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SEC Adopts Amendments to the JOBS Act to help Entrepreneurs and Investors

Crowdfunding

By Peter V. Hogan, Esq.

On April 5, 2017, the Securities and Exchange Commission (the “SEC”) announced that it adopted amendments to increase the amount of money companies can raise through crowdfunding to adjust for inflation from $1,000,000 to $1,070,000. On April 5th, the SEC also approved amendments for inflation adjustments the annual gross revenue threshold used to determine eligibility for benefits offered to “emerging growth companies” (“EGCs”) under the Jumpstart Our Business Startups (“JOBS”) Act. The SEC is revising the EGC definition under Rule 12b-2 to mean an issuer that had total annul gross revenues of less than $1,070,000 (adjusted from $1,000,000).

The SEC is required to make inflation adjustments to certain JOBS Act rules at least once every five years after it was enacted on April 5, 2012. The SEC approved the new thresholds on March 31, 2017 and they will become effective when published in the Federal Register.

BACKGROUND

Section 101 of the JOBS Act added Section 2(a)(19) to the Securities Act of 1933 (the “Securities Act”) and Section 3(a)(80) to the Securities Exchange Act of 1934 (the “Exchange Act”) to define the term “emerging growth company.” Under those sections, the SEC is directed every five years to adjust the annual gross revenue amount used to determine EGC status for inflation by reflecting the change in the Consumer Price Index for All Urban Consumers (“CPI-U”) published by the Bureau of Labor Statistics (“BLS”) over said five year period. In order to do this, the SEC adopted amendments to the Securities Act Rule 405 and Exchange Act Rule 12b-2 to include a definition for EGC that reflects an inflation-adjusted annual gross revenue threshold. The JOBS Act also provided an exemption from the registration requirements of Section 5 under the Securities Act for certain crowdfunding transactions which helps reduce the cost of raising money for entrepreneurs. The SEC adopted amendments to Rule 100 and 201(t) of Regulation Crowdfunding and Securities Act Form C to reflect the required inflation adjustments.

Additionally, the SEC adopted Sections 102 and 103 of the JOBS Act to amend the Securities Act and the Exchange Act to provide several exemptions from certain disclosure, shareholder voting, and other regulatory requirements for any issuer that qualifies as a EGC. The exemptions reduce the financial disclosures an EGC is required to make in a public offering registration statement and relieve an EGC from conducting advisory votes on executive compensation, as well as provide relief from a number of accounting and disclosure requirements.

Below please find the tables demonstrating the inflation-adjustments made by the SEC which increase certain maximum amounts raised and invested under Regulation Crowdfunding.

Table 1:  Inflation-Adjusted Amounts in Rule 100 of Regulation Crowdfunding (Offering Maximum and Investment Limits)

Regulation Crowdfunding Rule Original Amount Rounded Inflation-Adjusted Amount
Maximum aggregate amount an issuer can sell under Regulation Crowdfunding in a 12-month period (Rule 100(a)(1)) $1,000,000 $1,070,000
Threshold for assessing investor’s annual income or net worth to determine investment limits (Rule 100(a)(2)(i) and (ii)) $100,000 $107,000
Lower threshold of Regulation Crowdfunding securities permitted to be sold to an investor if annual income or net worth is less than $107,000 (Rule 100(a)(2)(i)) $2,000 $2,200
Maximum amount that can be sold to an investor under Regulation Crowdfunding in a 12-month period (Rule 100(a)(2)(ii)) $100,000 $107,000

Table 2:  Inflation-Adjusted Amounts in Rule 201(t) of Regulation Crowdfunding (Financial Statement Requirements)

Regulation Crowdfunding Rule Original Offering Threshold Amount Rounded Inflation-Adjusted Amount
Rule 201(t)(1) $100,000 $107,000
Rule 201(t)(2) $500,000 $535,000
Rule 201(t)(3) $1,000,000 $1,070,000

While these adjustments may seem small, they may make a big difference to a company raising money to expand its business or an investor looking to qualify to invest in a crowdfunding transaction.


Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions, please feel free to contact the author, Peter Hogan, by email at phogan@clarktrev.com or telephonically at (213) 629-5700.

Circular 230 Disclaimer: To comply with IRS requirements, please be advised that, any tax advice contained in this blog is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement. For more information, please go to www.Clarktrev.com.

 

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Relief for the Dissolution of a California LLC

Limited Liability Company

By Peter V. Hogan, Esq.

Effective January 1, 2017, California Assembly Bill 1722 will amend California’s Revised Uniform Limited Liability Company Act to provide potential relief to members of limited liability companies (“LLC”).

The Act previously provided that a LLC is dissolved, and its activities are required to be wound up, if, among other things, a majority of the members of the LLC vote to dissolve. For an LLC with two members who each own a 50% membership interest, both members would have to agree to dissolve the Company since a “majority” would require 51% or more. If the two members can’t agree to dissolve the LLC, the member who wants to dissolve would need to go to court and seek judicial dissolution which can be costly and time consuming. Assembly Bill 1722 now requires the vote of 50% or more of the voting interests of the members of the LLC to dissolve. The bill is designed to help small, two member LLCs locked in a voting dissolution deadlock to avoid unnecessary litigation and expense.

The amendment does, however, allow for the members to require a higher voting percentage approval to initiate dissolution in the LLC’s articles of organization or the operating agreement. Thus, in the case where it doesn’t make business sense for one member to be able to decide the dissolution issue, the members of the LLC can agree to revert back to a simple majority rule on such decisions.

You can read the bill and the amended law in its entirety here.


Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions, please feel free to contact the author, Peter Hogan, by email at phogan@clarktrev.com or telephonically at (213) 629-5700.

Circular 230 Disclaimer: To comply with IRS requirements, please be advised that, any tax advice contained in this blog is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement. For more information, please go to www.Clarktrev.com.

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REGULATION A+ AND PREPARING THE MINI-IPO

By Peter V. Hogan

Business is booming but do you find yourself in need of additional capital to expand operations? Private companies that need capital should evaluate whether Regulation A+ is a viable option to raise money and if the compliance associated with utilizing Regulation A+ is worth the time and effort. Regulation A+ went into effect in June of 2015, spurred by the JOBS Act, and private companies are hoping to utilize the new rules to raise capital from small investors within the general public, not just from accredited and institutional investors. Regulation A+ attempts to make it easier for these smaller companies to raise capital by increasing the potential pool of investors and limiting the amount of disclosure requirements. Under Regulation A+, small companies can raise up to $50 million in a 12-month period in new capital through what’s being called a “Mini-IPO”. In evaluating the pros and cons of doing a “Mini-IPO”, a company must look at the key features of a Regulation A+ offering.

1. Determining Eligibility

Regulation A+ is available only to companies organized in and with their principal place of business in the United States or Canada. Generally, Regulation A+ is not available to companies that are already public reporting companies or “shell” companies with no specific business plan. Additionally, companies that issue fractional undivided interests in oil or gas rights or similar interests in other mineral rights are not eligible to utilize Regulation A+. Companies that are subject to “bad actor” disqualifications, where the company or other relevant persons (such as underwriters, placement agents and the officers, directors and significant shareholders of the company) have experienced a disqualifying event, such as being convicted of securities fraud or other violations of law, also are prohibited from raising money under Regulation A+.

2. Preparation of Audited Financial Statements

Companies looking to raise money via Regulation A+ will need to file an offering statement with the Securities and Exchange Commission. A Tier 1 offering consists of securities offerings of up to $20 million in a 12-month period, with no more than $6 million in offers by selling security-holders that are affiliates of the company, whereas a Tier 2 offering consists of offerings of up to $50 million in a 12-month period, with no more than $15 million in offers by selling security-holders that are affiliates of the company. A Tier 2 offering also requires that the company file audited financial statements for the last two years. Hiring  an experienced auditor is imperative, since the SEC has routinely rejected many initial Regulation A+ filings based on incorrect financial statements. Since preparation of Regulation A+ financial statements take a considerable amount of time and effort, working with an experienced accountant and auditor are critical to expedite the process.

3. The Offering Statement

Companies will also need to work with experienced securities counsel to draft and prepare the offering statement that will be filed with the SEC and comply with ongoing reporting requirements under Tier 2 offerings. The offering statement has three parts: Part I requires basic issuer information such as the securities being offered, the jurisdiction where the securities will be offered, and the recent sale of securities by the issuer. Part II of the offering statement requires financial statements as well as business, management, and other substantive disclosures. Part III contains exhibits and related documents to be filed based on the company’s determination of pertinent documentation including exhibits that should be filed on a confidential basis with the SEC in order to protect the company’s trade secrets, pricing, etc. Utilizing a team approach, the chief financial officer, auditor and securities counsel can work together to draft the offering statement without interrupting the day-to-day business of the company. The same approach should be used to complete any ongoing reporting obligations under Tier 2.

A private company that is looking to raise capital through a Regulation A+ offering needs to understand the timing and expense associated with such an offering. The earlier you obtain experienced securities counsel and an experienced auditor to help you prepare the offering statement, the quicker you can get your offering statement into the hands of the SEC to be qualified and raising funds. Please contact me by e-mail at phogan@clarktrev.com or call me direct at 213-341-1385 if you would like further information on Regulation A+ as well as the timing and costs associated with such a transaction.

Thank you for joining us on ClarkTalk! We look forward to seeing you again on this forum. Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered above.