Title 4 of the Jobs Act by, 91¶¶Ňő – San Francisco Business Law Firm

Despite the recent floundering of Title 3 of the JOBS Act before the Securities and Exchange Commission, it appears that Title 4 may actually come to fruition in the near future.  So what does this mean for San Francisco startups? Our Business Law Firm strives to take complex legal terms and break them down into understandable readable blog post. If you like this post please repost it and help us add transparency to the legal profession.

Background

The JOBS Act has been around for a few years now.  It was enacted by President Obama in April 2012 in an effort to encourage job and capital creation by reducing the regulatory hurdles for small, growing companies.  But Title 3 and 4 required implementation by the Securities and Exchange Commission through rulemaking, which can often be a protracted grind.  Originally, Title 4 had 90 days following passage of the Act to be implemented.  Now in 2015, it looks more than ever like our patience may pay off.

Title 4 is also commonly referred to as Regulation A+, which is a slight jab at the provision it is seeking to amend, Regulation A.  Reg A was an exemption that issuers could use to avoid registration of their securities sales and offers, as required under Section 3 of the Securities Exchange Act of 1933. Reg A allowed unregistered public offerings up to $5 million in a 12-month period.

But there was a problem. Reg A was a Trojan Horse.  Contained within it was a burdensome Blue Sky Law provision – a mandate that, even though investors were exempt from federal registration, they still had to comply with securities law requirements for every state involved in the offering. This is true for San Francisco Startups business as well as all California business. Add to that other burdens, like the limit of $5 million for offerings and a requirement to file a mini registration with the SEC, and Reg A really started to stink.  As a result, companies sidestepped Reg A in favor of other exemptions from Federal Registration, or they just bit the bullet and registered their sales with the SEC.

Congress recognized that Reg A was collecting dust in the corner and ordered the retooling through Reg A+ in Title 4. “It is our goal to make Reg A an effective and workable path,” SEC Chair Mary Jo White said recently at the meeting to finalize the Title 4 rules.  Reg A+ circumvents Blue Sky Laws for certain offerings with a simple pre-emption doctrine: only federal law applies regarding securities registration and qualification, and not state law as well.  Reg A+ also beefs up the 12-month offering limit from $5 million to $50 million, and allows for confidential SEC review of draft offering statements. Under Reg A+ Issuers can sell equity securities, debt securities, and convertible notes.  They can sell securities of corporations, limited liability companies and limited partnerships, and REITs can use Reg A+ to raise money for real estate projects.

San Francisco Startups wishing to take advantage of Reg A+ will need to ensure they are properly formed as a corporation.  If you have questions about the proper corporate structure please reach out to our San Francisco business law firm for legal guidance.

Nitty-Gritty

Lets look under the hood.  Reg A+ proposes to establish two Tiers of investment.  Under Tier 1, a company will be able to offer up to $20 million of securities in a 12-month period and selling security holders will be able to offer no more than $6 million of securities. Notably, under Tier 1, the preemption preference in Reg A+ does not apply, such that the offerings are still subject to the securities law of every state in which the Issuer offers and/or sells its securities (this included California).  If a company limits its sales to a small number of states, state law applicability may not be a substantial matter.  Additionally, the SEC will require a one-time report, with no subsequent reporting, for Tier 1 offerings.

Under Tier 2, a company will be able offer up to $50 million of securities in a 12-month period and selling security holders will be able to offer no more than $15 million of securities. It is in Tier 2 offerings that state preemption applies.

Additional requirements come with the additional capital limit under Tier 2.  Companies offering under Tier 2 will need to file annual audited financial statements, semi-annual updates, and periodic event reports. Also, non-accredited investors in Tier 2 sales will be limited to a maximum investment of the greater of 10% of their annual income or 10% of their net worth. It’s under Tier 2 that we would start to see portal marketplaces for the exchange of securities.

There also exist limits on the companies eligible to exercise Reg A+.  To name a notable few, companies are precluded from Reg A+ if they already report to the SEC, if they are issuing asset-backed securities or fractional undivided interests in oil or gas, or are disqualified under “bad actor” rules.  San Francisco Startups wishing to take advantage of Reg A+ should ensure that they are not precluded.

Take Away

The Title 4/Reg A+ exemption is slated to become effective 60 days after publication in the Federal Register.  Nevertheless, opposition exists which may further delay adoption.  The National Association of Securities Administrators Association, a special interest lobby for state regulators, is not thrilled about state preemption and will likely challenge Title 4/Reg A+ in court.  The NASAA “continues to have concerns that [Reg A+] does not maintain the important investor protection role of state securities regulators.”  Indeed, it is this dissatisfaction that has caused the delay of Reg A+ implementation thus far.  Should NASAA challenges prevail in court, the preemption advantage of Reg A+ may be nullified.

If Reg A+ does become effective, it will be interesting to see how Issuer view the role of unaccredited investors in capital formation. Crowdfunding under Title 2 of the JOBS Act may serve as a simpler means if the Issuer determines that non-accredited are not needed.  With the involvement of non-accredited investors may come an unwanted increase in risk.

It will also be interesting to see how quality control emerges.  Standard, reliable due diligence will need to be conducted on Issuers, necessitating a sector of rating agencies.

Another consideration is the need for a secondary market on which to buy and sell the securities.  Until such market emerges, an investor may be saddled with his investment in a company for a while if the cap has already been met on sales by selling security-holders. If you have questions about Crowdfunding, Startups, or Business in San Francisco or just need advice on your Startup please feel free to contact our business law firm.

The post Title Four – CrowdFunding Update appeared first on 91¶¶Ňő Business Law Firm.

By: Eric H. Milliken, San Francisco Business Attorney

Table of Contents

• What is Due Diligence?
• Why is Due Diligence Important?
  • 1- First, it helps investors make informed decisions.
  • 2- Second, due diligence can help investors avoid costly mistakes.
  • 3- Third, due diligence can help investors negotiate better terms.
• Investors Due Diligence
• Investors Due Diligence Checklist:

What is Due Diligence?

Due diligence is the process of gathering and analyzing information about a potential investment opportunity.

This information can include financial statements, market data, legal documents, and other relevant information.

The goal of due diligence is to assess the potential risks and rewards of the investment and to ensure that the investment is a good fit for the investor.

Why is Due Diligence Important?

Due diligence is important for several reasons.

1- First, it helps investors make informed decisions.

By gathering and analyzing information about a potential investment opportunity, investors can assess the potential risks and rewards of the investment.

This information can help investors make a more informed decision about whether to invest in the opportunity or not.

2- Second, due diligence can help investors avoid costly mistakes.

By conducting due diligence, investors can identify potential red flags or warning signs that may indicate that the investment is not a good fit.

For example, if an investor discovers that a company has a history of financial mismanagement or legal issues, they may choose to avoid investing in that company.

3- Third, due diligence can help investors negotiate better terms.

By gathering information about a potential investment opportunity, investors can identify areas where they may be able to negotiate better terms or conditions.

For example, if an investor discovers that a company has a high level of debt, they may be able to negotiate a lower purchase price or better financing terms.

Investors Due Diligence

Business is going well, it’s going really well.

Your clever idea is building into a workable business model.

Now that you have proven yourself with actual revenue, you have the attention of investors. After winning and dining, an investor gives you an offer and a list of requirements long enough to make the average person’s head spin.

An investor is going to do their due diligence.

They are not going to give you a check without making sure YOU and your Company are a good investment.

An investor is going to want to see your financials, proof of corporate compliance, and corporate structure.

This can be quite daunting for a larger established corporation; however, if you are just starting out, things may be simple. Here is a list of some of the an investor may want to see

Investors Due Diligence Checklist:

1. Corporate documentation of good standing from the state you incorporated in
2. Proof of license to do business in every state in which you have risk exposure
3. Copies of any commercial leases or mortgages
4. Company’s articles or certificate of incorporation
5. Bylaws or operating agreement
6. Any equity holders’ agreements
7. Voting agreements
8. Voting trust agreements
9. Joint venture agreements
10. Registration rights agreements
11. Agreements or documents relating to the organization
12. Management structural chart
13. Intellectual Property Rights (IE that the company owns the IP)
14. Any other debts or obligations that would affect the company’s value

These are just a few of the corporate documents that investors will want to see before handing over a check.

So many start-ups think they can ignore their quarterly and yearly meetings—but keeping your corporate books in order is an ongoing process.

The last thing you want is to ask the person with a check to wait while you get your corporate books up to date.

If you have any questions you should contact a San Francisco Business Attorney for assistance.

Contact 91¶¶Ňő Business Legal firm for a free consultation

The post Investors Due Diligence, What is after the Deal? appeared first on 91¶¶Ňő Business Law Firm.

By: Eric H. Milliken, 91¶¶Ňő, San Francisco Business Attorney

What is Crowdfunding and what has changed?

You may know…sites like , and .

These and other websites take small donations for charitable, artistic endeavors or contributions to launch a business in return for the product being made, service, or some type of a thank-you gift.

What has changed?

The JOBS Act creates a special exemption for crowdfunding so that companies can sell securities by way of crowdfunding. Generally, under the Act, companies are limited to raising $1 million in any 12-month period using crowdfunding and $2 million with audited financials. Companies cannot crowdfund on their own but will have to engage an intermediary that’s registered with the SEC as a broker or funding portal. These intermediaries will be required to vet the company seeking funding.

Individual investors will be limited in the amount they can invest by way of crowdfunding in any 12-month period if your annual income or net worth is less than $100,000 – the greater of $2,000 or 5 percent of annual income or net worth, or if your annual income or net worth is more than $100,000 – 10 percent of annual income or net worth up to a maximum of $100,000. When calculating net worth, you should not count the value of your primary residence or any loans secured by the residence (up to the value of the residence).

What are the limitations of “Intermediaries”?

Intermediaries may not compensate promoters or finders and may not allow their officers or directors to take a financial interest in any issuer using their services.

Funding portals are prohibited from:
• Offering investment advice,
• Soliciting transactions for securities offered on the portal, or compensating employees or agents for doing so, and
• Holding investor funds or securities.

What information do you need?

Issuers must provide the following information to the SEC in its initial filing and make the information available to its intermediary, potential investors, and investors:
• The name, legal status, and addresses of the business, as names of directors, officers, and significant shareholders,
• A business plan and description of the business,
• Financial information that may, depending on the size of the business, include income tax returns and officer-certified financial statements, unaudited financial statements or audited financial statements,
• A description of the purpose and intended use of the funds, the target offering amount, and the price of the securities,
• The ownership and capital structure of the business, including the terms of each class of the issuer’s securities, risks of minority ownership, and methods of valuation for the securities, and
• Any other information required by the SEC.

Compliance Requirements:

Issuers must provide the SEC and investors, through the crowdfunding intermediary, with annual reports on the results of the company’s operations and financial statements for the prior year.

Liability Issues:

An issuer, including its officers, directors, or partners, can be liable for any material misstatements or omissions.

Issuers are prohibited from:

• Advertising the securities, except for providing a notice that directs investors to the intermediary.
• Compensating any promoter of the securities, unless such compensation is fully disclosed.

Crowdfunded securities are:

• Considered “covered securities” exempt from state securities laws, regulations, and fees.
• Restricted securities, subject to a one-year holding period, except when transferred under certain limited circumstances.

Rule 506 General Solicitation:

A frequently used exemption is what’s called a Rule 506 exemption. Many startups, such as those in Silicon Valley and San Francisco, use this exemption to raise money from investors, like venture capital firms. The two principal limitations for using the exemption are that the offering is principally limited to accredited investors and that there is no general solicitation.

First, the restriction on general solicitation means that the company can’t advertise the offering, such as on TV or in a print publication. Otherwise, this would be a public offering and registration would be required. The other limitation is that it mostly be for accredited investors.
The exemption does allow for a limited number of non-accredited investors. From the standpoint of individual investors, accredited investors in short are high-income or net-worth individuals. The premise for the exemption is that these investors are capable of fending for themselves—

An accredited investor, in the context of an individual investor, is a person: who has a net worth over $1 million, either alone or together with a spouse, or whose income exceeded $200,000 (or $300,000 together with a spouse) in the prior two years, and reasonably expects the same for the current year.

When calculating you should not count the value of your primary residence or any loans secured by the residence (up to the value of the residence).

This exclusion of a primary residence was a change made by the Dodd-Frank Act. Otherwise, the definition hasn’t changed since it was conceived in 1982. $200,000 in income is still a lot today but was more some 30 years ago. Under Dodd-Frank, the SEC can revisit the definition every four years and make changes.

These limitations, for all practical purposes, limited the pool of investors in any particular company’s exempt offering.

Now, under the JOBS Act, companies can conduct general solicitation and advertising for a Rule 506 offering. This means that you may see a TV or newspaper advertisement to buy the common or preferred stock of a private company. You may also see a proliferation of websites that, similar to crowdfunding, offer a platform for companies to raise money with a Rule 506 offering online.

However, only accredited investors may participate in these offerings that take advantage of general solicitation. This is unlike the existing exemption which allows for up to 35 non-accredited investors. If you are an accredited investor and find yourself interested in investing in a private company, you should bear in mind the reasons that such offerings are limited from the public. These offerings are not for everyone and carry a very high degree of risk. For every successful venture, there are numerous failed ventures.

You will not be seeing such advertising immediately as this area is again contingent on SEC rule-making. The SEC has not fully implemented Title III of the jobs act as of yet, but we should see the implementation by January 2016.

If you have any questions about Title II or Title III please feel free to contact 91¶¶Ňő, a San Francisco Business Law Firm.

The post What is Crowdfunding and What has changed? appeared first on 91¶¶Ňő Business Law Firm.

Table of Contents

• The EV’s Bidirectional Charging Policy
• The Impacts on Automobile and Energy Sector
• Energy Policy resources
• Conclusion

California is renowned for its avant-garde approach to energy policies, having led substantial breakthroughs in renewable energy adoption and climate change mitigation. However, navigating the ever-changing landscape of California’s energy policy poses both challenges and opportunities for businesses operating within the state. Understanding these policies is crucial for legal firms like 91¶¶Ňő that specialize in business law, as it helps provide targeted legal advice in this domain.

The EV’s Bidirectional Charging Policy

Perhaps the most unconventional change brewing in California’s energy policies is one revolving around electric vehicles (EVs). Faced with a precarious situation to stabilize its power grid, Pacific Gas and Electric Company (PG&E), California’s largest electric utility, contemplates leveraging EV batteries to balance the grid during unstable periods.

This audacious move aims to utilize the parked EVs –which are usually idle 95% of the time– to return excess power to the grid to prevent blackouts. Supporting this innovative proposal, lawmakers in Sacramento are considering Senate Bill 233, which would make bidirectional charging mandatory for all new electric vehicles.

The Impacts on Automobile and Energy Sector

While conceptually intriguing, this proposal sparks several concerns, especially for businesses in the automobile and energy sectors. First and foremost is the question of its impacts on EV’s lifespan. Battery longevity decreases with charge cycles, there could be potential battery life reduction due to the discharging and recharging process. This may affect customer satisfaction and the vehicle’s life cycle cost, two critical factors for consumers when selecting a vehicle.

Also, the policy could lead to unexpected consequences. If drivers wake up to a battery-drained vehicle because power had been transferred to the grid, a rush to recharge simultaneously could adversely affect grid stability. Such possibilities necessitate the need for clear regulations and legal advice to protect businesses from liabilities.

Furthermore, while EV owners worry about the possible impacts on their car batteries’ lifespan, others show apprehension about the hefty cost of installation, estimated to add around $3,700. How utilities plan to incentivize this program for EV owners may also affect the adoption rate of this new energy policy.

Energy Policy resources

It’s always a good thing to keep up with the Joneses when dealing with energy policy.

To help, we have compiled a list of links for you.

If you need some legal guidance please contact 91¶¶Ňő and we will be happy to give you a free consultation.

Conclusion

Increasingly, California is confronting the challenges of stabilizing its power grid while balancing the demands of environmental sustainability and economic growth. As they continue to enact bold energy policies, businesses in California and their legal partners must remain updated with policy changes to optimize operations and mitigate potential risks.

The post An Overview of Energy Policy in California for Businesses appeared first on 91¶¶Ňő Business Law Firm.