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As we’ve previously blogged, in July 2013 the SEC adopted rules that permit general solicitation and general advertising in connection with certain offerings of securities to accredited investors.  Yesterday, to help the markets understand some common interpretative questions associated with these new rules, the SEC issued several new Compliance and Disclosure Interpretations.  The new interpretations mainly address:

  • when and how companies may switch between “old” Rule 506(b) (no general solicitation) and new 506(c) (general solicitation permitted),
  • the need to amend Form D if such changes are made,
  • the

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Continue Reading SEC Provides Interpretations on Rule 506(c)

CONTRIBUTED BY Trent Dykes and Nathan Luce

Earlier today, the Securities and Exchange Commission (SEC) took an important step in making securities-based crowdfunding a reality for many small companies with the release of its proposed rules governing crowdfunding. The proposed rules, called “Regulation Crowdfunding,” were drafted in connection with Title III of the JOBS Act. Whereas traditional crowdfunding involves a company offering things like advanced product or information releases, premium services or the ability to contribute to a given cause in exchange for an investment, Regulation Crowdfunding would allow those same companies to issue actual securities (i.e., debt or equity) in exchange for investments—a dramatic shift from what has become fairly common practice on websites such as Kickstarter or Microryza over the past few years.

The SEC’s Regulation Crowdfunding proposal would implement rules governing the offer and sale of securities under new Section 4(a)(6) of the Securities Act of 1933 (Section 4(a)(6)). The proposal also provides a framework for the regulation of registered funding portals and brokers, whom issuers must use as intermediaries in their crowdfunding efforts pursuant to Section 4(a)(6). In addition, the proposal would exempt securities sold pursuant to Section 4(a)(6) from the registration requirements of Section 12(g) of the Securities Exchange Act of 1934.
Continue Reading Overview of Proposed SEC Crowdfunding Rules

The SEC is currently open and operational despite the recent federal government shutdown. So far the federal government shutdown has not slowed the proposed Twitter IPO, as their Form S-1 registration statement was posted to the SEC website on October 3.

The SEC has released its operational plan in the event of a future SEC shutdown, which can be found here. If there is a lapse in appropriations resulting in an SEC shutdown, the SEC will continue only certain functions, which are discussed both in the SEC release referenced…
Continue Reading SEC operating status in light of federal government shutdown

CONTRIBUTED BY
Trent Dykes, Megan Muir and Kiran Lingam (guest contributor from SeedInvest)

I. Introduction / Background

With the passage of the JOBS Act, the regulation governing most private securities offerings is undergoing a dramatic makeover. Congress tasked the Securities and Exchange Commission (SEC) with developing new rules allowing companies to generally solicit funds, subject to restrictions as determined by the SEC. In July 2013, the SEC issued final rules on this topic and also proposed additional rules that are not yet final. Managers of incubators, accelerators, angel groups and others involved in startup capital raising have expressed great concern about how the revised regulations will affect them, particularly with respect to their public-facing events.

Whether presenting at a demo day event, angel group meetings or business plan competitions constitutes “general solicitation” is a question that has caused great concern among many angel groups, incubators and other event organizers around the country. This post is designed to provide practical tips to event organizers on how to structure their demo day, pitch event or angel group meeting event in light of new federal rules and the current regulatory landscape.

Starting today, September 23, 2013, the final rules published by the SEC in July go into effect and companies can use general solicitation (or advertising) in connection their securities offerings under the new Rule 506(c) of Regulation D of the Securities Act of 1933, adopted under Title II of the JOBS Act. However, the companies that choose to take advantage of general solicitation under the new rules will have to take steps they did not need to take in the past, including additional verification of accredited investor status. If the proposed rules go into effect, there are a further steps that would be imposed on companies choosing to generally solicit, including making advance filings of a Form D, filing with SEC the materials used in the general solicitation and including specific language (referred to as “legends”) in written solicitation materials.
Continue Reading Demo Days, Pitch Events and the New Reg D

Megan Muir.jpgCONTRIBUTED BY
Megan Muir

Earlier this summer, together with some of my partners within DLA Piper (Christopher Paci, Jason Harmon, Darryl Steinhause and Wesley Nissen), I wrote an article about new SEC regulations concerning private offerings. The final rules issued in July 2013 by the SEC go into effect on September 23, 2013. Below is a summary of the changes with respect to the disqualification of certain “bad actors” in connection with private offerings.  Also, attached is a sample Rule 506 Covered Person Questionnaire seeking information about potentially disqualified individuals and entities. The full article also contains a discussion of new rules allowing general solicitation in certain private fundraising as well as a discussion of certain proposed private offering rule changes that are not yet final. That piece may be found here.

The Dodd-Frank Act, enacted in 2010, required the SEC to adopt rules to prohibit use of the Rule 506 exemptions under Regulation D for securities offerings in which certain “bad actors” are involved, whether or not general solicitation or general advertising are used in the offering. Rule 506 is the exemption from registration requirements used in many private offerings, including most startup financings. To fulfill this Dodd-Frank requirement, the SEC has adopted rules that disqualify an issuer from selling securities in reliance upon the Rule 506 exemption if the issuer, its board members, certain of its officers and its large shareholders, among others covered by the rule, have experienced a “disqualifying event.” This is similar to existing bad actor rules, such as those found in Rule 505 of Regulation D, which relies on the disqualification provisions set forth in Rule 262 of Regulation A.

Disqualifying events include criminal convictions in connection with sales of securities, certain SEC civil and administrative actions and certain other orders from financial service industry regulatory authorities. If the issuer or other covered person is deemed a bad actor under this rule, the Rule 506 exemption will not be available to the issuer.

Continue Reading New SEC Rules Disqualifying “Bad Actors” in Private Fundraising

Megan Muir.jpgCONTRIBUTED BY
Megan Muir

Earlier this summer, together with some of my partners within DLA Piper (Christopher Paci, Jason Harmon, Darryl Steinhause and Wesley Nissen), I wrote an article about new SEC regulations concerning private offerings. The final rules issued in July 2013 by the SEC go into effect on September 23, 2013. Below is a summary of the changes with respect to general solicitation in such rules. The full article contains a discussion of other regulatory issues that should be considered and new “bad actor” rules, as well as a discussion of certain proposed private offering rule changes that are not yet final. That piece may be found here.

On July 10, 2013 the US Securities and Exchange Commission adopted much-anticipated amendments to its regulations on private offerings under Rule 506 of Regulation D of the Securities Act of 1933, as amended, that lift the more than 80-year ban on general solicitation and advertising for certain purchasers, as mandated by Section 201(a) of the Jumpstart Our Business Startups Act (popularly called the JOBS Act).

Beginning September 23, 2013, these changes will permit issuers to use advertising and other forms of mass communication to sell securities solely to “accredited investors” under Rule 506 of Regulation D. However, these amendments also include several new requirements and procedures. You will want to be aware of these changes before you launch a general solicitation campaign.

Continue Reading New SEC General Solicitation Rules Go Into Effect

Ban on General Solicitation Lifted with Respect to Accredited Investors

Today, the Securities and Exchange Commission (SEC) adopted new rules to lift the ban on general solicitation of funds or general advertising for certain private offerings of securities.  Once the rules become effective (60 days after publication in the Federal Register), provided that certain requirements are met, startups, fund managers and other companies will be able to utilize general advertising to offer to sell stock to “accredited investors” as defined in Rule 501 of Regulation D of the Securities Act of 1933 (typically wealthy individuals with liquid net worth in excess of $1 million or investment funds; see our discussion of the recently revised accredited investor standards here as well as information on the SEC’s site http://www.sec.gov/answers/accred.htm). Continue Reading SEC Issues Rules Lifting Ban on General Solicitation in Unregistered Fundraising

This article is appearing simultaneously on The Venture Alley and on Startup Law Blog. 

The below flowchart may be helpful to you in answering the question whether you qualify for the exemption for “venture capital funds” under Section 203(l) of the Investment Adviser’s Act of 1940 ( the “Advisers Act”), pursuant to the final rules promulgated by the SEC.1  In all cases you should consult with an attorney.  For more detailed information regarding the federal exemption, check here.  Note that the Washington State Department of Financial Institutions (DFI) has proposed rules that are going to require many fund managers to register with the State as investment advisors.  We plan to prepare a separate flowchart to help you understand those rules once they are finalized.Continue Reading “Venture Capital Fund” Flowchart for Exemption Under the Investment Advisers Act of 1940

As readers of this blog know, Washington State is proposing new rules that will require more fund managers to become registered investment advisers.  These rules were originally proposed in the second half of last year and, in response to preliminary comments, the Securities Division of the Washington State Department of Financial Institutions (DFI) proposed new rules for comment by May 21, 2013.  Quoting from the DFI’s Notice to Interested Parties dated March 27, 2013:

In August 2012, the Securities Division circulated an early draft of rule amendments to the interested parties list. We also conducted a small business economic impact survey. In response to comments received from interested persons, and in response to the results of the small business economic impact survey, the Securities Division made certain changes to the proposed rules compared to the earlier draft…

The Securities Law Committee of the Business Law Section of the Washington State Bar Association, representing attorneys practicing in this area throughout Washington State, submitted formal comments to the DFI’s request.  Their comment letter is included below.  Full disclosure, I’m not a member of the Committee, but they asked me to help them in drafting their formal response with respect to how the rules relate to private fund advisers.Continue Reading Comment Letter Response to Washington State’s Plans to Regulate More Fund Managers

A_Ledbetter_LR.jpgCONTRIBUTED BY
Andrew Ledbetter
andrew.ledbetter@dlapiper.com

In one of the worst kept secrets in the securities world, yesterday SEC Chair Mary Schapiro announced that she would step down on December 14, 2012, and President Obama announced that he intends to designate Elisse Walter, a current SEC Commissioner, as SEC Chair upon Ms. Schapiro’s departure.  Ms. Walter will serve as SEC Chair until a long-term successor is found (who will require Senate confirmation), and she is able to serve in this role through next year (because she was previously confirmed…

Continue Reading Changes to SEC Leadership Next Month