PUBLIC AND PRIVATE OFFERINGS UNDER THE JOBS ACT GEORGE LEE LEE & STONE LLP June 25, 2012 copyright 2012 Lee & Stone LLP.

PUBLIC AND PRIVATE OFFERINGS UNDER THE JOBS ACT

GEORGE LEELEE & STONE LLP

June 25, 2012 copyright 2012 Lee & Stone

LLP

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Presenter Info

George Lee is a founding partner of Lee & Stone LLP, a boutique law firm representing the investment management community in transactional, securities and regulatory matters. Previously, he served as General Counsel of Greenway Capital, a Texas registered investment adviser and worked in private practice at major international law firms in New York, Dallas, and Houston. Mr. Lee graduated from the University of Texas School of Law in 1987, and received his BA in 1983 from Carleton College. He is a member of the Texas and New York bars. Mr. Lee is also a member of the College of the State Bar of Texas and is active in the Texas and Dallas Bar Association Securities Sections, The Securities Law Committee of the Texas Business Law Section and the Dallas Fort Worth Compliance Roundtable.

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Jumpstart Our Business Startups Act

Primarily designed to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies

Seven Titles, including “IPO On Ramp” for emerging growth companies Allowing public solicitation in certain private

offerings Crowdfunding Increasing dollar limits for Regulation A Increasing thresholds for ‘34 Act registration

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JOBS Act & Timing

Signed into law April 5, 2012 Many provisions are self-executing –

Facilitating IPOs for emerging growth companies (“EGCs”)

Relaxing reporting requirements for EGCs; and Public Company Registration Thresholds

Many require SEC rulemaking: Private Offerings due by July 4, 2012 Study on Blue Sky Laws impact on Regulation A

offerings due byJuly 5, 2012 Crowdfunding due by December 31, 2012 Regulation A, mandatory but no deadline

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What is an Emerging Growth Company?

An EGC is a company with gross annual revenues of less than $1 billion

A company remains an EGC until the earliest of: Gross revenues of $1 billion or more Fifth anniversary of its IPO Issuance of $1 billion in non-convertible debt

during the previous three years Public float is $700 million or more

A company does not qualify as an EGC if it conducted its IPO on or before December 8, 2011

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Reporting and Other Requirements Reduced for EGCs

Two years (not three years) of audited financial statements in IPO registration statement

Exempt from certain proxy rules "say-on-pay" shareholder vote shareholder vote on golden parachute

compensation Certain executive comp. disclosures

Exempt from the auditor attestation requirements with respect to internal controls

Permitted to delay application of new public company financial accounting standards until they become mandatory for private companies

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Communications Prior to and During a Securities Offering

EGCs can “test the waters” Can communicate with qualified

institutional buyers (QIBs) and institutional accredited investors (“IAIs”) before and after the filing of registration statement

Includes communications by underwriters Oral and written communications to QIBs

and IAIs remain subject to potential liability under Section 12 of the Securities Act for any material misstatement or omission

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Confidential Submission of IPO Registration Statements

Permitted to submit any IPO registration statement and subsequent amendments confidentially

IPO registration statement and amendments required to be publicly filed with the SEC no later than 21 days before a road show If an EGC submits its IPO registration statement

to the SEC confidentially, management of the EGC may be limited in its ability to communicate with QIBs and IAIs to gauge their interest in the potential offering for 21day quiet period

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Analyst Research Reports Publication of research on EGCs by Investment

Banks is not considered an offer or a prospectus, even if the bank is participating or will participate in the offering Applies to equity offerings including IPOs Reports no longer subject to liability under Section

12 of the Securities Act for material misstatements or omissions

Still subject to other securities law liability Neither the SEC nor FINRA may adopt or

maintain quiet periods for equity research reports for EGCs

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Research Analysts’ Communications and Meetings

Prohibits the SEC and FINRA from adopting or maintaining rules or regulations in connection with an IPO of an EGC that restrict: who at a broker-dealer may arrange for

communication between a securities analyst and a potential investor

participation of a securities analyst in meetings with management, even if investment bankers are present

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Private Offering Exemptions

Elimination of Prohibition against general solicitation and general advertising in Rule 506 Offerings Requires SEC to amend Rule 506 by July 5 Requires that all purchasers be accredited investors Issuer using public solicitation must take reasonable

steps to verify that the purchasers are accredited using methods determined by the SEC

SEC to revise Rule 144A to allow general solicitation and general advertising Seller and any person acting on behalf of the seller

must reasonably believe the buyer is a QIB

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Private Offering Exemptions

Only available to U.S. organized issuers May be available to private funds

New Section 4(b) of “33 Act now provides that general advertising or general solicitation Not deemed public offering under Federal Securities Laws 3(c)(1) and 3(c)(7) of Investment Company Act May not be available to Commodity Pools

Not available to: Registered investment companies; Issuers already subject to reporting requirements;

and Issuers with “bad boys”

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Rule 506 Intermediaries

Rule 506 intermediary is not subject to broker-dealer registration solely because that person: Maintains a platform or mechanism that permits

the offer, sale, purchase, negotiation, general solicitation, advertisements, or similar activities in connection with the offering;

Co-invests in the securities being offered; or Provides ancillary services in connection with the

offering State law is not pre-empted for 506 Intermediaries

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Rule 506 Intermediaries

Rule 506 Intermediary not registered as a broker dealer must: Receive no compensation in connection with

the purchase or sale of securities in the offering (transaction based compensation);

Not be in possession of customer funds or securities in connection with the offering; and

Not be subject to a statutory disqualification under section 3(a)(39) of the Securities Act (No “Bad Boys”)

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Crowdfunding

Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act Small offerings seeking small investments

from many investors New Section 4(6) of the Securities Act $1 million annual limit (debt or equity) Not effective until SEC rulemaking

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Crowdfunding

SEC rules due by the end of the year Investor with net worth or annual income of

$100,000 or greater may invest up to 10% of net worth or income, with a ceiling of $100,000

Investor with net worth or annual income of less than $100,000 are limited to greater of $2,000 or 5% of net worth or income

In all crowdfunding offerings, Issuer must verify whether Investor has money in other crowdfunding investments

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Crowdfunding

“Covered Securities” under Section of the Securities Act Not subject to state blue sky registration

requirements Still subject to state anti-fraud enforcement

Securities remain restricted Mandatory one year holding period with

certain exceptions

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Crowdfunding

Certain disclosures required depending on offering Less than $100K - financials certified by CEO $100K-$500K - financials reviewed by CPA Over $500K - audited financials

Issuer Not required to register under ‘34 Act Still must make annual SEC filings and

disclosures to investors as the SEC determines to be appropriate

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Crowdfunding

Crowdfunding offerings must be conducted through a broker-dealer or through a “funding portal” that does not: Offer investment advice or recommendations; Solicit purchases, sales, or offers to buy the securities

offered or displayed on its website or portal; Compensate employees, agents, or other persons for

such solicitation or based on the sale of securities displayed on its website or portal;

Hold manage or possess, or otherwise handle investor funds or securities; or

Engage in such other activities as the SEC, by rule determines appropriate

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Crowdfunding

Funding Portal is required to: Register as a Funding Portal with the SEC Obtain membership in a national securities

association (FINRA) Obtain a background and securities

regulatory enforcement check for the directors, officers, and holders of more than 20% of the outstanding equity of the issuer

Meet any other requirements that the SEC, or FINRA as the regulator of Funding Portals, prescribes as appropriate

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Crowdfunding

To prevent fraud by the issuer, the Broker-Dealer/Funding Portal must “ensure” that no offering proceeds are distributed to the Issuer until the target offering amount is established

The offering may not be advertised except by directing the investors to the Broker-Dealer or Funding Portal

Broker-Dealer/Funding Portal must also make available to investors and the SEC, at least 21 days before any sale, any disclosures provided by the Issuer

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Regulation A

‘33Act registration exemption to be increased from $5 million to $50 million raised in 12 months Requires SEC rulemaking, but no deadline Only equity, debt and convertible debt

Securities may be publicly offered and will not be restricted

State law generally pre-empted SEC Rules will require certain annual

filings and investor disclosures

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Increased Registration Threshold for Public Company Reporting

No requirement to register until company reaches 2000 shareholders (or 500 shareholders who are not accredited investors) “of record” Excludes record holders who receive the

securities pursuant to an employee compensation plan exempt from registration under Section 5 of the Securities Act

SEC must exempt securities held by crowdfunding investors

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Q&A

Any questions? [email protected]