New capital-raising strategies The letter from Issa raised questions regarding crowdfunding, singling out that approach as a possible new method of capital formation that has gained popularity. Schapiro stated that she understands crowdfunding to be a new method of capital formation whereby groups of people pool money, typically small individual contributions, to support an effort by others to accomplish a specific goal. Initially, such arrangements did not trigger securities law issues because there was no profit participation. Schapiro noted, however, that interest in offering an ownership interest in a developing business and an opportunity for a return on investment capital is growing. She provided an example of crowdfunding as described to the staff as an offering of up to a maximum of $100,000 of equity securities of a company, with individual investments capped at $100. She noted that proponents of this approach to capital formation seek a registration exemption, and the SEC has been exploring several approaches to address this.22


In considering whether


to grant an exemption from registration for such arrangements, Schapiro stated that the SEC would consider, for example, its experience with Securities Act Rule 504, which was revised in 1999 due to concerns about fraud in the market. The widespread use of the internet for capital raising presents additional challenges in this area.


Legislative and other efforts At more or less the same time that these exchanges were taking place, legislative efforts were moving forward that contemplated other changes to the capital formation process for smaller and emerging companies. Representative David Schweikert introduced the Small Company Capital Formation Act of 2011 in the US House of Representatives, which sought to amend the Regulation A offering threshold from $5 million to $50 million for public offerings by smaller companies.23


The Small


Company Formation Act was introduced after hearings on the topic of capital formation were held in December 2010, during which industry representatives expressed support for Regulation A reform as well as other changes to the capital formation process. During the same session of Congress, other individual


bills were introduced that would have increased the threshold for mandatory registration for all companies under the Exchange Act from 500 persons holding equity securities of record to 1,000 persons, and that would have amended section 12(g) of the Exchange Act by raising the registration threshold from 500 to 2,000 record holders if the issuer is a bank or a bank holding company.24


Representative Patrick McHenry introduced legislation that would have added a crowdfunding exemption under both section 4 of the Securities Act and section 12(g) of the Exchange Act. Representative Kevin McCarthy introduced legislation to amend section 4(a)(2) of the Securities Act to state specifically that general solicitation and general advertising would not affect the availability of the private placement exemption to registration under section 5 of the Securities Act, and to direct the SEC to remove the prohibition against general solicitation and advertising for securities issued under Rule 506 of Regulation D, provided that all purchasers of the securities are accredited investors and that the issuer took reasonable steps set forth by the SEC to ascertain that the holder is indeed an accredited investor. Of course, these individual legislative proposals were the precursors to the JOBS Act. In March 2011, the US Treasury Department convened


the Access to Capital Conference to “gather insights from capital markets participants and solicit recommendations for how to restore access to capital for emerging companies – especially public capital through the IPO market.” At this conference, a small group of professionals representing broad sectors of the IPO market decided to form the IPO Task Force to examine the challenges that emerging growth companies face in pursuing IPOs, and to provide recommendations for restoring effective access to the public markets for emerging growth companies. The Task Force published its report, titled Rebuilding the IPO On-Ramp, in October 2011.25


In the report, the


Task Force noted that after achieving a one-year high of 791 IPOs in 1996, the US IPO market severely declined from 2001 to 2008, averaging only 157 IPOs per year during that period, with a low of 45 in 2008, with IPOs by smaller companies showing the steepest declines. The report presents a nuanced view of the causes of this decline, pointing to a series of regulatory and market structure changes. The report notes that these changes have coalesced and as a result have had the effect of driving up costs for smaller companies looking to go public; constraining the amount of information available to investors about such companies; and shifting the economics of investment banking away from long-term investing in such companies and toward high-frequency trading of large-cap stocks, thus making the IPO process less attractive to, and more difficult for, smaller companies. The report made four principal recommendations to the Treasury Department: providing an on-ramp (or phasing in of disclosure requirements) for smaller companies that complete IPOs; improving the availability and flow of information for investors before and after an IPO; lowering the capital gains tax rate for investors who


JOBS Act Quick Start 11


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68  |  Page 69  |  Page 70  |  Page 71  |  Page 72  |  Page 73  |  Page 74  |  Page 75  |  Page 76  |  Page 77  |  Page 78  |  Page 79  |  Page 80  |  Page 81  |  Page 82  |  Page 83  |  Page 84  |  Page 85  |  Page 86  |  Page 87  |  Page 88  |  Page 89  |  Page 90  |  Page 91  |  Page 92