Corp Fin Staff are considered “essential” during a shut down is “all”?
It looks like some media outlets got confused and reported something different, perhaps because at the same time its “we’re staying open” notice was posted, the SEC simultaneously posted its shutdown plan. What we don’t know is how long the SEC can keep its doors open if the rest of the government is closed.
On Friday, the SEC extended the comment period for its latest Reg D proposals by 30 days…
Today’s Spreecast: “PCAOB’s Audit Report Proposals: A Big Sleeper?”
Come participate in the spreecast – “PCAOB’s Audit Report Proposals: A Big Sleeper?” – at 1 pm eastern today! During it, Davis Polk’s Joe Hall & re:theauditor’s Francine McKenna will analyze the PCAOB’s new audit report proposal that could come to rival Sarbanes-Oxley’s Section 404 – internal controls – as a burden we all face. To access the spreecast, go here at 1 pm eastern. [Note the recent “More on Reg D Offerings Today” spreecast has had over 700 views; a new spreecast has been calendared for October 22nd: “Latest Corp Fin Comment Letter Trends“]
Here are FAQs about how spreecasts work – but the upshot is you have to register for Spreecast first (although it’s possible to watch without registering if you close a prompt). Simply sign up by using an email address by clicking the “Or sign up via email” link in the upper right hand side of the site (it’s in small print under the “Connect with Facebook” logo).
The Great Ellison and the America’s Cup
Here’s a note from Yahoo!’s Carrie Darling:
Last Wednesday, as I was flying back home from Broc’s conference in D.C., I watched The Great Gatsby. Unfortunately, the timing of my flight was such that I was missing the America’s Cup yacht race. When I got off the plane, I had a text from my husband saying that Oracle Team USA had won the America’s Cup. All I could think of was “The Great Ellison.” I kept saying it over and over to myself as I waited in baggage claim (baggage claim is really slow in San Jose). What is this America’s Cup you ask? Why is Ellison so great? Well, let me tell you . . .
Larry Ellison is the CEO of Oracle Corp. and is the driving force behind/owner of Oracle Team USA. Last Wednesday, Oracle Team USA’s victory marks one of the most improbable comebacks in the history of sports. His team won 11 races to score the 9 points required for victory, due to a penalty imposed by the International Jury of two points. Only a week before on September 18, Oracle Team USA trailed the series 8-1. They came back to win the series over Emirates Team New Zealand with eight consecutive victories. What an amazing day for sports and sailing.
So, what is the America’s Cup? The America’s Cup is the oldest international sporting trophy. The America’s Cup, affectionately known as the “Auld Mug”, is a trophy awarded to the winner of the America’s Cup match races between two sailing yachts. One yacht, known as the defender, represents the yacht club that currently holds the America’s Cup and the second yacht, known as the challenger, represents the yacht club that is trying to take the cup away from the defender. The timing of each match is determined by an agreement between the defender and the challenger.
The trophy was originally awarded in 1851 by the Royal Yacht Squadron for a race around the Isle of Wight in England, which was won by the schooner America. America finished 8 minutes ahead of her closest rival. Queen Victoria, who was watching at the finish line, was reported to have asked who was second, the famous answer being, “Ah, Your Majesty, there is no second.” Thus, the trophy was renamed the America’s Cup after the yacht (not after the country) and was donated to the New York Yacht Club (NYYC) under the terms of the Deed of Gift, which made the cup available for perpetual international competition.
Any yacht club that meets the requirements specified in the Deed of Gift has the right to challenge the yacht club that holds the Cup. If the challenging club wins the match, it gains control of the cup.
The trophy was held by the NYYC from 1857 until 1983 when the Cup was won by the Royal Perth Yacht Club, ending the longest winning streak in the history of the sport. From the first defense of the Cup in 1870 through 1967, there was always only one challenger. In 1970, for the first time, there were multiple challengers. Louis Vuitton has sponsored the Louis Vuitton Cup as a prize for the winner of the challenger selection series since 1983.
Early matches for the Cup were raced between yachts that were between 65-90 ft. long. The 2010 America’s Cup was raced in 90 ft. multi-hull yachts in Valencia, Spain. Challenger BMW Oracle Racing beat defender Alinghi 2-0 and won the Cup for the Golden Gate Yacht Club, bringing it back to San Francisco Bay. The 2013 America’s Cup was raced in AC72 wing-sail catamarans, and was held in the San Francisco Bay. It remains to be seen where Ellison will decide to hold the next America’s Cup races. If not in San Francisco, I vote for Lanai!
With a government shutdown starting to look quite possible on Tuesday, many members have emailed me this week wondering how deals will get through Corp Fin if it indeed happens. As I blogged last week, sadly we’ve seen this movie before. Here’s a blog about what the SEC said back in ’11, when a shutdown seemed likely (but never happened). Essentially, the SEC’s statement said:
EDGAR will remain fully functional – but that the SEC’s Divisions (including Corp Fin) will be unable to process filings, provide interpretive advice, issue no-action letters or conduct any other normal activities. As a result, new or pending registration statements or applications for exemptive relief will not be processed regardless of the status of any review of those filings.
There will be only an “extremely limited number” of Staffers working during the shutdown – so although the SEC’s statement provides an email address and phone number for emergencies, I imagine only true emergencies will be handled by the Staff. Other than these designated essential Staffers, any attempt to work during the shutdown is a firing offense – so there is nothing that a staffer can do for you even out of kindness of their heart. The government is scheduled to shutdown tonight at midnight.
I imagine that we will see a similar statement from the SEC either today or on Monday…
Improving Your Communications
In this podcast, Theresa Hyatte and Scott Morgan of MorganHyatte explain why – and how to – better communicate, including:
– What types of communication training do most corporate lawyers need?
– How is training for talking to the media different than other types of communication training?
– How can a corporate lawyer tell if they are someone that needs training?
– What is your process for training?
The legal cost and accounting cost of the following items can easily cause death by expense of crowdfunding:
1. Disclosure Document and Due Diligence Cost
2. Accounting Cost of Financial Statements and shareholders’ equity statements, so that investors understand what percentage they are buying and for how much. Even if the financials are not audited or reviewed, even if “compiled” standard, accountants compiling the financials require special certifications for public offerings, and therefore at higher costs.
3. Portal Costs – How do the Portals get paid? Assuming some cost to the Issuer, out of the raise, or in advance?
4. Portal Legal Fee Cost – Legal Negotiations between Issuer and Portal – What liability shifting from Portal to Issuer will occur in the Portal Agreement? Issuer’s counsel called on scene to protect Issuer from liability, or alternatively add a liability risk disclosure to the Disclosure Document. Will Portal’s counsel start with an underwriting agreement and edit? (If so, this process will keep Issuer’s counsel busy, and on their toes.) Very costly process either way, especially as we collectively “figure this out”. Even after “standard” provisions settle in, the Portal Agreement would likely be a negotiated agreement, which adds Portal’s law firm costs to the mix. Who pays those? Negotiating process between Issuer’s counsel and Portal’s counsel will add cost to an already “too large budget, for the size of the deal”. Add an interesting phenomenon if the Portal does not have counsel?
5. Legal Fee Cost of Subscription Agreements, with many permutations. With complexity comes cost. Though these costs will settle down eventually.
6. Legal Fee Cost, Consultant’s Cost, or Issuer’s In-House Compliance Cost, of Monitoring Investor Compliance with the Investor Thresholds – Various percentage calculations and income or net worth calculations, and investment limits based on both, will require due diligence on the investor. Issuer must maintain calculations on each investor and its threshold. The “per investor” cost of legal fees goes up.
7. Legal Fee Cost, or Issuer’s In-House Compliance Cost, of Reporting Notice to the SEC – Crowdfunding notice will likely be a pre-offer notice, which typically includes substantial detail in reporting, if not inclusion of the disclosure document.
8. Social Media Cost – Legal Fee cost of managing/reviewing/editing communications of Issuer/clients over social media.
Crowdfunding: A Preview of State Discontent?
And Kim Lisa Taylor of Trowbridge & Taylor notes: This “Notice of Intent to Issue Cease and Desist Order” illustrates the Ohio Division of Securities’ opinion about crowdfunding. Despite the fact that SoMoLend jumped the gun, Ohio appears to have carefully crafted this Notice to illustrate their issues with crowdfunding in general. This Notice could be the first of many if other states share their sentiments.
There are currently a number of companies online purporting to offer crowdfunding opportunities (not just the donation type), who apparently don’t understand that it’s not yet legal or that they will have to be an approved portal to offer them when (if ever) it becomes legal. The public’s confusion appears to stem from the mass media’s misuse of the term “crowdfunding” to describe everything from crowd-sourcing (for non-profit purposes) to advertising for accredited investors under new Rule 506(c).
When I tell people it’s not yet legal, they don’t believe me, citing the numerous websites and articles that talk about it as if it is. My law partner and I I teach hundreds of real estate investors how to syndicate every year. This misinformation problem seems to be prevalent in the real estate investing industry – and I hear that many “guru” types are teaching crowdfunding to wannabe group sponsors as if it’s legal. I also have a column in the September/October issue of “Personal Real Estate Investor Magazine.”
Crowdfunding: Will It Really Help Startups in the Long Run?
Say startups raise small sums of $100K-$400k through crowdfunding. What are they left with then? Is the result consonant with the rationale for the Act, creating jobs? Will such startups be real businesses? Can they go forward as is? Or do they then have to raise real sums? Could they? Will the commercial lender look at them? The VC? Will such startups be able to do real rounds or even go IPO? Would they have to go through an expensive restructuring to become a real contender?
As a strategic matter, startups that go after such small sums – $100K-$500k – usually think that they need only a small cash infusion to get into production, to get the first contract, to build a prototype and file a patent application, or to sit and code in an incubator, but how often is this need realistic? Usually they end up being seriously undercapitalized, if they succeed at all, because they misunderstand burn rate. They mistake their real costs and their real needs because they defer the critical financial questions. Marketing, ramp up, and scale up seem much farther away than they actually are. Sometimes reality is too complex to understand or too scary to think about. Such startups usually end up going back to the trough many times.
Too many startups have been down this path. It’s the classic story in angel, friend, and family funding. Sometimes the startups are the next instant hit, the designer cupcake or disruptive gadget, but more often, the startups run through the first $300k and then they are back trying to raise the next $300k, if, in fact, they don’t just disappear. Their “deal lawyer” rarely sees them again or they become the habitual client, in the door every two years or so. Years on, they seem to be largely in the business of raising small sums. And if one looks at their real business model, one sees that the world has moved on and the market opportunity or the technology window has gone; someone else has already done it or built something better.
Crowdfunding is a source of ready cash but I’m not sure it has much to do with creating jobs or growing real companies. Vanity funding may have its place, but it doesn’t make economies run – which was the point if the JOBS Act.
You may not be familiar with the ‘mandate’ under the America Invents Act, under which patent lawyers are asked to provide free legal assistance to startups and inventors as part of the ABA Model Rule 6.1 obligation to provide “at least” 50 hours of pro bono work a year. That is quite an obligation when all lawyers in this high liability field are pressured to discount heavily and to accept conflict-ridden sweat equity.
Here’s a note from the US Patent Office: “The America Invents Act specifically called on the United States Patent Office and practitioners alike to establish a pro bono program to assist financially under-resourced independent inventors and small businesses. The USPTO is working with different regions across the country by educating both IP law associations and non-profits on how these pro bono programs work and how to successfully implement them in new regions. Efforts are now well underway with volunteers endeavoring to achieve the goals of ABA Model Rule 6.1 to provide at least 50 hours of pro bono legal services per year.”
A while back, I blogged that Dr. Mike Piwowar was sworn in as an SEC Commissioner by the SEC’s Los Angeles Regional Office Director – and a few members asked me who had the authority to swear a Commissioner in? Before answering that question, let me explain what the oath is.
As noted on this site, federal employees take the same oath of office as Congress, by which they swear to support and defend the Constitution. Specifically, the oath is:
“I, [name], do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; that I take this obligation freely, without any mental reservation or purpose of evasion; and that I will well and faithfully discharge the duties of the office on which I am about to enter. So help me God.” 5 U.S.C. §3331
According to this site, the history of the oath for federal employees can be traced to the Constitution, where Article II includes the specific oath the President takes – to “preserve, protect, and defend the Constitution of the United States.” Article VI requires an oath by all other government officials from all three branches, the military, and the states. It simply states that they “shall be bound by oath or affirmation to support the Constitution.” The very first law passed by the very first Congress implemented Article VI.
So now to the question of who within the SEC has the authority to administer the oath? I think it is pretty much anyone. As I recall, some low-level Staffer – who worked in human resources – swore me in on the first day when I joined the Staff (each time; I was sworn back in when I did my second tour of duty).
25 Years Ago Today: Grabbing a Doughnut…
Wow. Twenty-five years ago, I began my legal career by starting my job as an examiner in Corp Fin. Upon arriving and doing the half-day of orientation – including getting sworn in – I reported to duty in one of the banking branches. My branch chief handed me a copy of Regulation S-K and said “read this.” That was my training. More on all that someday.
Anyways, six of us started the same day. Back then, Corp Fin hired most of its new lawyers straight out of law school (laterals were rarely hired from firms, etc.) So at the beginning of every fall, there would be a new class of “newbies.” A handful would start every two weeks – ie. start of a bi-weekly pay period – through August and September (we started before we even learned whether we had passed a bar exam – I believe you would be on tentative status for a year, giving you three chances to pass). Most of the examiners in the Division were young and single – and from different parts of the country. A lot of fun.
So a hearty “shout out” to those that started in my class, including good friends Mark Coller, Bill Tolbert & Larry Spaccasi. Marty Dunn, Laurie Green, Peggy Fisher, Scott Freed & Todd Schiffman started a few weeks before. Here’s a recent pic of Bill & I using our fingers to signify the 25th anniversary. And Mark, Larry & I are in this old pic from back in the day. I had hair (and crutches as I started the job with a broken leg)!
