Corporate Finance & Securities

Amendment to Stock Legend Guidance for Restricted Securities

Recently, the Securities Division of Washington’s Department of Financial Institutions  adopted amendments to WAC 460-44A-502 to provide stock legend guidance for restricted securities.

The adopted amendments remove a reference to an outdated North American Securities Administrators Association (“NASAA”) guideline and instead provide the suggested language for the legends in the text itself. A “legend” on a stock certificate is a statement noting restrictions on the transfer of the stock, often due to SEC and state requirements for unregistered securities.

The new suggested legend language in Washington state is as follows:

(d) A written disclosure or legend will be deemed to comply with the provisions of WAC 460-44A-502 (4)(b) or (c) if it states:

“(i) These securities have not been registered under the Securities Act of...

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Corporate Finance & Securities

Electronic Filing Depository

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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Corporate Finance & Securities

When is a loan subject to securities regulations?

Background

What is a security? Securities are contracts for an interest in a company, sometimes called an “investment contract.” A typical example of a security transaction is the sale of company stock in exchange for cash. The SEC’s definition of “security” includes a 30-item list that stocks, notes, bonds, and investment contracts, among others. We recently discussed the Howey case, which provides the test courts use when determining whether something is an investment contract. Today’s post looks into the circumstances under which a note or loan would fall within the SEC’s definition of a security.

To start: Why does it matter if something’s a security? Securities are extensively regulated because of the real risk that individuals and the companies they control could swindle unwitting...

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Intellectual Property

News Roundup: FCC Ruling May Lead to Better Internet Service; Fundraising Updates; etc.

FCC Updates Broadband Definition

The FCC voted to raise the minimum thresholds needed to meet the definition of broadband. Internet service providers now must provide download speeds of at least 25Mbs and upload speeds of at least 3Mbps to call their services “broadband.” The previous standard was 4Mbps for download speed and 1Mbps for upload speed.

While this sounds pretty innocuous, the new definition may have some interesting consequences.

A little background: In 1996 Congress mandated that the FCC report on whether broadband is being deployed to all Americans in a reasonable and timely fashion, and Congress defined broadband as high-quality capability that allows users to originate and receive high-quality voice, data, graphics, and video.

The first and most obvious consequence of the...

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Corporate Finance & Securities

Basics of Investment Adviser Regulation

Generally speaking, investment advisers are people that are in the business of advising others on the value of, and investment in, securities. Investment advisers are subject to extensive regulation by the Securities Exchange Commission and state regulators.

The investment adviser regulations are designed to make sure that people in the business of advising on securities meet professional competency standards, have adequate capital, and provide adequate disclosures to investors.

What is an Investment Adviser?

Investment advisers are defined and governed by either state law, federal law, or both. Under RCW 21.20.005 an “investment adviser” is “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling...

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Corporate Finance & Securities

What You Should Know About Reselling Private Stock

If you purchased stock from a startup in a “friends and family” round, can you sell it to someone else without violating securities laws? The answer to that question probably depends on whether you’re in compliance with Rule 144, which provides requirements that if satisfied, allow people to re-sell privately issued stock.

Background

There’s a general rule in the Securities Act of 1933 that if you sell a non-exempt security to another person, the sale must be registered unless an exemption from registration applies.

There’s a few things to unpack here. First, what is a non-exempt security? Second, what does it mean for the sale to be registered? Third what are the exemptions from registering the sale?

Exempt Securities Section 3 of the Securities Act...

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Corporate Finance & Securities

Raising Capital from Foreign Investors—Regulation S

If you’re a founder of a U.S. company thinking about raising capital from foreign investors, chances are good that you’ll want to utilize Regulation S.

There’s a general rule in the United States that if you want to sell stock in your business, you have to register the stock offering with the SEC. The registration process is cost-prohibitive for startups. Luckily, there are a number of commonly used exemptions. If you’re offering stock to US residents, you’ll likely be relying on a Regulation D exemption like Rule 506. Regulation S is a commonly used exemption for US companies that want to sell their stock to foreign investors.

There are two key parts to the Regulation S exemption:

The sale of securities must be an offshore transaction. There...

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Corporate Finance & Securities

You Can Now Use Crowdfunding in Washington State

As of this month, you can officially utilize crowdfunding to raise money in Washington for your startup. This new opportunity allows companies to advertise their securities offering and raise money from all investors. Traditional securities offerings restrict advertising and limit offerings to those who satisfy the income and net worth standards to qualify as an accredited investor. This new opportunity is different from platforms like Kickstarter, because with Kickstarter campaigns you can’t offer stock in exchange for the donations; instead the donations are usually straight gifts or made in exchange for a product or promotional item. Crowdfunding is not yet available on a national scale despite a section in the JOBS Act directing the SEC to enact crowdfunding rules (Congress...

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Corporate Finance & Securities

GoPro—An Illustration of the Importance of Investor Lockup Provisions

Here’s an example of a commonly overlooked provision in a term sheet coming into play. Recently, news broke that there was a “loophole” in GoPro’s lockup provision, and the company’s shares subsequently tumbled almost 13%.

What is a lockup provision? A lockup provision is an agreement that the shareholders will not sell their shares for a specified period of time—often 180 days—following a company’s initial public offering. The point of the lockup provision is to keep existing shareholders from flooding the market and depressing prices in the company’s offering. There are two primary types of lockup agreements. The first is an agreement between the investors and the company during a private offering.

A standard industry term sheet has the following lockup provision:

Investors shall...

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Corporate Finance & Securities

SEC Advisory Committee Issues Accredited Investor Recommendations

The SEC recently release advisory committee recommendations for updates to the definition of “accredited investor,” other issues related to accredited investors, and recent updates to the securities laws. For years, there has been concern over the definition of accredited investor—specifically whether the financial thresholds are outdated—and whether changes to the definition would narrow the number of accredited investors, which could significantly reduce access to capital for startups and established private companies. The committee’s most recent recommendations do not include a higher financial threshold, but they do include a number of other recommendations and propose analysis of whether the threshold should be increased.

Highlights from the Committee’s Recommendations: Does the definition of accredited investor accomplish its goal?

The first recommendation looks at whether the...

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