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Issues Involved When Using “Finders” for Investment Fundraising

October 26, 2011 by

There can be a variety of difficulties for small, emerging companies to locate capital funds, find investors, or discover prospective acquirers. Often times, small companies will draw upon “finders” to identify possible financing resources or acquirers. A true, and legally operating, “finder” merely introduces prospective investors to companies seeking capital. The finder acts like a consultant, and earns a fixed fee or hourly fee. However, finders will typically overstep these bounds and often request that they be paid a commission based upon the amount of financing they are able to raise for the company.

If a finder takes a more active role in negotiations, investment, and advising, both federal and state securities laws require that finders register as a broker-dealer. Not only is the finder likely violating federal and state securities laws by operating as an unregistered broker-dealer, but the legal implications can be significant for the company hiring the finder. If the investment fails and investors sue, they can argue that the use of an unregistered broker-dealer voids the investment transaction. Such an argument could result in the company being liable for making investors whole on their losses. In addition, private offering exemptions can be lost by use of an unregistered broker-dealer, which could give rise to securities fraud claims.

Companies seeking to raise capital should consult with an experienced securities attorney before hiring a “finder,” or should use the services of a registered broker-dealer.

Filed Under: Finance, Securities

Venture Capital IPO Activity Slows in Third-Quarter

October 7, 2011 by

The National Venture Capital Association released their report on Q3 2011 venture-backed IPOs. The report shows a significant slowdown compared to Q2 2011. According to the report, only 5 venture-backed companies completed IPOs in Q3 2011, compared to 22 in Q2 2011. The full report can be found here.

Filed Under: Securities, Venture Capital

“Reverse Merger” Update – SEC Advisory

June 21, 2011 by

To follow up on my post from the other week, the U.S. Securities and Exchange Commission (SEC) issued an Investor Bulletin about the risks of investing in “reverse merger” companies. The SEC cited “instances of fraud and other abuses” by reverse merger companies that have recently entered the public markets. The full Investor Bulletin can be found here.

Filed Under: Securities

Nasdaq Proposes New Listing Requirements for Reverse Merger IPOs

June 8, 2011 by

Last month Nasdaq proposed additional listing requirements for companies going public through reverse mergers. Reverse merger IPOs involve a privately held entity acquiring a publicly traded shell corporation and retainig the acquired company’s stock exchange listing. The reverse merger IPO is typically faster and less expensive than the standard IPO process. The Nasdaq proposal is the result of recent allegations of fraud involving several Chinese companies that gained access to U.S. public markets through the reverse merger process.   

Under the proposed rules, reverse merger companies will face more rigorous “seasoning” requirements. In particular, a company formed by reverse merger would only be able to apply for an initial Nasdaq listing after the combined company:

  • Has been traded in the OTC market, or on another recognized national or foreign exchange, for at least 6 months following the filing of audited financial statements for the combined company; and
  • Has held a bid price of $4 per share or higher for at least 30 of the 60 trading days immediately preceding the filing of the initial listing application.

Once the combined entity qualifies to apply for an initial listing, the application would only be approved if the company has filed at least 2 periodic financial reports with the SEC or other regulatory authority. The full text of the Nasdaq proposal can be found here.

Filed Under: Securities

SEC Proposes New Rule for Private Placements

June 2, 2011 by

Last week, the U.S. Securities and Exchange Commission (SEC) announced a proposed rule that would restrict private placements under Rule 506 if the offering involves “certain felons and other bad actors.” The rule was proposed as part of the ongoing implementation of the Dodd-Frank Act, in particular Section 926.

Rule 506 is one of the registration exemptions promulgated under Regulation D. Rule 506 is the most common method of conducting a private placement, accounting for as much as 90% of all private capital raised under Regulation D. If an offering is exempt from registration under Rule 506, an issuer is permitted to raise an unlimited amount of capital from an unlimited number of accredited investors, and up to 35 non-accredited investors. [Read more...]

Filed Under: Securities, Start-Ups

SEC Adopts Final Rules on Whistleblower Awards

May 27, 2011 by

Earlier this week the U.S. Securities and Exchange Commission (SEC) adopted final rules allowing cash awards to be paid to whistleblowers who provide information to the SEC that results in payment of monetary penalties to the SEC of more than $1 million. The rules were prompted by provisions of the Dodd-Frank Act, which was enacted last year.

Importantly, the new rules allow whistleblowers to report information directly to the SEC without first reporting the information through internal company channels. Following the enactment of Sarbanes-Oxley in 2002, many companies (public and private) spent significant time and money developing internal reporting policies and procedures. However, the new rules do not require that a whistleblower exhaust a company’s internal reporting process in order to be eligible for an award.

The new rules create an incentive for employees to forego company procedures in favor of reporting directly to the SEC. Accordingly, it is important for companies to build strong internal compliance procedures that are responsive to employee concerns in order to give employees confidence that reports through normal channels will be taken seriously and addressed promptly.

Filed Under: Securities

SEC Considers Expansion of Fundraising Exemptions

April 13, 2011 by

The Securities and Exchange Commission is considering rule amendments that would expand the exemptions currently available for small businesses and start-ups looking to raise capital. Possible amendments would allow companies to use online social networks (e.g., Facebook and Twitter) to solicit investors for small stock issuances. The practice, known as “crowd-funding,” has grown increasingly popular with the expansion of social networks that give entrepreneurs access to a wide audience of potential investors. The SEC is considering allowing companies to raise as much as $100,000 while largely bypassing most of the disclosure and other legal requirements of a typical small offering.

Filed Under: Securities, Start-Ups

SEC Proposes Revised Definition of “Accredited Investor”

January 30, 2011 by

Start-ups and small businesses seeking to raise capital under the Regulation D private placement exemptions should review the Securities and Exchange Commission’s (SEC) recent proposal to change the “accredited investor” definition found in Rule 501 of Regulation D. The proposal, mandated by the Dodd-Frank Act, revises the definition to exclude the value of a person’s primary residence for purposes of determining whether the person’s net worth exceeds $1 million. The proposed definition of “accredited investor” is:

“Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of purchase, exceeds $1,000,000, excluding the value of the primary residence of such natural person, calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.” (Emphasis added) [Read more...]

Filed Under: Securities, Start-Ups