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Private Placements: A Look into the Nature of Offerees

In 1953, the SEC fought Ralston Purina Co. over whether a security offering to its employees was exempt from registering its offering with the SEC.

  Gavin Johnson

Typically, when you sell a security you must register the sale with the Securities and Exchange Commission (SEC). However, Section 4(2) of the 1933 Act exempts “transactions by an issuer not involving any public offering.” In these transactions, better known as private placements, the 4(2) exemptions apply to accredited investors, who are deemed by the SEC to be  sufficiently sophisticated and have sufficient bargaining power so as not to require the protection afforded by federal registration, as well as institutional investors who have obvious sophistication and bargaining power. You can learn more about the private placement exemption here.

In 1953, the SEC fought against Ralston Purina Co. over whether Ralston’s security offering to its employees was exempt under 4(2). Ralston argued that an...

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Early Numbers Show that Companies are Using Rule 506(c) to Raise Funds

A report from the SEC shows that companies are adopting rule 506(c) offerings as an alternative to raising funds under the old 506 rules.

  Gavin Johnson

If you are as curious as we are about the consequences of the new Rule 506(c), I’ve got some good news for you. There’s some early data that points to how issuers are taking advantage of the recent SEC rule changes.

Keith Higgins, the newly appointed director of the SEC’s Division of Corporate Finance, recently commented on the preliminary effects Rule 506(c) on the investment landscape. For those of you that have been following the JOBS Act and its various moving parts, you are well aware of Rule 506(c) and the fact that the SEC lifted the ban on general solicitation for securities offerings. For the rest of you, here’s a primer on Rule 506(c) and the lifting of the ban...

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Basics of Broker-Dealer Regulation

In this blog post we discuss the basic regulations for broker-dealers including, what a broker-dealer is, compliance requirements, and potential penalties.

  Kyle Hulten

Generally speaking, broker-dealers are people that are in the business of buying and selling securities or in the business of helping others buy and sell securities. Brokers and dealers are subject to extensive regulation by the Securities Exchange Commission and state regulators.

The broker-dealer regulations are designed to make sure that people in the business of buying and selling securities meet professional standards, have adequate capital, and provide adequate disclosures to investors.

What is a broker?

The Exchange Act, in Section 3(a)(4)(A), defines a broker as any person or company that is engaged in the business of effecting transactions in securities for the account of others. This definition is analyzed in three parts. A broker must:

be “engaged in the business,” of “effecting transactions in...

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Investor Verification Services Offer Simple Affordable Solution for Companies Using Advertising to Raise Funds

This post highlights issues with the regulations surrounding the JOBS Act and the effect the rules have on raising capital through general solicitation.

  Gavin Johnson

A recent Wall Street Journal article discussed the “murky” waters that have become the regulations surrounding the JOBS Act and the lifting of the ban on general solicitation for raising funds in a private placement. The article highlights some of the issues with the new regulations and points out that many small, privately-held companies are not taking advantage of the opportunity to raise capital using general solicitation because of the uncertainties associated with the new rules. One “hurdle” that the article points to is the requirement for companies to take “reasonable steps to verify” that investors are accredited investors—individuals with annual income of at least $200,000 (or $300,000 joint income with his or her spouse), or at least $1M in...

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FINRA Authorizes Collection of Information from Funding Platforms

The Board authorized FINRA to create a form to obtain information from funding platforms that intend to register with FINRA pursuant to the JOBS Act.

  Gavin Johnson

The frustrations have been loud and clear from funding platforms, investors, and bloggers alike regarding the SEC’s failure to implement rules governing online fundraising under the JOBS Act. The SEC has been dragging its feet and has missed just about every deadline that was set for it to enact the regulations that will allow investors and fundraisers to connect via online funding portals. However, in early December FINRA took a small step in the right direction.

The FINRA Board of Governors met to discuss a number of regulatory issues, including funding portals and the JOBS Act. The result? The Board authorized FINRA to create a form that is geared towards obtaining information from funding platforms that are intending to register with...

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Electronic Filing Depository

To streamline the filing of security's notices, the North American Securities Administrators Association, Inc. created the Electronic Filing Depository.

  Collin Roberts

The most common method companies use to raise private capital requires filing notices with each state in which you have an investor. To streamline the process of filing these notices, the North American Securities Administrators Association, Inc. (“NASAA”) created the Electronic Filing Depository (“EFD”).

Who does the EFD help?

The general rule in the United States is that, unless you have an exemption, in order to sell stock in your company, you need to register your stock offering with the SEC. Stock registrations are so expensive and time-intensive that they’re not feasible for most all small companies. As we’ve discussed before, Rule 506 of Regulation D is a “safe harbor” for the private offering exemption of Section 4(a)(2) of the Securities Act....

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Income Verification & Deferred Compensation: What’s included in income calculation?

Companies offering securities under Rule 506(c) must take "reasonable steps to verify" that all purchasers are accredited investors.

  Kyle Hulten

Companies offering securities under new Rule 506(c) (which allows issuers to advertise the securities offering) must take “reasonable steps to verify” that all purchasers are accredited investors. One of the ways an individual qualifies as an accredited investor is by having annual income for the last two years exceeding $200,000 or a joint annual income (with spouse) for the last two years exceeding $300,000, and the individual must have a reasonable expectation that he or she will meet these thresholds in the current year.

Do you include deferred compensation, 401k contributions, and other fringe benefits as income? If you take a look at your W-2’s you’ll see that box 2 “wages, tips, other compensation” does not include some forms of deferred...

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iVLG News Roundup Week 35: JOBS Act; Venture Capital; Mergers and Acquisitions; Dispute Resolution

  Kyle Hulten Securities Regulation

SEC Issues Proposed Rules to Implement Title II of the JOBS Act Last Wednesday the SEC submitted for comment proposed rules to implement Title II of the JOBS Act, which would remove the prohibition on general solicitation for certain private placement offerings.

The highlights from the proposed rules:

The current 506 exemption will remain in place, and 506(c) will provide for the new rule, which lifts the ban on general solicitation. The SEC is proposing a flexible “facts and circumstances” test to determine whether offerors took reasonable steps to verify the accredited status of an investor. Form D will be amended to include a check box for 506(c) offerings, enabling the Commission to track the quantity of 506(c) offerings being made. Almost all of the...

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Will Startups Ditch Traditional Venture Capital Funding in Favor of Alternative Financing Options? One Survey Says No

Many believe that crowdfunding will become the most popular financing strategy, instead of the traditional VC funding. A recent survey says no.

  Gavin Johnson

Much of the startup financing chatter over the last few months has revolved around the passage of the JOBS Act, and its impact on startup financing in the US. With the passage of the JOBS Act came crowdfunding, an innovative way to raise capital for businesses. Many believe that crowdfunding will become the most popular financing strategy—a movement away from the traditional venture capital firms. However, a recent survey may change this belief.

A recent update to a 2010 survey conducted by law firm Dorsey & Whitney polled more than 300 startup executives about how they plan to fund their business. Here are some of the reasons why startup CEOs may continue to seek traditional venture capital financing.

Survey Highlights

A Rise of...

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News Roundup Week 13: The JOBS Bill, Securities Law, Employment Law, Social Media Law, etc.

  Kyle Hulten The JOBS Bill & Securities Laws

Senate and House Approve Major Overhauls of Federal Securities Law This week the house and senate JOBS bills were reconciled and H.R. 3606 was sent to the president to be signed into law. The White House has publicly supported the bill, and is expected to sign the bill soon. The 22 page bill has seven different titles, each of which is intended to make it easier for companies to raise money.

Title I “Reopening American Capital Markets to Emerging Growth Companies” creates reduced reporting obligations for “emerging growth companies,” a newly defined classification of businesses. These reduced filing and reporting obligations mean that only the largest companies will have to fully comply with the burdensome filing and...

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