As the United States continues to rebuild its economy, the JOBS Act will impact businesses and financial markets. Legal practitioners, scholars, and students must be proficient in the legal and business aspects of the JOBS Act. This symposium will facilitate discussions of potent topics related to the future of securities transactions regulated under the JOBS Act and the impacts these transactions will have on the practice of law.
Topics addressed included:
- Crowdfunding and Other Exempt Offerings
- IPO On-Ramp for Emerging Growth Companies
- The JOBS Act and Investor Protection
Panel 1: Crowdfunding and Other Exempt Offerings, Moderated by Thomas Joo
- Bruce Dravis, Downey Brand LLP
- Joan Heminway, University of Tennessee College of Law
- Andrew Schwartz, University of Colorado Law School
Reg D, Rule 506 – Bruce is not a fan. Protections went down. Not severely or profoundly but disclosure is weakened. Rule 506 most used for private placements. Scope of private placement is gigantic, almost equal to registered offerings. Generally no advertising. Restricted securities (six months until sale). Offerings subject to anti-fraud provisions. Accredited investors 506(c): must take reasonable steps to ensure only accredited investors buy in. Reasonable steps need to go beyond self-certification. For some issuers without contacts, advertising to find money may be helpful. Most people aren’t that disconnected. It also makes it easier for fraudsters using affinity groups.
Must use a registered broker or registered portals. Portals must take a number of actions to ensure investor review and understanding, reduce fraud, ensure compliance with investment limits, institute privacy protections. Can’t sell investor informations, prevent self-dealing, etc. Many open issues. Who is the principal? Who compensates the funding portal? Relationship of issuer and funding portal violations to a funding portal’s status? Can you delegate? Reputational intermediary. Fiduciary duty to investors? Can’t offer investment advice.
Andrew discussed rural crowd funding. 1/5 of population in rural America. More economic problems. Fewer than 10% in rural areas work in farming. Relative scarcity of financing for startups and small businesses. Since 1970s all net job creation has come from small businesses. Banks wary. Angel investors needed. Hubs, like Silicon Valley, are full of funding sources but it is hard to find financing in rural areas… you have to move. JOBS Act will allow people to raise a little from a lot of people. Can raise money from people who are not even millionaires. Some people don’t want to move. Thanks to crowd-funding act it is possible for rural entrepreneurs to get funding without moving.
Discussion: Right now you have to buy access to accredited investors. Maybe just a different kind of intermediary with efficiency gains. Risk-adjusted returns. Will they understand the risks? There a lot of unregulated finders out there right now. Because of transaction costs, people will move to the most unregulated paths of least resistance. Huge amount of intellectual infrastructure that needs to be built. Someone can develop the Amazon-like recommendations for possible funders… eBay star system for reputation of portal or promoters. Requires good internet access. Micro-financing/internet coding. Will brokers have a different fiduciary duty than portals? It will be a pool for fraudulent events.
Background: According to the SEC, in 2012, more than 100 companies utilized the JOBS Act’s confidential filing process to “test the waters” for a possible IPO. More thaw than three-quarters (80%) of investment bankers indicate that lack of transparency has a negative impact on their ability to advise clients of their offerings due to a lack of information on potential competitors for investment dollars. Only 9% of bankers describe this difficult as “substantial.” Investor groups give this aspect mixed reviews, since many are reluctant to meet with emerging businesses until the company has made a public commitment to the offering. (2013 BDO IPO Outlook)
Easing access to capital for small issuers. How streamlined? Life after public offering? Good v Bad.
Emerging growth company. Under $1B revenues for IPO. Now when you file, it is public. Under JOBS Act initial can be confidential for 21 days prior to IPO roadshow. Risk factors section of the company must be lawyered up. Competitors use that against company during that 21 day period. The longer they stay on file when not confidential, the more they are damaged goods. Allowed to go talk to investors, not the same lookback on communications and disclosure.
Detailed descriptions of how execs are compensated and methodologies. Not required under JOBS Act. Reduced disclosure reduces costs and cycle time. Once filed with SEC it takes 28 days but they haven’t hired so at risk if SEC can’t turn around paperwork timely. 6 months from draft of S1 ready. If you don’t get out by 1st week of August, you’ll need to wait until September. One or two days slippage could be critical. Legal fees for IPO $1-2M. Accounting another $1M. Lots of fees and expenses. If confidential filing you don’t have to pay a fee.
First cycle now of proxy reporting. They have reduced disclosure requirements for 5 years but will most companies report anyway? 2 yrs rather than 3 of audits. Do they want to look different? No, they want to be compared apples to apples so will disclose even if they don’t have to… except for executive compensation. No vote on compensation.
Auditor certification. Internal control must be tested and audited. That can take a year. Accounting standards being phased-in for emerging growth companies. SEC doesn’t treat confidential filing any differently re time to review. SEC was already under a lot of pressure to not give as many comments.
People who buy IPOs aren’t the same who buy on open market. The IPO guys don’t care that much about pay and governance issues. Still have all the gun-jumping provisions but JOBS Act does create exceptions.
Panel 3: The JOBS Act and Investor Protections, moderated by John Patrick Hunt
- Michael Guttentag, Loyola Law School
- Andrew Hargadon, UC Davis Graduate School of Management
- Anne Simpson, CalPERS
Guttentag. Access to capital was the issue JOBS Act was to address. Investor protection core idea. Interesting history. Protection of investors from what? Consequences, confusion. JOBS Act doesn’t protect. Louis Brandeis (What publicity Can Do), Huston Thompson 1923 article and wrote Dem platform that Roosevelt ran on. No protection from losses.
- Fraudsters, Other People’s Money and How the Bankers Use it (Brandeis sunlight quote)
- Informational disadvantages, asymmetry — Reg FD
- Extraction of private benefits (tunneling) against the wiles of promoters by insiders (protect outside investors)
- Themselves – Need to keep investors from doing stupid things. Focus on the plight of average investors who lack sophistication.
See also, Guttentag, Michael D., Porath, Christine and Fraidin, Samuel N., Brandeis’ Policeman: Results from a Laboratory Experiment on How to Prevent Corporate Fraud (June 1, 2008). Journal of Empirical Legal Studies, Vol. 5, No. 2, July 2008; Loyola-LA Legal Studies Paper No. 2009-24.
Bubbles – moments when assets trade in excess of their intrinsic value. Reward early investors. Incented to sell, even when they believe in long-term value. Undermine market confidence. Two key ingediants. new and uncertain asset classes (the very companies JOBS Act hopes to bring in). Novice and uninformed investors. JOBS Act will bring many tiny bubbles (aplolgies to Lawrance Welk). In Silicon Valley 99% is getting early money out, rather than providing necessary capital for jobs to grow. Create conditions for small businesses as speculative investments — casino. Law of unintended consequences.
Anne Simpson asks, “Why bother protecting investors?” Purpose of companies use to be to create a public good. Invented for a purpose. South Sea Bubble. Banned companies for a while. Joint stock company… notion of limited liability intended to appeal to investors. Other things like having a board with fiduciary duty. Ability to call a meeting, file resolutions, require audit of accounts. Investors were originally a self-help enterprise. Companies didn’t want to be governed federally. Chartered by states. Purpose of corporation. Accumulation of private capital, bearing and spreading of risks, living beyond founder. However, shareholders lack many fundamental rights, like the ability to hold board accountable. Most have no requirement to leave the board if they don’t win a majority of the vote.