April 9, 2014
 

1. The Director of the SEC’s Division of Corporation Finance, Keith Higgins, recently gave the keynote address, here, at the 2014 Angel Capital Association Summit. He focused on the following three items on the SEC rulemaking agenda important to angel investors. (He didn’t mention Regulation Crowdfunding, which might suggest that he thinks, as we do, that crowdfunding won’t be useful).

• Rule 506(c). Higgins noted only $10 billion has been raised in 900 offerings relying on the 506(c) exemption in contrast to $233 billion in 9,200 506(b) offerings in the same period. He shared thoughts on the most cited reasons for the slow 506(c) start. Not cited by Higgins is perhaps a more fundamental reason for 506(c)’s slow start: just because you can tell the world you’re raising money doesn’t mean you’ll get any money, and some may not want to publicly fail to get financing. There likely always will be a place for brokers and finders paid to connect with specific investors able and willing to invest money in risky startups, and if you’re going to use them anyway, why not rely on the tried-and-true 506(b) exemption?
   
• Fear about disclosure of sensitive financial information under the enhanced accredited investor verification standards. Higgins waved this off, and we agree this doesn’t make much sense. The SEC provided non-exclusive safe harbors, like confirmation of your status by your accountant, and a principles-based rule that allows you to protect financial information with modest effort.


• Fear about the meaning of “general solicitation.” Higgins noted the furor over what “general solicitation” means may be curbing reliance on 506(c), which is ironic since general solicitation is allowed under 506(c), so it doesn’t matter if you know what it means. He reminded everyone the SEC’s view has not changed: demo days and venture fairs are as permissible as they always have been (which has always depended on the facts and circumstances). He did suggest SEC no-action letter guidance on the issue might be due for an update, given that general solicitation is allowed in one type of Rule 506 exemption but not in another.


• Fear about pending process rules. Higgins acknowledged the proposed process rules are controversial. While he didn’t suggest what might happen here, or when, he did say that no one should fear retroactive application and that he expects reasonable transition rules will be adopted.
  • Accredited investor definition. Higgins didn’t say much new here, reiterating that Dodd-Frank requires a review of the definition, which, aside from excluding the value of a primary home from the net asset test, hasn’t changed since 1982. He did say that the SEC would consider whether it should apply criteria beyond the income and net worth tests, including professional licenses (e.g., CFA or CPA), existing ownership of a specific amount of investment securities, and reliance on intermediaries that enhance a person’s ability to make good investment decisions.
  
  
  • Regulation A+. Here Higgins simply summarized the SEC’s proposed rules.
     

1. A useful primer on Rule 506 and commentary on new ways to raise money after the JOBS Act, in a format we haven’t seen others use, are available here. They are, in a word, killer.


2. To balance the lengthy discussion about private offerings, reviews of IPO activity in the two years since the JOBS Act are here and here and statistics about 2013 “venture-backed” IPOs are here.


3. And speaking of IPOs, or at least public offerings, a highlight of trends in securities litigation settlements last year (“up”) is here and highlights and commentary identifying a trend in securities litigation filings after securities offerings and regulatory investigations of public companies (also “up”) are here.


4. That’s not to say M&A as an exit strategy is any great shakes either, at least from a “subjecting yourself to litigation” perspective. A report noting that most (public) M&A activity results in litigation is available here.


5. Information about the SEC’s cybersecurity roundtable, where you may also find a transcript when completed, is available here. The meeting and focus, on the heels of the release of NIST’s Framework for Improving Critical Infrastructure (here), highlight the continued importance of the issue.


6. The SEC posted
   • Nine more FAQs on conflicts mineral reporting here; and
   • A revised statement on how well known seasoned issuers may obtain a waiver of “ineligible issuer” status here.
      
7. Finally, two reports that caught our eye:
   • Another study about whether the Sarbanes-Oxley Act was worth it (no, but what are you going to do?) is here and commentary about the study is here.
   
   
   • ISS’s 2014 preseason report on Environmental and Social Issues is here.