Emerging Markets Law

Showing 7 posts from September 2014.

Congress Writes Letters to SEC

It must be a sign of the times that even Members of Congress feel so much frustration with the pace of the SEC's efforts to implement legislation that they are forced to write letters to the SEC.

On September 23rd, four Democratic Senators (including Senators Levin and Warren) penned this letter to SEC Chair Mary Jo White (September 23, 2014), reminding her that it has been a year since the SEC proposed rules to implement the general solicitation provisions applicable to Regulation D (Rule 506(c)) without making those proposed rules effective.

The SEC's proposed rules, issued in the Fall of 2013, would require private issuers relying on Regulation D to upload copies of their offering materials to the SEC under Rule 510T if the issuers intend to engage in a public solicitation for their private offering.

The Democratic Senators in their letter, claim that the SEC's delay in implementing the rules leave investors with no protection against issuers.  Practitioners in the space might instead argue that the delay in implementing regulations also leaves entrepreneurs and prospective issuers in the unenviable position of having no clear path to raising funds while also ensuring compliance.

Two days later, however, members of the House Republican caucus sent their own letter to the SEC (September 25, 2014) asking the SEC to extend the exemption from blue sky compliance made possible under the JOBS Act to all issuers under Regulation A.

The 2012 JOBS Act modified the provisions of the rarely-used Regulation A to make it easier for issuers to raised larger amounts in qualified offerings under Regulation A without complying with the costly and time-consuming requirements of state-level blue sky laws.  When the SEC implemented the JOBS Act, however, it permitted blue sky pre-emption for only a narrow class of Reg. A issuers.

The House Republicans argue that extending blue sky pre-emption to all Regulation A issuers would encourage capital formation by lowering the cost of utilizing Regulation A.

How to Invest in a Crowdfunded Startup

Posted In Crowdfunding

Kendall Americo has a helpful introductory piece in Entrepreneur magazine on the top ten items to consider when you invest in a crowdfunded startup.

Americo says that investors should ask themselves ten key questions when they invest in a crowdfunded startup:

  • Is the investment for equity or a convertible note?
  • How and when does the investor get the money back?
  • How will the business make money?
  • How can the investor profit from an investment?
  • What rights come with an investment?
  • How will the investment money be used?
  • Who are the founders and key personnel?
  • What are the founders being paid?
  • Are the sales projections and profit projections reasonable?
  • What's the risk associated with investing in the startup?

Another question I would add to the list is, "who are the startup's primary endorsers and service providers?"  Having well-known early investors, board members or other endorsers (such as accountants and lawyers) can add a great deal of value to a startup.

Having well-known advisors involved in a startup means that the startup will be able to enjoy the benefits of the experience and networking the advisor brings to the table.  This can include valuable advice on how to accelerate the product development table and how to grow the management team, to valuable introductions to business partners and prospective institutional investors at a later stage.

Looking for well-known advisors in a startup can be a helpful indicator that the startup is headed for success.

The History of Wind and Solar Power

solarpanelsThe New York Times ran a great piece over the weekend on the history of wind and solar power.

The piece describes the development of wind and solar generation in Germany and contrasts that development with the United States.  It accurately portrays the importance of government subsidies to fund generation and the different experience in Germany in comparison to the U.S.

Importantly, the article describes the problem of base load generation that persists as a chief problem for the economics of distributed generation.

The "base load" of the electrical grid is the amount of power that is almost always constantly in use.  Power usage may ebb and flow, but the base load never disappears.  (Think about all of the devices in your house - AC, lights, clocks, etc. - that never turn off.)

Providing base load power is the chief duty of incumbent electric utilities.  Utilities receive subsidies from the government (in the form of price controls and monopoly control over the electrical grid) that make it possible for the utilities to maintain base load power.

Interconnecting distributed generation to the grid, however, imposes additional costs on the utilities.  And, while distributed generation can help to meet peak demand for power (think of all the power required to support air conditioning on a hot, sunny day) distributed generation does little to support the base loan (imagine the power drop off from solar on days when there is heavy cloud cover)

For decades, utilities made additional profit margin on the swells in electric power needed on peak days.  If distributed generation from independent producers takes on that part of the power curve, the economics of the utilities changes.

There are no easy answers here, but it's interesting to focus on the challenge.

MainStreet: New Real Estate Crowdfunding Platform

Posted In Crowdfunding

Another day brings another real estate crowdfunding platform called MainStreet.

I visited MainStreet this morning after reading their launch press release.

Like several other platforms, MainStreet is available only to accredited investors.  Access to the internal pages of the site, with information about actual deals, requires online certification of name and accredited investor status.

MainStreet claims to have debt offerings for commercial real estate projects. It issues payment dependent notes, much like Prosper Lending, so that individual investors get debt-like returns without actually having privity of contract with the underlying borrower. Presumably, MainStreet organizes a special purpose entity for each deal, issuing payment dependent notes to the investors in reliance on Regulation D.

MainStreet claims to have raised more than $1.7 million since August 2014, but I was not able to find any Form D filings for the company within EDGAR. (I searched for issuers with the name "MainStreet." If this platform is using special purpose entities with different names, that might explain my inability to find any Form D filings.)

Our Clients Do Cartwheels

Not all of our clients do cartwheels, but some do.  Here's a clip of Troy Helming, CEO of client Pristine Sun, LLC, doing cartwheels (or back handsprings, depending on your point of view) after we closed a financing for one of Pristine Sun's solar portfolios.

Pristine Sun's Embedded Energy System™ operates like an "on-site" power generator on your property that utilizes clean renewable energy technology.  Pristine Sun installs, owns, operates and insures the solar, solar thermal and/or wind system on its customers’ property.

Solar Photovoltaic (PV) systems have a number of merits and unique advantages over conventional power-generating technologies. PV systems can be designed for a variety of applications and operational requirements; they are modular, easily expandable, and transportable. Energy independence and environmental compatibility are two attractive features of PV systems. PV systems can be used for either centralized or distributed power generation. The fuel (sunlight) is free and no noise or pollution is created from operating PV systems. In general, PV systems which are well designed and properly installed require minimal maintenance, have long service lifetimes and are very reliable, usually warranted for twenty-five years with a life expectancy of 50 years.

SEC Pays Bounty to Corporate Compliance Whistleblower

Striking fear into the hearts of corporate counsel and corporate board members, the SEC has paid a bounty to a corporate compliance whistleblower when her employer failed to respond to complaints regarding compliance issues.

According to the SEC, this is the "first award for a whistleblower with an audit or compliance function at a company."

Sean McKessy, Chief of the SEC's Office of the Whistleblower, said “Individuals who perform internal audit, compliance, and legal functions for companies are on the front lines in the battle against fraud and corruption.  They often are privy to the very kinds of specific, timely, and credible information that can prevent an imminent fraud or stop an ongoing one. ”

“These individuals," he continued, "may be eligible for an SEC whistleblower award if their companies fail to take appropriate, timely action on information they first reported internally.”

The whistleblower in this case reported concerns of wrongdoing to appropriate personnel within the company, including a supervisor.  But when the company took no action on the information within 120 days, the whistleblower reported the same information to the SEC.  The information provided by the whistleblower the led to an SEC enforcement action.

The SEC’s whistleblower program is intended to incentive reporting of original information that results in an SEC enforcement action with sanctions exceeding $1 million.  Whistleblower awards can range from 10 percent to 30 percent of the money collected in a case.  By law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower’s identity.

For corporate board members and counsel, however, allowing internal audit and compliance staffers to self-report violations when they feel their companies have been unresponsive is problematic.  Often, a reported violation must be analyzed by counsel and, sometimes, an internal investigation must be conducted.

In most firms, internal audit investigations report up the chain to the Board's Audit Committee.  It is not unreasonable for such efforts to take several months to complete.

In addition, because such investigations must necessarily be confidential it is often not possible to keep original reporters "in the loop" on all the efforts that are being taken to address the concern or potential legal violation.

By incentivizing compliance professionals to file their own whistleblower claims, the SEC will be increasing the complexity of the internal investigative and remedial process.  Now, not only must counsel and the Board act swiftly in response to an internal concern, the professionals in charge of the investigation must also keep the original reports appraised of the status of the investigation so that the original reports do not have cause to believe that their initial reports have been ignored.

Wisconsin Intrastate Crowdfunding Hits Snag

Posted In Crowdfunding

The Wisconsin intrastate crowdfunding rule has hit a snag, as reported in local media.

It seems that the Wisconsin intrastate crowdfunding rules requires that investor funds be escrowed in a Wisconsin state-chartered bank.  (Other states that have escrow rules require only that funds be escrowed in a bank licensed to do business in that state).  According to the article, the lack of state-chartered banks has made it hard to find qualified escrow agents.

Due to the SEC's delay in implementing Title III of the 2012 JOBS Act, roughly a dozen states have adopted intrastate crowdfunding rules to make crowdfund offerings possible for their in-state firms and investors.  These intrastate crowdfunding arrangements have become popular means of finding equity for small real estate projects.

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