Business Law Today May 2012

Business Law Today
May 2012
Our Mini-Theme: The JOBS Act

The JOBS Act, signed by President Obama on April 5th, promises significant changes to the ways in which many private companies raise capital and creates an IPO on-ramp for a new category of company, an emerging growth company. Business lawyers, private companies, and the investor community are quickly coming up to speed regarding the JOBS Act, the opportunities it presents, and the questions it raises. This issue of Business Law Today examines the JOBS Act from a number of different perspectives. First, in The JOBS ActAn Overview: What Every Business Lawyer Should Know, I review some of the lead-up to the JOBS Act, and then present a summary of the principal provisions of the act. The other articles in this issue focus on specific topics. In The JOBS Act: Easing Exempt Offering Restrictions, Elizabeth M. Dunshee and David M. Lynn discuss the provisions of the JOBS Act eliminating the restrictions on general solicitation and general advertising in connection with Rule 506 and Rule 144A offerings; establishing a new offering exemption under Securities Act Section 3(b) to permit companies to offer and sell up to $50 million in securities within a 12-month period; and increasing the holders of record threshold before a private company is required to register under the Exchange Act. In Crowdfunding: Its Practical Effect May Be Unclear Until SEC Rulemaking is Complete, Yoichiro Taku discusses the new JOBS Act offering exemption for crowdfunding, which involves a company raising capital by selling securities to a large number of investors whose individual investments are limited in amount. In IPO On-Ramp: The Emerging Growth Company, Bonnie J. Roe discusses this new category of issuer designated by the JOBS Act, and the accommodations provided to such companies in connection with their IPOs and subsequent reporting. The JOBS Act relaxes a number of restrictions on research at the time of an Emerging Growth Companys initial public offering. Dana G. Fleischman focuses on these changes in JOBS Act on Research: Strong Buy? In addition to affecting many smaller companies, the JOBS Act may also have implications under the Investment Company Act. Martin E. Lybecker discusses some of these considerations in The Effect of the JOBS Act on Private Investment Companies: Foreseen Consequences? Finally, a number of the changes effected by the JOBS Act may be relevant to foreign companies. In The JOBS Act for Foreigners, Daniel Bushner discusses some of the implications for foreign companies and foreign investors. The Federal Regulation of Securities Committee is very pleased to be taking a role in connection with the JOBS Act. As one of the largest committees in the Business Law Section, Fed Regs is the principal ABA committee dealing with the SEC and federal securities law matters. In addition to presenting CLE programs and publishing an Annual Review of Federal Securities Regulation in The Business Lawyer, the Committee covers the full range of federal securities law topics. Our subcommittees focus on issues of importance to practitioners in connection with the activities of many of the divisions of the SEC, including the Division of Corporation Finance (the Disclosure and Continuous Reporting Subcommittee; the Securities Registration Subcommittee; the Proxy Statements and Business Combinations Subcommittee; the Employee Benefits, Executive Compensation and Section 16 Subcommittee; the Small Business Issuers Subcommittee; and the International Securities Matters Subcommittee), the Division of Trading and Markets (the Trading and Markets Subcommittees), the Division of Investment Management (the Investment Companies and Investment Advisers Subcommittee; and the Hedge Funds Subcommittee) and Enforcement (the Civil Litigation and SEC Enforcement Matters Subcommittee). We also follow developments at FINRA, through our FINRA Corporate Financing Rules Subcommittee. In addition, we have a number of other very active task forces and subcommittees, including our Securities Law Opinions Subcommittee. Often working with the Legal Opinions Committee, the subcommittee has been a standard-setter in identifying and establishing customary practice in this area. One of our principal activities has been the submission of comment letters to the SEC that express the views of securities law practitioners and have helped to make SEC rulemaking more informed and more effective. In connection with the JOBS Act, we recently submitted a pre-rulemaking comment letter relating to the elimination of general solicitation and general advertising restrictions in Rule 506 and Rule 144A transactions. In addition, at the
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Published in Business Law Today, May 2012. 2012 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
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2012 Spring Meeting, we co-sponsored two programs dealing with JOBS Act provisions in Perspectives on Regulatory Reform for Small and Mid-Sized Companies: Change is in the Air (audio) and Current Securities Law Issues for Small Business (audio). Information about the Spring Meeting programs is available at here. We welcome the membership of all business lawyers interested in federal securities regulation. Information regarding the Committee is available here. We are also very pleased that this issue of Business Law Today and our other JOBS Act initiatives represent a collaborative effort by a number of Business Law Section Committees. We are indebted to the Middle Market and Small Business Committee (chaired by Greg Yadley), the Private Equity and Venture Capital Committee (chaired by Mark Danzi), the Corporate Governance Committee (chaired by John Stout), and the State
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Regulation of Securities Committee (chaired by Shane Hansen), for their extremely valuable contributions and support. In addition to the extraordinary efforts by the authors of the articles in this issue to prepare and present cogent discussions of the JOBS Act so soon after enactment, we also very much appreciate the efforts of the many who commented on the articles, including Cathy Dixon, Carol McGee, John Murphy, and Ann Yvonne Walker. Our next meetings will be held in conjunction with the ABA Annual Meeting at the Marriott Downtown in Chicago, from August 3rd through August 5th, and in Washington, D.C., at the Ritz-Carlton on November 16th and 17th. We hope to see you there.
Best regards, Jeffrey W. Rubin Chair, Federal Regulation of Securities Committee
Business Law Today
May 2012
The JOBS Act: An OverviewWhat Every Business Lawyer Should Know

By Jeffrey W. Rubin
On April 5th of this year, President Obama signed the JOBS Act. The act, technically called the Jumpstart Our Business Startups Act, is focused specifically on smaller companies and is intended to ease some of the regulatory burdens imposed by the securities laws on the ability of such companies to raise capital. This article will discuss briefly the background of the JOBS Act and provide an overview of its principal provisions. The principal changes effected by the JOBS Act are: the designation of companies with less than $1 billion in total annual gross revenues as emerging growth companies; such companies are provided with certain accommodations relating to their initial public offering (IPO) of equity securities and subsequent reporting obligations; the elimination of restrictions on general solicitation and advertising in connection with Rule 506 and Rule 144A offerings under the Securities Act of 1933 (Securities Act); the establishment of an offering exemption for crowdfunding by non-reporting U.S. companies; the expansion of the scope of offerings under Section 3(b) of the Securities Act; and amendments to the thresholds requiring Section 12(g) registration and reporting under the Securities Exchange Act of 1934 (Exchange Act). Small and Emerging Companies, whose work continues. Despite these efforts, and a number of rule changes adopted by the SEC, many companies and investor groups were concerned that the SEC was not acting quickly enough to remove the regulatory burdens on small businesses. Another worrisome trend was the significant dropoff in smaller IPOs during the past decade. This concern was highlighted by a report issued in October 2011 by the IPO Task Force, a group created by the Department of the Treasury, entitled Rebuilding the IPO On-RampPutting Emerging Companies and the Job Market Back on the Road to Growth. In a very lively exchange of correspondence last year between Congressman Daniel Issa, Chairman of the House Committee on Oversight and Government Reform, and SEC Chairman Mary Schapiro, Chairman Issa posed questions to the SEC regarding a broad range of factors that appeared to inhibit small company capital formation and that may have led to the decline of the smaller company IPO market. (See Chairman Issas March 22, 2011, letter; Chairman Schapiros April 6, 2011, response; Chairman Issas April 29, 2011, letter posing additional requests; and Chairman Schapiros further response.) The legislative impetus for the JOBS Act began in 2011 as a bipartisan effort
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Many smaller companies have expressed concerns about the cost and regulatory burdens associated with raising capital. In the case of smaller public companies, these burdens have increased in recent years as the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 have expanded the disclosure obligations and liabilities applicable to public companies. The SEC has, for many years, sought input as to appropriate means to encourage small company capital formation while also assuring investor protection. Pursuant to congressional mandate, since 1982, the SEC has hosted an annual GovernmentBusiness Forum on Small Business Capital Formation, coordinated by the SECs Office of Small Business Policy. (See the reports of each Forum since 1993.) In 2005, the SEC created an Advisory Committee on Smaller Public Companies, which issued a final report in 2006 setting forth 33 recommendations, including the elimination of general solicitation and general advertising constraints on private placements. In September 2011, as mandated by the Dodd-Frank Act, the SEC created an Advisory Committee on
Background
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to increase the ability of small businesses to raise capital. The bill introduced to the House (then called the Reopening American Capital Markets to Emerging Growth Companies Act of 2011) was limited to benefits for emerging growth companies, but was later expanded to cover a number of other matters. The legislation that ultimately resulted from these efforts was supported by many in the technology and venture capital communities, including Google and the National Venture Capital Association, and many entrepreneurs, and was passed by Congress as the JOBS Act at the end of March. In his signing statement, President Obama characterized the bill as follows: Heres whats going to happen because of this bill. For business owners who want to take their companies to the next level, this bill will make it easier for you to go public. And thats a big deal because going public is a major step towards expanding and hiring more workers. Its a big deal for investors as well, because public companies operate with greater oversight and greater transparency. And for start-ups and small businesses, this bill is a potential game changer. Right now, you can only turn to a limited group of investorsincluding banks and wealthy individualsto get funding. Laws that are nearly eight decades old make it impossible for others to invest. But a lot has changed in 80 years, and its time our laws did as well. Because of this bill, start-ups and small business will now have access to a big, new pool of potential investorsnamely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in. Although it received widespread support from the business community, the JOBS Act was not without its critics, who questioned the relaxation of important investor protections. In a letter to Congress dated March 13, 2012 (prior to final approval by Congress), SEC Chairman Schapiro expressed concern that a number of provisions should be added or modified to improve investor protections, and also noted that the rulemaking time limits imposed on the SEC in the legislation were not achievable. Further, a number of securities regulators and investor advocacy groups expressed concerns about the potential for fraud and investor exploitation that could result from the relaxed regulatory requirements. Some of these concerns, including some concerns about crowdfunding, were reflected in the final version of the JOBS Act. One of the harshest critics, former New York Governor Elliot Spitzer (referring to the provisions of the JOBS Act that removed certain restrictions on research at the time of public offerings) said, It is a bad sequel to a bad movie. It shouldnt be called the JOBS Act. It should be called the Bring Fraud Back to Wall Street Act. Time will tell whether the JOBS Act achieves its objective of expanding capital-raising opportunities for smaller companies without compromising important investor protections. Although many of the JOBS Act provisions are prescriptive, the SEC is charged with significant rulemaking obligations, and the SECs ability to implement these provisions while preserving investor protections may well determine how the JOBS Act will be assessed a few years from now. In order to assist it with the rulemaking process, the SEC has (as it did in connection with the Dodd-Frank Act) invited public comments prior to the publication of its proposed rules. The comments submitted may influence the rules that the commission proposes. The opportunity to help shape not only the final rules but also the proposals can have a significant impact on the rules that are ultimately adopted. Particularly in view of the very abbreviated rulemaking deadlines, informed and helpful comments will assist the SEC to understand the implications of the proposed rulemaking, including an identification of unanticipated consequences that may result from the adoption of proposed rules. Even though many of the JOBS Act provisions are not yet effective, the SEC has received many questions from the public relating to particular JOBS Act issues. In an effort to be responsive to these inquiries, the Division of Corporation Finance
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has created a web page setting forth its guidance on these matters. Among other things, the staff of the division has issued a number of frequently asked questions regarding JOBS Act provisions.
The JOBS ActPrincipal Provisions
Although the other articles in this issue will address the provisions of the JOBS Act in more detail, it may be helpful here to review some of the major JOBS Act provisions. The following are summaries of major provisions rather than detailed descriptions.
Title IEmerging Growth Companies
Effective upon enactment on April 5th, the JOBS Act creates a new category of company, an emerging growth company, that is eligible for certain accommodations in connection with its IPO of equity and its subsequent Exchange Act reporting. This has been characterized as creating a transitional IPO on-ramp for such companies. An emerging growth company (or EGC) means an issuer that has total annual gross revenues of less than $1 billion. Once within the EGC category, an EGC remains so until the earliest of: the last day of its fiscal year during which it had total annual gross revenues of $1 billion or more; the last day of its fiscal year following the fifth anniversary of the date of its first sale of its common equity securities pursuant to an effective Securities Act registration statement; the date on which it has, during the previous 3-year period, issued more than $1 billion of nonconvertible debt; or the date it becomes a large accelerated filer (generally requiring one year of Exchange Act reporting history and an aggregate worldwide market value of its voting and non-voting common equity held by its non-affiliates of $700 million or more).
EGCs are entitled to a number of accommodations: an EGC can submit a draft equity IPO registration statement to the
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staff of the SEC for a confidential nonpublic review, provided that it will be required to file the draft registration statement and all amendments with the SEC not later than 21 days before the EGCs road show. an EGC can test the waters for a proposed public offering before and after filing a registration statement, provided that the test the waters communications are made only to QIBs and institutional accredited investors; an EGC only needs to present two years of audited financial statements and managements discussion and analysis (MD&A) in a Securities Act registration statement in connection with an IPO of its common equity and, in a Securities Act registration statement and Exchange Act reports, needs to present selected financial data only as far back as the earliest audit period presented; an EGC can elect not to comply with any new or revised financial accounting standard that has a different effective date for public and non-public companies until the date that non-public companies are required to comply; an EGC may comply with the executive compensation disclosure requirements applicable to smaller reporting companies, and need not prepare a compensation discussion and analysis; in addition, such companies are not required to seek say on pay or say on parachute votes from shareholders; an EGC need not provide auditor attestations to internal control reports, or comply with any PCAOB rule requiring mandatory audit firm rotation or any supplement to an auditors report to provide additional information regarding the audit and the financial statements (auditor discussion and analysis); an EGC need not obtain an audit report on its internal control over financial reporting; and the SECs rules with respect to the preparation, publication, or distribution of research reports regarding an EGC that is the subject of a proposed public offering of its common equity are relaxed, even if the broker or dealer is participating in the offering, and certain restrictions with respect to security analyst communications and post-offering communications are relaxed.
May 2012
rules that require the issuer to take reasonable steps to verify that the purchasers of securities in Rule 506 offerings are accredited investors, using such methods as the SEC shall determine. (Note that the current definition of accredited investor in Rule 501 means any person who comes within any of the categories set forth in the definition, or who the issuer reasonably believe comes within any of such categories, at the time of the sale.) Title II also provides an exemption from broker or dealer registration with respect to securities offered and sold pursuant to Rule 506 if all the person does is maintain a platform or mechanism for offering, selling, purchasing, or negotiating securities or that permits general solicitation or general advertising, subject to certain conditions with respect to the activities of such person. The provisions of Title II will not become effective until the SEC completes its required rulemaking.
Title IIICrowdfunding
It should be noted that EGCs may, if they so elect, opt to comply with the requirements applicable to companies that are not EGCs. In addition to the above provisions, Title I requires the SEC to conduct a study with respect to the impact the trading and quoting of securities in penny increments (decimalization) has had on IPOs and on the liquidity for small and middle capitalization company securities, and to report its results to Congress on or before July 4, 2012 (90 days after enactment). The SEC is also required to conduct a review of Regulation S-K to determine how the regulation can be updated to modernize and simplify the registration process and reduce the costs and other burdens associated with those requirements for EGCs. The SEC is required to submit its report to Congress, setting forth specific recommendations, by October 2, 2012 (180 days after enactment).
Title IIElimination of General Solicitation and General Advertising Restrictions
Crowdfunding is the raising of capital, which may involve the use of the Internet, from a large number of investors whose individual investments are limited. Title III of the JOBS Act will, following adoption of implementing rules by the SEC, permit crowdfunding by U.S.-organized issuers, subject to a number of conditions. Among other things: the aggregate amount sold to all investors by the issuer, including amounts sold by the issuer pursuant to crowdfunding during the 12-month period preceding the transaction, may not exceed $1 million; the aggregate amount sold to any single investor by the issuer, including amounts sold by the issuer pursuant to crowdfunding during the 12-month period preceding the transaction, may not exceed: The greater of $2,000 or 5 percent of the annual income or net worth of the investor, if either the annual income or net worth of the investor is less than $100,000; and
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The JOBS Act requires the SEC, on or before July 4, 2012, to revise Rule 506 and Rule 144A under the Securities Act to provide that the prohibition against general solicitation and general advertising does not apply to Rule 506 offerings, provided that all purchasers are accredited investors, or to Rule 144A offerings, provided that securities are only sold to persons the seller (and any person acting on behalf of the seller) reasonably believes is a qualified institutional buyer (QIB). The SEC is also required to adopt
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10 percent of the annual income or net worth of the investor, not to exceed a maximum aggregate of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000; tration requirements, but specifically preserves state enforcement authority. Although concerns have been expressed as to whether the crowdfunding provisions provide adequate investor protections, in a letter to the president referred to in a White House release relating to the JOBS Act, a consortium of crowdfunding companies committed to appropriate regulation of the industry, including an industry standard Investors Bill of Rights.
Title IVSecurities Act Section 3(b) Amendments
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ments, including offering statement preparation, filing, and distribution requirements; in addition, the SEC may provide disqualification provisions for persons subject to certain securities-related or regulatory sanctions; and the securities will be treated as covered securities, thereby pre-empting state securities registration requirements if they are offered and sold on a national securities exchange or offered or sold to a qualified purchaser (as yet to be defined by the SEC pursuant to Section 18 of the Securities Act).
the transaction must be conducted through an intermediary (a broker or a funding portal); and the issuer is required to: comply with certain disclosure and SEC filing obligations; comply with certain limitations on advertising the terms of the offering; comply with certain limitations on compensating promoters; file a report on the issuers results of operations and a financial statement not less than annually with the SEC and disclose such information to investors; and comply with any other requirements the SEC may prescribe.
The JOBS Act expands the scope of the exemptions from registration under Section 3(b) of the Securities Act, permitting the SEC to exempt up to $50 million of securities offered and sold within a 12-month period in reliance on the new exemption. This increase responded to criticisms regarding the limitations of current Regulation A and Rule 504, which have not been widely used. Under the new provision, among other things: the securities eligible for the new exemption are limited to equity, debt, debt convertible or exchangeable into equity, and guarantees of such securities; the securities may be offered and sold publicly, and are not deemed to be restricted securities; any person offering or selling the securities is subject to civil liability under Section 12(a)(2) of the Securities Act; the issuer may test the waters by soliciting interest in the offering prior to filing any offering statement with the SEC; the issuer will be required to file audited financial statements with the SEC annually, and will be subject to such periodic disclosure obligations as the SEC may determine; the SEC is authorized to adopt other terms, conditions, or require-
The implementation of the statutory amendments under Title IV is subject to SEC rulemaking.
Titles V and VI Exchange Act Section 12(g) Triggers
Title III provides for a private right of action by an investor against an issuer for negligent misrepresentation (Section 12(a)(2) of the Securities Act); the securities purchased in a crowdfunding transaction are subject to a one-year restriction on resales, subject to certain exceptions; the SEC is required to adopt rules to disqualify issuers from offering securities in crowdfunding transactions, and brokers and funding portals from effecting or participating in crowdfunding transactions, if they have been subject to certain securities-related or regulatory sanctions; and the crowdfunding exemption preempts state securities law regis-
Prior to the JOBS Act, a company that had, at the end of a fiscal year, over $10 million in assets and a class of equity securities (other than exempted securities) held of record by 500 or more persons was required to register the class of securities under the Exchange Act. As a result of Section 12(g) registration, a company becomes subject to SEC reporting obligations. For a number of companies, this reporting trigger became problematic, and risked forcing them into public company status prior to the time they otherwise would have wanted to become subject to the burdens of public company compliance. The JOBS Act has now amended these triggers. Section 12(g) now provides that an issuer is not required to register under Section 12(g) until, at the end of a fiscal year, it has over $10 million in assets and a class of equity securities (other than exempted securities) held of record by either: 2,000 persons; or 500 persons who are not accredited investors (as defined by the SEC).
Importantly, Section 502 of the JOBS Act provides that, for the purpose of determining whether an issuer is required
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to register a class of equity security under Section 12(g), the definition of held of record does not include securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from the registration requirements of the Securities Act (such as pursuant to Rule 701). Although the amendments to Section 12(g) became effective upon enactment of the act, SEC rulemaking will be necessary to determine how some of the changes will be implemented. Further, the JOBS Act provides for the SEC to exempt from Section 12(g), either conditionally or unconditionally, securities acquired pursuant to a crowdfunding offering. With respect to banks and bank holding companies, the applicable threshold has now been increased to 2,000 holders of record, without a further test based on the number of persons who are not accredited investors. Although the JOBS Act did not change the standards for deregistration under Section 12(g) or Section 15(d) of the Exchange Act for non-bank companies, it amended the provisions applicable to banks and bank holding companies to permit deregistration and a termination of Exchange Act reporting if the number of holders of record of a class of securities is reduced to under 1,200. Also, in addition to requiring SEC to amend the definition of held of record to reflect the exclusion of securities held by employees in exempt offerings pursuant to employee compensation plans as described above, the SEC is required to adopt safe harbor provisions that issuers can follow when determining whether holders of their securities fall into this exclusion. Finally, the SEC is required to examine its authority to enforce the holder of record provision in Exchange Act Rule 12g5-1 to determine if new enforcement tools are needed to enforce the anti-evasion provision contained in the rule, and to report to Congress by August 3, 2012 (120 days after enactment).
Conclusion
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by the JOBS Act, with the first rulemaking (under Title II of the JOBS Act), and the first study (the decimalization study under Title I) required by July 4, 2012. As with all legislation intended to achieve a specific purpose, most securities practitioners eyes are keenly focused on the implementation of the statutory provisions by the SEC, and on whether the desired objectives will be achieved.
Jeffrey W. Rubin is a partner of Hogan Lovells US LLP and Chair of the Federal Regulation of Securities Committee of the ABA Business Law Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of Hogan Lovells US LLP or the American Bar Association.
The SEC is currently engaged in the significant rulemaking and studies required
Published in Business Law Today, May 2012. 2012 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 5
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May 2012
The JOBS Act: Easing Exempt Offering Restrictions

By Elizabeth M. Dunshee and David M. Lynn
The JOBS Act significantly eases some of the restrictions on exempt offerings under the Securities Act of 1933 (Securities Act) and updates thresholds that would trigger reporting under the Securities Exchange Act of 1934 (Exchange Act). In particular, the JOBS Act: directs the SEC to eliminate the ban on general solicitation and general advertising for certain offerings under Rule 506 of Regulation D, provided that the securities are sold only to accredited investors, and under Rule 144A offerings, provided that the securities are sold only to persons who the seller (and any person acting on behalf of the seller) reasonably believes is a qualified institutional buyer (QIB); establishes a new offering exemption under Securities Act Section 3(b), which will permit companies to offer and sell up to $50 million in securities in a public offering within a 12-month period; and increases the number of holders of record of equity securities that private companies are permitted to have before requiring registration and reporting under the Exchange Act. eral advertising for offerings conducted under Rule 506 of Regulation D and Rule 144A of the Securities Act, provided that Rule 506 sales are made only to investors who are accredited and Rule 144A resales are made only to investors who are qualified institutional buyers, as each of those terms is defined under the federal securities laws. Title II also provides that general solicitation and general advertising will not cause a Rule 506 offering to be deemed a public offering.
Rule 506 Offerings: The Current Regime
ment to interest a broker-dealer to expend the effort to undertake an offering.

Rule 144A Offerings: The Current Regime
Private Offering Reforms
Title II of the JOBS Act directs the SEC to permit general solicitation and gen-
Rule 506 is the most popular means for conducting a private offering, because it permits issuers to raise an unlimited amount of money and pre-empts state securities laws. Generating interest in a Rule 506 offering is sometimes difficult for companies, due in part to a long-standing prohibition against general solicitation and general advertising. This prohibition has meant that issuers can offer securities only to investors with whom there is a preexisting relationship, and that they cannot advertise the offering in order to reach a broad group of potential investors. Some companies undertaking private capitalraising activities are able to access a larger group of potential investors by engaging a registered broker-dealer who has preexisting relationships with such persons. This alternative may not be available, however, if the company is too early in its develop-
Rule 144A, which is a popular means for conducting large private offerings, permits financial intermediaries to buy securities from an issuer and resell them to an unlimited number of QIBs in transactions that comply with the conditions of Rule 144A. Those QIBs can in turn trade the securities among themselves in transactions that comply with the conditions of Rule 144A. Rule 144A(d)(1) provides that the securities must be offered and sold only to a QIB or an offeree or purchaser that the seller (and any person acting on behalf of the seller) reasonably believes to be a QIB. As a result, Rule 144A currently prohibits offers to non-QIBs, thus preventing the use of any general solicitation or general advertising in connection with a Rule 144A offering.
Private Offerings after the JOBS Act
The amendments to Rules 506 and 144A contemplated by the JOBS Act remain subject to SEC rulemaking, which the JOBS Act directs the SEC to complete by July 4, 2012. The revised rules will permit broader communications by issuers and Rule 144A sellers, allowing notice of accredited- and QIB-only offerings in any manner, including through unrestricted issuer or intermediary websites and social
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media sites, as well as print, radio, and television advertising. Until the rules are amended, however, market participants should continue to comply with the existing rules and follow customary procedures with respect to these offerings. The JOBS Act directs the SEC to revise Rule 506 to provide that the prohibition against general solicitation or general advertising in Rule 502(c) shall not apply to offers and sales of securities made pursuant to Rule 506, provided that all purchasers of the securities are accredited investors. Under the SECs existing definition, an accredited investor is a person who falls within one of the categories specified in the definition, or a person whom the issuer reasonably believes falls within one of those categories. The revised rules must further require that issuers utilizing general solicitation or general advertising in connection with Rule 506 offerings take reasonable steps to verify that purchasers of securities are accredited investors, using methods to be determined by the SEC. With respect to Rule 144A, the rule as revised must provide that securities may be offered to persons other than QIBs, including by means of general solicitation or general advertising, provided that the securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe is a QIB. The JOBS Act also provides certain intermediaries with greater latitude to assist with Rule 506 offerings, without requiring registration of those intermediaries as broker-dealers. Specifically, such thirdparties will not be required to register as broker-dealers solely because they operate websites or other platforms that facilitate the offer, sale, purchase, or negotiation of or with respect to securities, or that permit general solicitation or general advertising in connection with Rule 506 offerings, or that provide ancillary services such as due diligence or standardized documentation, provided that such third-parties: (1) receive no compensation in connection with the purchase or sale of the securities; (2) do not hold investor funds or securities in connection with the transaction; and (3) are not subject to statutory bad actor disqualification provisions. Once the SECs rules are in place, a practice of broadly disseminated announcements of Rule 506 and Rule 144A offerings is likely to develop. It may become more common for issuers to use third-party matching and marketing platforms in order to facilitate these offerings. Until the new rules are effective, issuers and intermediaries must continue to comply with current regulations. The Federal Regulation of Securities Committee of the Business Law Section of the American Bar Association has submitted a pre-rulemaking comment letter regarding the elimination of general solicitation and general advertising restrictions in connection with Rule 506 and Rule 144A transactions, which is available here. Other pre-rulemaking comment letters relating to Title II of the JOBS Act are available here.
No Fraud Allowed
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it permits limited solicitations of interest (sometimes referred to as testing the waters) and purchasers receive securities that are not restricted securities under federal securities law. In addition, Regulation A calls for less extensive disclosure than a traditional initial public offering and, although a very successful public offering under Regulation A could result in the company having a number of holders of record that would require registration under Section 12(g) of the Exchange Act following the end of the fiscal year, Regulation A does not in and of itself trigger ongoing periodic reporting obligations under the Exchange Act. Regulation A has, however, fallen out of favor because of the $5,000,000 limit on aggregate consideration to be received for securities offered thereunder, including no more than $1,500,000 of securities offered by selling shareholders, in any 12-month period. In addition, companies relying on Regulation A must comply with state regulations in every state where the offering occurs.
The New Small Offering Exemption
Although the JOBS Act relaxes restrictions on the audience for communications, it does not eliminate anti-fraud rules. Issuers and intermediaries must continue to ensure that communications do not contain material misstatements or omissions that could subject them to liability in connection with the offering.
A New Small Public Offering Exemption
In addition to easing restrictions on private capital-raising efforts as discussed above, the JOBS Act establishes a new exemption pursuant to new subparagraph (2) of Section 3(b) of the Securities Act. The JOBS Act gives the SEC significant latitude in crafting this new exemption, and in many ways it appears to be similar to current Regulation A, which permits private companies to conduct small public offerings without registration. Some commentators have referred to this new exemption as Regulation A+.
Regulation A Offerings: The Current Regime
Today, Regulation A provides some advantages over a private offering, because
Title IV of the JOBS Act directs the SEC to establish an exemption for offerings of up to $50,000,000, without a maximum for selling shareholders, in any 12-month period. In order to maintain the utility of the new exemption, the JOBS Act requires the SEC to consider adjustments to the dollar limitation every two years. Companies will be permitted to offer equity securities, debt securities, and debt securities convertible or exchangeable into equity interests, including any guarantees of such securities. Although the new exemption would not trigger required periodic reporting under the Exchange Act pursuant to Securities Act Section 15(d), it will, among other things, subject a company to the civil liability provisions of Section 12(a)(2) of the Securities Act and require the filing with the SEC of annual audited financial statements. Through rulemaking, the SEC may also require that the company file with the SEC and distribute to potential investors an offering statement, and may require the company to file additional periodic disclosures.
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Like existing Regulation A, the new exemption will allow for solicitations of interest (testing the waters) and purchasers in such offerings will receive securities that are not restricted securities. In addition, securities offered under this exemption will be considered covered securities under the National Securities Market Improvements Act of 1996 (NSMIA), and therefore not subject to state securities registration and qualification requirements, but only if the securities are offered or sold on a national securities exchange (which would require Exchange Act registration under Section 12(b) of the Exchange Act), or offered or sold to a qualified purchaser, which is a term yet to be defined by the SEC.
Stay Tuned for Rulemaking
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in assets and a class of equity securities held of record by 500 or more persons. Under this provision, financing rounds and equity compensation arrangements led many private companies either to become subject to public disclosure rules long before they were ready to go public, or to engage in share buy-backs or other means to avoid or delay registration.
Relief from Exchange Act Registration
implementation of the amendments to Section 12(g).

Conclusion
There is no timeframe within which the SEC is required to adopt regulations implementing so-called Regulation A+. The most controversial aspect of Title IV is likely to be the scope of the state law pre-emption. The JOBS Act directs the U.S. Comptroller General to complete a study by early July 2012 (three months after enactment) regarding the impact of state laws regulating securities offerings on Regulation A offerings.
Increases in Exchange Act Registration Triggers
While the amendments described above will be useful for capital-raising by private companies, their benefits would be muted in the absence of an increase to the mandatory Exchange Act registration triggers that permits companies to stay private longer. Accordingly, the JOBS Act increases the number of holders of record of a companys equity securities that are permitted before the company must register under the Exchange Act and begin public reporting.
Section 12(g): Before the JOBS Act
Before the JOBS Act, a company was required to register under Section 12(g) of the Exchange Act and begin the periodic reporting process if, at the end of its fiscal year, the company had at least $10 million
The JOBS Act raises the Section 12(g) registration thresholds and thereby improves the utility of the JOBS Act capital formation provisions. As amended, Section 12(g) will now require registration if, at the end of its fiscal year, a company has at least $10 million in assets and a class of equity securities held of record by either (1) 2,000 persons, or (2) 500 persons who are not accredited investors. Banks and bank holding companies are not required to register unless they have, at the end of the fiscal year, at least $10 million in assets and a class of equity securities held of record by 2,000 or more persons. Importantly, the definition of holders of record will also be amended to exclude securities held by persons who received the securities in exempt transactions under an employee compensation plan, or pursuant to the JOBS Act crowdfunding exemption (see Crowdfunding: Its Practical Effect May Be Unclear Until SEC Rulemaking is Complete). Since these are two of the most likely avenues for the issuance of securities to nonaccredited investors, a company could potentially have a significant number of non-accredited investors that will not be counted against the 500 holder-of-record limit (or the 2,000 holder-of-record limit for banks and bank holding companies) described above. It remains to be seen how difficult it will be for nonpublic companies to monitor the accredited investor status of their shareholders. Except for banks and bank holding companies, the deregistration thresholds under Sections 12(g) and 15(d) of the Securities Act have not been amended. The SEC has posted an initial series of frequently asked questions regarding
The JOBS Act aims to afford significantly more latitude for capital-raising efforts, particularly for private companies. As the SEC develops its rules under the JOBS Act, it will have to balance the need to promote capital formation with the goal of protecting investors. Ultimately, we can expect to see a much more public private offering market, and perhaps new alternatives to the traditional initial public offering.
Elizabeth M. Dunshee is an associate with Fredrikson & Byron, P.A., in Minneapolis. David M. Lynn is a partner of Morrison & Foerster LLP at the firms Washington, D.C., office. The views expressed in this article are those of the authors and do not necessarily represent the view of their respective law firms or the American Bar Association.
Business Law Today
May 2012
Crowdfunding: Its Practical Effect May Be Unclear Until SEC Rulemaking is Complete
By Yoichiro Taku
President Obama signed the Jumpstart Our Business Startups Act (known as the JOBS Act) into law on April 5, 2012. One highly anticipated provision of the JOBS Act, Title III, is entitled Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012 or the CROWDFUND Act. Title III enables crowdfunding, or the ability to sell securities in small amounts to a large number of investors. Whether or not the crowdfunding provisions will have a significant impact on small business fundraising is yet to be determined. Despite the buzz among entrepreneur communities, various restrictions may make crowdfunding impractical for companies raising money and the intermediaries that facilitate the process. Most importantly, the crowdfunding provisions of the JOBS Act are not yet effective. On April 23, 2012, the SEC published guidance reminding issuers that any offers or sale of securities purporting to rely on the crowdfunding exemption would be unlawful under federal securities laws until the SEC adopts new rules.
Crowdfunding Prior to the JOBS Act
Crowdfunding is not a new concept. The Internet has made it easier for individuals and organizations to raise money for charitable purposes, political campaigns, artists seeking support from fans and various other projects. In 2005, Kiva launched
a micro-finance platform that allows people to lend small amounts of money to entrepreneurs in developing areas. This lending model was further refined, and peer-to-peer lending companies like Prosper emerged in 2006 and Lending Club emerged in 2007. More recently, companies like Kickstarter have emerged to enable the public to fund creative projects ranging from independent films, video games, and food projects. Prior to the JOBS Act, crowdfunding suffered from some several legal limitations. First, crowdfunding involving the sale of securities triggers the prohibitively expensive registration requirements of the Securities Act of 1933, as generally no exemptions are available in many crowdfunding models. Second, websites that facilitate crowdfunding may be subject to regulation as brokers. As a result, current crowdfunding platforms have generally developed business models designed to avoid characterization as a sale of a security. Some companies utilize pure donation models. Companies like Kiva that provide micro-loans without interest and do not take commissions are arguably not offering securities because there is no expectation of profit on the part of the investors. Other companies like Kickstarter offer rewards or facilitate the pre-purchase of products. At the other extreme, because the SEC has taken the position that interest-bearing notes are
securities, companies like Prosper and Lending Club have registered their offerings with the SEC. Under pressure from Congress, the SEC agreed to review its regulations and their effect on capital formation in spring 2011. Crowdfunding received a boost when the Obama administration endorsed crowdfunding in September 2011. Although the SEC has the authority to exempt crowdfunding from the registration requirements of the Securities Act and to exempt intermediaries from registration as brokerdealers, Congress has forced the SEC to take action. The House of Representatives passed a crowdfunding bill in November 2011 and crowdfunding bills were introduced in the Senate in November 2011 and December 2011 that resulted in the crowdfunding provisions of the JOBS Act.
Crowdfunding under the JOBS Act
Title III of the JOBS Act amends Section 4 of the Securities Act by adding a new paragraph (6), and requires the SEC to promulgate related rules to create an exemption from registration that permits a private company to sell securities in small amounts to large numbers of investors that are not accredited over a 12-month period. Under the crowdfunding provisions, the aggregate dollar amount of securities that an issuer can sell in a crowdfunding transaction is limited to $1 million (less the aggregate amount of securities sold
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under other exemptions) over a 12-month period. In addition, the amount an issuer can sell to an individual investor in any 12-month period is limited to the maximum of: the greater of $2,000 or 5 percent of the annual income or net worth of an investor, if either the investors net worth or annual income is less than $100,000; and 10 percent, not to exceed $100,000, of annual income or net worth of an investor, if either the investors annual income or net worth is equal to or greater than $100,000. make available to the SEC and potential investors the disclosure required to be provided by issuers not later than 21 days prior to the first day on with securities are sold; ensure that offering proceeds are provided to the issuer only when the target offering amount is reached or exceeded and allow investors to cancel their commitments; ensure that no investor in a 12-month period has purchased securities pursuant to the crowdfunding exemption that exceed the per-investor limits in the aggregate; take steps to ensure the privacy of information collected from investors; not compensate promoters, finders, or lead generators for providing the intermediary with the personal identifying information of any potential investor; and prohibit its directors, officers, or partners from having a financial interest in an issuer using its services.
May 2012
raising process, such as web sites like AngelList that facilitate introductions between companies and investors, are not subject to broker-dealer registration. Section 201(c) of the JOBS Act provides that certain trading platforms involved with the sale of securities in a valid Rule 506 private placement are not subject to registration as a broker or dealer as long as certain conditions are met, including that persons receive no compensation in connection with the purchase or sale of securities and that the platform does not have possession of customer funds or securities in connection with the purchase or sale of securities.
Requirements for Issuers
Securities sold pursuant to the crowdfunding provisions are not transferable by the purchaser for one-year from the date of purchase, unless the securities are transferred to the issuer, an accredited investor, in a registered offering, or to family of the purchaser. The securities may also be subject to such other limitations as may be determined by the SEC.
Requirements on Intermediaries
Issuers utilizing crowdfunding must make financial and other information available to both the SEC and investors, both in connection with the offering and on an annual basis. The JOBS Act provides for a tiered disclosure regime based on the size of the offering, including the following: $100,000 or less: Income tax returns for the last fiscal year and unaudited financial statements certified as accurate by the principal executive officer. $100,000 to $500,000: Financial statements reviewed by an independent public accountant. More than $500,000: Audited financial statements.
An issuer must sell the securities in a crowdfunding offering through a broker or funding portal, which is required to register with the SEC and other applicable self-regulatory organizations. These intermediaries need to meet a series of specific and restrictive requirements to be determined by the SEC. For example, intermediaries will be required to: provide investors with certain information (such as disclosures related to risks and other investor education materials); ensure that investors review the investor-education information, affirm their understanding of the risks and answer questions demonstrating an understanding of the risks; take measures to reduce the risk of fraud, including conducting background checks on officers, directors, and holders of more than 20 percent of the shares of issuers;
The SEC is directed to establish rules that exempt funding portals from brokerdealer registration as long as they are subject to the authority of the SEC, are a member of a national securities association and are subject to other requirements the SEC may establish. However, in order to qualify as a funding portal, the intermediary must not offer investment advice or recommendations; solicit purchases, sales, or offers to buy the securities offered on its website; compensate persons for such solicitation based on the sale of securities referenced on its website; hold, manage, possess, or otherwise handle investor funds or securities; or engage in other activities that the SEC determines. While separate from the crowdfunding provisions, the JOBS Act also clarified that certain intermediaries in the fund-
As a practical matter, many early-stage startup companies that are considering crowdfunding may have only been recently incorporated and have not yet filed tax returns. Furthermore, many startup companies may not yet have engaged independent public accountants, nor have audited financial statements at the time they wish to raise funds. Among other things, the issuer must file with the SEC and provide to investors and the intermediary and make available to potential investors: basic corporate information including name, legal status, address, and website;
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names of officers and directors (and any persons occupying similar status or performing similar functions); names of any holder of more than 20 percent of the shares of the issuer; description of the business and the anticipated business plan of the issuer; description of the stated purpose and intended use of the proceeds of the offering; target offering amount, deadline to reach such target amount, and regular updates relating to the issuers progress in meeting the target offering amount; the price to the public of the securities or the method for determining the price, and written disclosure prior to the sale of the final price and all required disclosures, providing investors with a reasonable opportunity to rescind the commitment to purchase; description of the ownership and capital structure of the issuer; and such other information as the SEC may prescribe. omissions in disclosures provided to investors. Such an action is subject to the provisions of Section 12(b) and Section 13 of the Securities Act. The crowdfunding exemption will not be available to foreign companies, SEC reporting companies, investment companies, and companies excluded from the definition of investment company by virtue of Section 3(b) or 3(c) of the Investment Company Act of 1940. The SEC is directed to promulgate disqualification provisions under which an issuer is not eligible to offer securities pursuant to new Section 4(6) of the Securities Act and brokers or funding portals shall not be eligible to effect or participate in crowdfunding transactions.
Coordination with State Law and Other Exemptions
May 2012
old for registration under Section 12(g) of the Securities Exchange Act of 1934.
SEC Rulemaking
Issuers must file annual reports with SEC and provide to investors reports of results of operations and financial statements as the SEC determines. However, many private companies wish to protect such sensitive financial information and may be disinclined from utilizing the exemption for this reason. Furthermore, issuers may not advertise the terms of the offering except through notices that direct investors to the broker or funding portal. Compensation of intermediaries will be subject to rules designed to ensure that recipients disclose receipt of compensation. In addition, the JOBS Act specifically authorizes an investor in a crowdfunding transaction to bring a civil action against an issuer for material misstatements or
Securities acquired pursuant to the crowdfunding provisions will be exempt from registration or qualification under state blue sky laws. In addition, states may not require a filing or a fee for crowdfunding securities except for the state of the principal place of business of the issuer or the state in which purchasers of 50 percent or greater of the aggregate amount raised are residents. However, the crowdfunding provisions preserve state enforcement authority over unlawful conduct by intermediaries and issuers and with respect to fraud or deceit. While the JOBS Act specifically states that the crowdfunding amendments to the Securities Act are not to be interpreted as preventing an issuer from raising capital through other methods, it is unclear in practice how this will work. Private placements conducted through Regulation Dthe most common type of private offering transactionmay be integrated with other offerings conducted within six months. Absent SEC clarification, significant questions regarding integration may inhibit a crowdfunding transaction at the same time as an angel or venture capital-led transaction with accredited investors is being conducted. In addition, the SEC is directed to issue a rule to exclude persons holding crowdfunding securities from the shareholder thresh-
The crowdfunding provisions of the JOBS Act require significant SEC rulemaking, which is supposed to occur by December 31, 2012. In addition to specific areas that the SEC is supposed to address through rulemaking, the SEC is given wide discretion to prescribe various requirements on intermediaries and issuers for the protection of investors and in the public interest. The SEC has begun accepting public comments on regulatory initiatives under the JOBS Act, including the crowdfunding provisions. SEC Chairman Mary Schapiro has publicly stated that the proposed rulemaking deadlines in the JOBS Act do not provide sufficient time for the SEC to consider and adopt rules under the act. Given these statements, it is not clear when companies actually will be able to take advantage of all of the provisions of the JOBS Act, including the crowdfunding provisions. Given the extensive SEC rulemaking required by the JOBS Act, and the investor protection issues involved, it is unclear whether the SEC will meet the deadline.
Raising Capital Apart from Crowdfunding
Other provisions of the JOBS Act provide opportunities to enable capital raising other than through crowdfunding. For example, Section 201(a)(1) of the JOBS Act directs the SEC to amend Rule 506 to make the prohibition against general solicitation or general advertising contained in Rule 502(c) inapplicable to offers and sales under Rule 506 provided that all purchasers are accredited investors. Section 201(b) amends Section 4 of the Securities Act to provide that offers and sales exempt under Rule 506 as revised by Section 201 shall not be deemed public offerings under the Federal securities laws as a result of general advertising or general solicitation. Section 201(a) requires the SEC to amend both Rule 506 and Rule 144A not later than 90 days after enactment of the JOBS Act. Therefore,
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after SEC rulemaking is complete, it may be easier for issuers to advertise Rule 506 offerings and raise capital through the sale of securities to accredited investors.
What the Crowdfunding Provisions Mean
May 2012
rulemaking authority to prescribe a format, such as the Form 1-A Regulation A offering statement and the model offering circular contained in the form, which may impose a significant burden to raising a small amount of money. Sixth, the increase in number of stockholders as a result of crowdfunding may result in increased administrative burdens on issuers. Stockholders may call or e-mail company personnel with questions or request meetings and may seek to avail themselves of rights to attend and participate in stockholder meetings and to inspect corporate books and records. Should litigation arise, it may be more challenging to manage such actions as the number of stockholders increases. In addition, if an issuer is the target of an acquisition, having a large number of stockholders may complicate securities law compliance. Seventh, companies will need to choose intermediaries carefully. While some intermediaries websites have already begun to prepare for crowdfunding, the transaction fees charged by intermediaries have not yet been determined and there is the risk that fees will be excessive or that unscrupulous persons will masquerade as registered intermediaries. Finally, it is possible that the attention given to crowdfunding may result in more elaborate schemes to defraud the public. Although the SEC will likely establish strict regulations on issuers and intermediaries, the perception that crowdfunding is legitimate may encourage unscrupulous persons to spam the public with various fraudulent crowdfunding opportunities not in compliance with the crowdfunding provisions of the JOBS Act. This may range from fraudsters operating fraudulent intermediaries to directly soliciting investments in fraudulent businesses.
Yoichiro Taku is a corporate and securities partner in the Palo Alto office of Wilson Sonsini Goodrich & Rosati. He is the chairman of the Angel Venture Capital Subcommittee of the ABA Business Law Sections Venture Capital and Private Equity Committee. He also maintains a
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web site at http://www.startupcompanylawyer.com/.
First, companies should not try to utilize crowdfunding until the SEC finalizes rulemaking. Doing so would violate the securities laws and, in view of the bad actor provisions in the JOBS Act, may preclude a company from subsequently utilizing crowdfunding to raise capital. Second, crowdfunding will clearly expand the options available to small companies seeking financing. As some early-stage startup companies have used Kickstarter to fund pre-sales of products, some startups may choose to use crowdfunding as an alternative to more conventional sources of funding. Third, companies seeking to raise capital through crowdfunding will need attorneys involved to ensure that their corporate housekeeping is in order. Companies will need to ensure that an appropriate number and type of shares is authorized and review provisions relating to voting rights, board composition, and other matters that may be affected when the number of stockholders increases. In addition, companies will need to consider whether they will want their stockholders to enter into agreements imposing restrictions on share transfers, such as a company right of first refusal or IPO-related lock-up provisions. Furthermore, with a large number of stockholders, companies may want to review their director and officer indemnification provisions, and consider obtaining directors and officers liability insurance. Fourth, companies will be required to make filings with the SEC. Although these filings will be less burdensome than the filings required by public companies, they may still impose burdens on the resources of small companies, and may subject the companies and their officers and directors to potential liability if not properly prepared. Fifth, many companies may be unable to prepare disclosure documents in compliance with the crowdfunding provisions of the JOBS Act. The SEC may use its
Business Law Today
May 2012
IPO On-Ramp: The Emerging Growth Company

By Bonnie J. Roe
The JOBS Act springs from a belief that smaller companies are the engines of economic growth and job creation. In this view, the decline of the smaller company IPO market over the last decade threatens the long-term prospects of the American economy, as smaller companies that cannot access the IPO market must either rely on private capital to finance their growth or sell themselves to larger companies. In an effort to restore vibrancy to the smaller company IPO market, the JOBS Act eases disclosure and other regulatory requirements for smaller companies in the initial public offering process and in subsequent public reporting. The belief is that, over the past decade, smaller companies have been discouraged from entering public markets for capital due to the cost of regulatory compliance, particularly in the wake of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. If we create a new on-ramp to public markets by easing the regulatory burden for smaller companies, the thinking goes, more of these companies will seek to go public. In order to have a successful public capital market for smaller companies, however, analysts and investors have to come to the party as well. In this regard, the JOBS Act includes test the waters provisions to permit smaller companies to approach institutional investors prior to and during the offering period. More controversially, the JOBS Act includes provisions relaxing restrictions on communications by analysts during the offering period.
Emerging Growth Companies Defined
The JOBS Act creates a new category of issuerthe emerging growth companythat will benefit from a lighter level of regulation in the offering process and as a reporting company for a period of up to five years from the date of the issuers first public offering. An emerging growth company is an issuer that: had less than $1 billion in annual gross revenues during its most recently completed fiscal year; made its first sale of common equity securities pursuant to an effective registration statement within the last five years (or has not yet made a registered sale of common equity securities); has not issued more than $1 billion in non-convertible debt securities over the past three years; and is not a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934 (i.e., a seasoned issuer with at least $700 million in common equity market capitalization held by nonaffiliates).
2011, are excluded from the definition of emerging growth companies. The goal of the emerging growth company on-ramp, after all, is to create new public companies, not to assist those that were already public when the JOBS Act was conceived. Companies that are reporting companies as a result of Section 12(g) under the Exchange Act and have not issued shares in a registered offering under the Securities Act of 1933, and companies that have publicly issued debt but not equity, might nonetheless qualify as emerging growth companies under the JOBS Act definition. The $1 billion revenue ceiling for emerging growth companies is significant, as a large number of companies seeking to go public are likely to have revenues of less than that amount. On April 16, 2012, and May 3, 2012, the Division of Corporation Finance of the Securities and Exchange Commission (SEC) posted frequently asked questions relating to emerging growth companies on the SEC website, indicating among other things that foreign issuers are eligible to be treated as emerging growth companies so long as they otherwise meet the requirements.
Financial Disclosures and Reporting Requirements
Companies that made their first sale of common equity securities in a registered offering on or before December 8,
The JOBS Act seeks to make the financial reporting process easier and less expensive for emerging growth companies in several ways, reflecting the fact that the public company accounting requirements and accounting costs often are a substantial deterrent to going public.
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Number of Years of Financial Statements
May 2012
first year following the effective date of the registration statement for their initial public offering. The JOBS Act extends this exemption from auditor attestation to all emerging growth companies. While this might seem to be a relatively small change, it is the item that is most likely to produce significant savings. Like smaller reporting companies and newly public companies, emerging growth companies are still required to provide officer certifications of the companys internal control of financial reporting. Auditor Rotation and Reports. The JOBS Act also exempts emerging growth companies from any future requirement of the Public Company Accounting Oversight Board (PCAOB) that reporting companies be subject to mandatory auditing firm rotation. Again this may appear to be a relatively small item, particularly because the PCAOB has proposed for discussion but not yet adopted such a requirement. If auditor rotation is adopted in the future, however, the exemption from this requirement could prove to be a significant benefit, as the process of selecting and engaging a new auditor can be a difficult and expensive one for smaller companies. Emerging growth companies are also exempted from any future requirement that auditors provide additional information about the audit and financial statements of the company in an auditors discussion and analysis. New Accounting Principles. Finally, the JOBS Act exempts emerging growth companies from compliance with new accounting principles that are adopted by the PCAOB after the date of the JOBS Act enactment, if the new principles are not applicable to non-reporting companies. This responds to a concern of many smaller companies that they do not have adequate resources to keep up with frequent and costly accounting changes. The exemption from new accounting principles comes with a significant caveat. While in general an emerging growth company is free to choose on an ad hoc basis whether or not to make use of the exemptions available to it, an emerging growth company must either opt in, or opt out, of the exemption from new accounting principles on a one-time basis. If the emerging growth company wishes to comply with a new accounting standard, it must comply with all new accounting standards and notify the SEC of such choice.
Executive Compensation Disclosure and Say-On-Pay
The JOBS Act limits the number of years of audited financial statements that must be included in the initial registration statement of an emerging growth company to two years (rather than the usual two years of audited balance sheets and three years of audited statements of income and changes in financial position). In presenting selected financial data in accordance with Item 301 of Regulation S-K in a registration statement or periodic reports (which requires five years of financial data), an emerging growth company need not present financial data for any year prior to which it has provided audited financial information in its initial registration statement. The emerging growth companys managements discussion and analysis of financial condition and results of operations, or MD&A, need not discuss information for years prior to which the emerging growth company has provided audited financial information in its initial registration statement.
Rolling Back the Clock on Unpopular Reforms
The JOBS Act also tackles several recent and unpopular requirements and proposals relating to the financial reporting process: auditor attestation of internal controls reporting; auditor rotation and reports; and compliance with new accounting requirements that are not required of non-reporting companies. Auditor Attestation. One regulatory requirement about which companies frequently complain is auditor attestation of the companys internal controls report. This requirement, which came into law under Section 404(b) of the Sarbanes-Oxley Act, can result in significant accounting expenses that can be particularly onerous for a smaller company. In response to concerns about the cost of complying with Section 404(b), the SEC now exempts all smaller reporting companies (generally those with a common equity market capitalization of less than $75 million held by non-affiliates) from auditor attestation, and all companies are exempt from the auditor attestation requirements for the
The JOBS Act exempts emerging growth companies from the requirement for a shareholder advisory vote on executive compensation (Say-On-Pay) and the frequency of Say-On-Pay voting. Emerging growth companies are also exempt from Say-On-Golden Parachute shareholder advisory voting requirements. In addition, emerging growth companies need not comply with SEC rules yet to be adopted under Dodd-Frank requiring disclosure of the relationship of the CEOs pay to the median pay for company employees. The executive compensation disclosures of emerging growth companies may follow the generally lighter requirements applicable to smaller reporting companies, rather than the full-fledged requirements applicable to larger companies. Significantly, this means that emerging growth companies need not provide a compensation discussion and analysis, may present compensation data for fewer named executive officers, and may omit some of the tables required for other companies. The JOBS Act directs the SEC to conduct a review of Regulation S-K to determine how it can be updated to modernize and simplify the registration process and the burdens of disclosure for emerging growth companies. A report on this review is to be sent to Congress by October 2, 2012.
Testing the Waters and Confidential Review
Investor interest in an initial public offering is often difficult to gauge. Companies are understandably reluctant to commit to the expensive and time-consuming process of preparing and filing a registration statement, and waiting for SEC staff comments, without knowing whether in-
Business Law Today

vestors will be interested. Frequently companies identify a potential problem and need feedback as to whether it is indeed a show-stopper for investors or the SEC. Market windows appear and disappear quite suddenly. Smaller companies may find the resulting uncertainties particularly vexing because they are unfamiliar with the market and the regulatory process, or they may face barriers created by lack of funds or management time. Some uncertainties, of course, can be resolved by getting good professional advice from investment bankers, attorneys, or accountants, but there may well be issues that cannot be resolved through such advice or a call to the SEC staff. The JOBS Act provides two mechanisms, available solely to emerging growth companies, designed to address uncertainties, preserve flexibility, and facilitate feedback, one from investors and the other from the SEC.
Testing the Waters and (Non-)Integration
May 2012
a potential offering and then determine whether to accomplish such offering as a private placement under Rule 506 under the Securities Act, or to offer securities publicly, without worrying about the potential integration of public and private offerings. By contrast, if the emerging growth company has already filed a registration statement when it tests the waters and then decides to accomplish the offering as a private placement, it might be required to withdraw the registration statement and consider, under the circumstances (and given the types of investors in the private offering), whether a waiting period is required to avoid integration of the contemplated private offering with the abandoned public offering. As other provisions of the JOBS Act have directed the SEC to remove restrictions on general solicitation in an offering under Rule 506 where all investors are accredited investors (see The JOBS Act: Easing Exempt Offering Restrictions), the emerging growth company might not need to worry about integration in this scenario
Confidential Review of Registration Statements
On April 10, 2012, the SECs Division of Corporation Finance posted frequently asked questions about the process surrounding the confidential submission of registration statements. The SEC noted that the drafts should be substantially complete and should include a signed audit opinion, but need not include the auditors consent. When a registration statement is actually filed, the prior confidential draft submissions will be filed as an exhibit to the registration statement. The confidential filing procedure is not available for registration statements on Form 10 under the Exchange Act.
Communications by Analysts
The JOBS Act amends Section 5 of the Securities Act to permit emerging growth companies to test the waters with certain types of investors prior to or after filing a registration statement with the SEC. Specifically, emerging growth companies and brokers or other persons authorized to act on their behalf may engage in oral or written communications with potential investors that are qualified institutional buyers, or QIBs, as defined in Rule 144A under the Securities Act, or institutions that are accredited investors, as defined in Rule 501 under the Securities Act, to determine whether such investors might have an interest in the contemplated securities offering. Communications with such investors can be made informally and will not violate Section 5 as gun-jumping or the use of an illegal prospectus, so long as the company complies with the prospectus delivery requirements at or prior to the time of sale in the registered offering. The testing-the-waters provision (new Section 5(d) of the Securities Act) permits an emerging growth company that had not yet filed a registration statement to approach institutional investors about
Smaller public companies are often stock market orphans, with little or no analyst coverage and typically less investor interest as a result. The investment banking firms that specialized in smaller company IPOs in the 1990s have in many cases been acquired by larger firms less interested in this market. The JOBS Act aims to restore analyst and investment banking firm interest in smaller company public capital markets by: enabling analysts to provide research on an emerging growth company during its offering period, even if the analysts firms are participating in, or will participate in, the offering, without classifying such research as an offer with resulting liability under the Securities Act; eliminating restrictions based on functional role relating to which associated persons of a broker, dealer or member of a national securities association may arrange for communications between a securities analyst and prospective investors in an emerging growth company; permitting an analyst to be brought over the wall to communicate with management and members of the investment banking team working with management on the offering of an emerging growth company; and
In the case of an initial public offering, the JOBS Act permits an emerging growth company to submit a draft registration statement to the SEC for nonpublic review by the SEC staff, provided that the initial draft submission and all amendments thereto are publicly filed with the SEC on EDGAR not later than 21 days before the date that the company conducts its road show. A company might want confidential treatment for business reasonsit might not want to announce to competitors or others that it was pursuing the possibility of a public offering until that offering was more certain to take placeand it might wish to keep its business and financial information confidential until then. If the company were to abandon its plans to go public before embarking on a road show, presumably the registration statement would never become publicly available on the SEC website and the companys financial and other information disclosed in the confidentially submitted draft would remain confidential.
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prohibiting regulatory restrictions by the SEC or any national securities association on the provision of research within any prescribed period of time following the public offering date of an emerging growth company or before and after the release of any lock-up period imposed by the underwriting agreement, restricting sales by the emerging growth company or its shareholders. ment greater than one cent but less than 10 cents for emerging growth companies for use in all quotations and trading.
Conclusion
May 2012
These provisions rescind pre-JOBS Act law that required investment banking firms participating in an IPO to refrain from publishing research in advance of an IPO or within 40 days following the completion of the offering or 15 days before and after the release or expiration of any lock-up period imposed pursuant to the underwriting agreement. These JOBS Act provisions also remove restrictions designed to preserve analyst independence and assure that analysts are not used to solicit investment banking business. It is unclear whether investment banking firms will take advantage of the latitude granted under the JOBS Act, or whether the scope of the provisions can or will be effectively narrowed by regulatory action of the SEC or the self-regulatory organizations. Despite the apparent latitude granted by the JOBS Act, investment banking firms must still consider the possibility of liability under Rule 10b-5 under the Exchange Act for research published by their analysts in the period before and after the offering.
Tick Size
The relief granted to emerging growth companies became effective with the enactment of the JOBS Act on April 5, 2012. Whether there will be a rush to market depends on many factors, including the willingness of underwriters to embrace the new rules, the appetite of investors, and general market conditions. Other provisions of the JOBS Actsuch as the elimination of the prohibition on general solicitation for offerings to accredited investors under Rule 506 and to qualified institutional buyers in Rule 144A offerings (see The JOBS Act: Easing Exempt Offering Restrictions), or the introduction of crowdfunding (see Crowdfunding: Its Practical Effect May Be Unclear Until SEC Rulemaking is Complete) may prove more appealing to some issuers and investors. Nevertheless, the desire to make it easier for companies to go public in the United States and to scale regulation appropriately to both foster capitalraising and ensure investor protection are worthy goals. Time will tell how effective the JOBS Act provisions are in achieving these goals and whether the stated objective, the creation of jobs, will result.
Bonnie J. Roe is a partner at Cohen & Gresser LLP in New York City.
Some studies have claimed that decimalization of the stock market (i.e., quoting and trading in increments of one penny) caused brokerage firms to retreat from this market as the profits that they could make on the spread between bid and asked prices was diminished. In response to this concern, the JOBS Act requires the SEC to conduct a study of the impact of decimalization on the number of initial public offerings and liquidity for small and midcap company securities. The JOBS Act empowers the SEC (not later than October 2, 2012) to designate a minimum increPublished in Business Law Today, May 2012. 2012 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 4
Business Law Today
May 2012
JOBS Act on Research: Strong Buy?

By Dana G. Fleischman
The Jumpstart Our Business Startups Act of 2012 (the JOBS Act) brings back into the spotlight sell-side researchwhich was turned into a four-letter word by former New York State Attorney General Eliot Spitzer back in the early 2000s. This time, however, it is not the alleged evils of research, but rather the desire to make research available to more investors and during those periods when information regarding a company is most in demand that is the rallying cry. This renewed interest in research availability was prompted by a task force (the Task Force) that was formed in mid-2011 following the U.S. Treasury Departments Access to Capital Conference. The Task Force, which was comprised of a group of venture capitalists, CEOs, public investors, securities lawyers, academics, and investment bankers, studied the market for initial public offerings (IPOs) over various periods in order to determine the relationship between IPO volume and job growth and concluded that the decline in the number of IPOs in recent years resulted in considerable job loss and damage to the American economy. Their recommendations to increase U.S. job creation and overall economic growth are embodied in a report, Rebuilding the IPO On-Ramp, which was issued and presented to the U.S. Treasury Department on October 20, 2011 (the IPO Task Force Report). At the heart of the Task Forces conclusions is the notion that the cumulative effect of various regulatory actions has made it more difficult and costly for emerging growth companies (EGCs) to access capital via the public market, thereby reducing opportunities for innovation and job creation. The IPO Task Force Report serves as the base for much of what later became Title I of the JOBS Act. Among the factors identified by the Task Force as having a negative impact on the ability of EGCs to successfully go public is the limited information about such companies available to prospective investors. The Task Force noted that the Global Research Analyst Settlement entered into between certain large investment banking firms and several regulators in 2003 (the Global Settlement) increased the stress already placed on the economic viability of sell-side research departments by decimalization and other market forces and caused sell-side analysts to shift their attention to the high volume, high-liquidity large-cap stocks that now drive revenues for their institutions and provide the basis for their compensation. This shift, the Task Force concluded, resulted in less research coverage of emerging growth companies and thus less transparency and visibility into emerging growth companies for investors. To correct this informational imbalance, the Task Force recommended that various changes be made to the existing rules regarding the issuance of research reports and communications by research analysts, including the elimination of unnecessary research quiet periods and other constraints on analyst communications around the time of an IPO. These recommendations, however, were made against the backdrop of the existing regulatory framework for research and with the acknowledgment that the extensive and robust nature of the substantive regulations already in place warranted further changes to allow greater research coverage without sacrificing appropriate investor protections.
What the JOBS Act Does
Incorporating the Task Forces suggestions regarding research, the JOBS Act prohibits the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority, Inc. (FINRA), from adopting or maintaining any rule or regulation in connection with an IPO of an EGC that: restricts based on functional role which employees of a broker-dealer may arrange for communications between research analysts and prospective investors; prohibits research analysts from participating in communications with company management in the presence of non-research personnel (including, e.g., investment banking and sales force personnel); or prohibits the publication or distribution of a research report or making of a public appearance within any prescribed period of time either
Business Law Today

(1) following the effective date of the EGCs IPO, or (2) prior to the expiration date of a company or shareholder lock-up agreement. As a result of the foregoing, the JOBS Act effectively supersedes current FINRA rules that impose research quiet periods during the 40 days (or, for participating firms other than managers and co-managers, the 25 days) immediately following an IPO, as well as during the 15 days preceding the expiration of a company or shareholder lock-up agreement with the underwriters. The JOBS Act also appears to override a FINRA interpretation expressed in Notice to Members 05-34 that prevented research analysts from participating in communications with internal sales personnel in the presence of company management, as well as other FINRA guidance that was generally viewed as restricting the ability of research analysts to participate in communications (other than for offeringrelated due diligence purposes) with company management in the presence of investment banking personnel.
What the JOBS Act Does Not Do
May 2012
nications with investors, regarding an investment banking transaction; research analysts from engaging in communications with investors in the presence of company management or investment banking personnel; non-research personnel (other than legal and compliance staff) from reviewing or approving a research report prior to its publication except (under certain circumstances) to verify certain information for factual accuracy; member firms from directly or indirectly promising favorable research coverage, or threatening unfavorable research coverage, as consideration for the receipt of investment banking business; and the involvement of investment banking personnel and investment banking considerations in connection with the supervision, control, evaluation and compensation of research analysts. informational barriers from the review, pressure, or oversight of those whose involvement in investment banking activities might potentially bias their judgment or supervision. Section 501(a)(2) of the Sarbanes-Oxley Act also mandated the adoption of rules that would define the periods during which [broker-dealers] that have participated, or are to participate, in a public offering of securities as underwriters or dealers should refrain from publishing or distributing research reports relating to such securities or the issuer of those securities. Notably, however, this provision did not include any specific time periods or category of issuers to which such rules would apply; thereby allowing for considerable flexibility in implementation. Finally, the JOBS Act has no impact on the remaining provisions of the Global Settlement (which was substantially amended in March 2010 to remove various requirements, including those largely subsumed in existing FINRA rules). Indeed, the Global Settlement may only be modified by court order or the adoption by the SEC or FINRA of a rule or interpretation that is expressly intended to supersede a particular provision or provisions of the settlement.
Conclusion
There are, however, a number of important caveats. The JOBS Act only impacts SEC and FINRA rules to the extent they apply in respect of an IPO by an EGC. That means it doesnt impact those rules that relate to IPOs by companies that do not satisfy the EGC criteria, nor does it impact rules relating to secondary or follow-on offerings by EGCs or other issuers. Moreover, the JOBS Act does not by its terms override other FINRA restrictions adopted in response to the tech boom scandal that erupted in the late 1990s and was alleged to have resulted from growing conflicts of interest between investment banking and research personnel. These restrictions include provisions that prohibit: research analysts from participating in efforts to solicit investment banking business or in investment banking-related road shows; investment banking personnel from directing analysts to engage in sales or marketing efforts, or in commu-
The JOBS Act also has no impact on SEC Regulation AC, which was adopted in 2003 and requires research analysts to include in their research reports (1) a certification that the views expressed in the reports accurately reflect their personal views about the subject securities or subject issuers, and (2) disclosure as to whether they were compensated in connection with the specific recommendations or views expressed in the reports. Similarly the JOBS Act does not supersede the provisions of the Sarbanes-Oxley Act of 2002 that directed the regulators to adopt certain rules to prevent conflicts of interest between investment banking personnel and research analysts (provisions that are now embodied in the existing FINRA research rules). In particular, Section 501(a)(3) of the Sarbanes-Oxley Act required the adoption of rules pursuant to which broker-dealers must establish internal safeguards to assure that research analysts are separated by appropriate
Nonetheless, it remains to be seen whether the JOBS Act will prompt the SEC and/or FINRA to make further revisions to their respective rules and interpretations (or to support a request for court modification of the Global Settlement) in order to address the JOBS Acts implicit desire that the production of research and the ability of research analysts to engage in communications with prospective investors and company management not be artificially and unnecessarily constrained. (It does appear somewhat anomalous, however, that there are now fewer restrictions relating to research coverage on EGCs than there are in respect of the largest and most widely followed companies.) Interestingly, a comprehensive review of the research rules by the SEC and FINRA is already underway as a result of FINRAs ongoing efforts to consoli-
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date the former NASD and NYSE equity research rules (respectively, NASD Rule 2711 and NYSE Rule 472) into a new FINRA-denominated rule (proposed FINRA Rule 2240), as well as by the issuance in January 2012 of the GAOs report on Securities Research, which was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Thus, the door to additional change appears to be open. One thing, however, is certain. The JOBS Act acknowledges that research is not inherently bad and, indeed, if used properly may be a force for good. The challenge for our regulators lies in creating appropriate incentives for sell-side firms to expend resources to cover EGCs in the same manner as they cover larger companies while maintaining requirements designed to enhance investor protection and remove improper influences that could erode the continued utility and independence of research analysts
Dana G. Fleischman is a partner in the New York office of Latham & Watkins LLP and is a member of Lathams Financial Institutions Group.
May 2012
Business Law Today
May 2012
The Effect of the JOBS Act on Private Investment Companies: Foreseen Consequences?
By Martin E. Lybecker
The JOBS Act makes a number of changes to traditional understandings and practices regarding what is a public offering that have been discussed in detail elsewhere. While most of the attention has been devoted to the direct implications of the JOBS Act to operating companies, the phrase public offering also appears in Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (the Investment Company Act), which exclude those two types of private investment companies from the definition of investment company. Private investment companies, like venture capital funds, hedge funds, and private equity funds, can usually rely on one of those two exclusions, and thus are not required to be registered with the Securities and Exchange Commission (SEC) as an investment company. Section 3(c)(1) of the Investment Company Act excludes an issuer that is not making or planning to make a public offering and has fewer than 100 beneficial owners. Section 3(c)(7) of the Investment Company Act excludes an issuer that offers its shares exclusively to qualified purchasers and is not making or planning to make a public offering. Since 1940, the SECs Division of Investment Management (and its predecessors) has taken the position that the concept of public offering in the Investment Company Act and the Securities Act of 1933 (Securities Act) were co-terminus. Section 201(b) of the JOBS Act provides that offers and sales exempt under Rule 506 are not deemed public offerings under the federal securities laws as a result of general solicitation or general advertising. Because Section 201(b) applies to all of the federal securities laws, the SEC will be faced with an interpretive dilemma. The SEC will have to decide whether it wants to: 1. maintain its traditional co-terminus position (which would have the effect of significantly liberalizing the notion of public offering for private investment companies that elect to rely on new Rule 506), or maintain its position that the term public offering still also includes a traditional private placement that relies on new Section 4(a)(2) of the 1933 Act, or argue that the words public offering in the Investment Company Act mean something altogether different than what they are now going to mean in new Rule 506 (notwithstanding Section 201(b)) or new Section 4(a)(2). Act, and sponsors will be allowed to choose which path they wish to follow. Note that new Rule 506 offerings utilizing general solicitation or general advertising must be made only to accredited investors. Some important points: Previously one could always rely on old Section 4(2) if someone were to allege that a Regulation D offering somehow failed to comply with the particulars of Regulation D, but that will no longer be true if the sponsor of the private investment company has engaged in permissible general solicitation activities pursuant to new Rule 506. Guidance from the Division of Investment Management as to Section 3(c)(7) regarding testing to determine that an existing investor is still a qualified purchaser each time a new investment is made, for example pursuant to a nonmandatory capital call with respect to an existing investment, may be extended to accredited creditors, too. While it is highly unlikely that new Rule 506 will be given any kind of retroactive effect, for those private investment companies that previously made their private offering pursuant to old Rule 506, included capital calls, and sold to
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It seems more likely than not that the SEC will decide to give the term public offering the two different meanings that this term will now have in the Securities
Business Law Today

non-accredited investors, it is an open question whether the requirements of new Rule 506only accredited investorswill apply to any ongoing non-mandatory capital calls from the prior offering(s). Sponsors of private investment companies will have to be ultracareful in testing whether a person is an accredited investor since one mistake could lead to an allegation that the offering cannot rely on new Rule 506, wont be able to rely on new Section 4(a)(2) because of the general solicitation conducted by the sponsor pursuant to new Rule 506, and thus should have been conducted through an offering registered with the SEC under the Securities Act. At present, Rule 501 under the Securities Act defines an accredited investor to be a person who comes within one of the specified categories of the Rule or who the issuer reasonably believes comes within any of the categories at the time of the sale. Guidance regarding the expected scope of accredited investor due diligence from the SEC in the process of implementing new Rule 506 would be welcomed by sponsors of private investment companies. The SEC was given 90 days to adopt regulations implementing new Rule 506, so it is hoped that these and other questions will be addressed during the rulemaking exercise. to the number of persons who can be shareholders in a Section 3(c)(7) fund. But such a private investment company could unintentionally have backed into registration under the Exchange Act if it had 500 holders of record, so most issuers have been very careful to observe a ceiling of 500 shareholders. Changing the threshold for registration to 2,000 holders of record or 500 holders who are not accredited investors will increase the potential number of shareholders which a Section 3(c) (7) fund can have before becoming subject to Section 12(g) registration. This change to Section 12(g) went into effective immediately.
Martin E. Lybecker is a partner at Perkins Coie LLP in Washington, D.C.
May 2012
The provisions in the JOBS Act that change the threshold for registration in Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act) from the old 500 holders of record test to the new test of either 2,000 holders of record or 500 holders of record who are not accredited investors also have implications for private investment companies. As noted above, Section 3(c)(7) has just two requirements: no public offering, and offers and sales only to qualified purchasers. In short, there is no limitation in the Investment Company Act as
Business Law Today
May 2012
The JOBS Act for Foreigners: Are Foreigners Interested?

By Daniel Bushner
The Jumpstart Our Business Startups Act (the JOBS Act), as signed into law by President Obama on April 5, 2012, is clearly U.S. legislation intended to address a domestic issue: how to improve capital formation for growth companies in the United States. The legislation was adopted with considerable momentum, and with broad bipartisan support, in part because of the argument that growth companies post-initial public offering (IPO) generate more new jobs, when compared to growth companies that are sold in an M&A transaction. The proposition turned out to be highly attractive to legislators. Many of the recommendations contained in the report prepared by the IPO Task Force for the Department of Treasury, Rebuilding the IPO On-Ramp: Putting Emerging Companies and the Jobs Market on the Road to Growth (October 20, 2011) (the IPO On-Ramp Report), were adopted in the JOBS Act. That report notes during the 1990s there were an average of 547 IPOs in the United States each year, compared to 192 each year during the following decade. In addressing the balance for regulatory burdens on IPO issuers, the IPO On-Ramp Report does not focus on small companies, but on growth companies, with the new category of emerging growth company (EGC) with revenues of up to $1 billion. The report, however, does not much mention foreign private issuers (FPIs). There is only mention of competition from foreign markets and the observation that the United States is no longer the international destination of choice for IPOs. A reasonable question is whether the statute extends to your, as well as our, business start-ups. The JOBS Act is generating interest overseas for two reasons. First, the legislation will impact the ability of FPIs to access U.S. markets, in particular through SEC registered IPOs or through traditional Rule 144A/Regulation S global equity offerings. Second, there has been an active debate, at least in Europe, about whether the IPO process in local markets (especially London) is broken, having become too complex, expensive, and convoluted. Market participants abroad are likely to follow JOBS Act developments carefully, to inform the local regulatory debate. As Winston Churchill said, You can always count on the Americans to do the right thingafter they have tried everything else.
SEC Registered IPOs by Foreign Private Issuers
The last 18 months have demonstrated a trend for non-U.S. companies, especially technology companies, turning to U.S.registered public offerings. In that period, 90 FPIs have filed registration statements, including 30 based in Europe. The JOBS
Act, depending on implementation, seems likely to accelerate that trend. FPIs should benefit under Title I of the JOBS Act as do domestic issuers. The benefits can be broadly divided into (1) liberalised communications; (2) accommodations in the IPO process; and (3) relief from certain disclosure obligations as a reporting company post IPO, while on the on-ramp, for up to five years. It appears that such relief and accommodations will be in addition to existing concessions afforded FPIs. If an FPI qualifies as an EGC, and elects to claim EGC status, testing the waters and the liberalized rules on research reports should apply equally to FPIs in their registered IPOs. For the IPO process, confidential treatment for IPO registration statements is particularly interesting. FPIs have long benefited from the ability to submit a draft registration statement on a confidential basis. The IPO On-Ramp Report observed that such confidential treatment was a significant advantage for foreign issuers in resolving complex issues, and recommended that confidential treatment be granted to domestic companies as well as FPIs. The staff withdrew the confidential treatment for FPIs (except for dual listings/offerings and certain other limited circumstances) a month after the IPO On-Ramp Report was made public in October. The JOBS Act adopted the recom1
Business Law Today

mendation for confidential submissions, as long as there is a public filing 21 days before the start of the road show, and so confidential treatment is now available for domestic EGCs and has been restored for FPIs (that qualify for, and elect to claim, EGC status). The liberalization of the disclosure regime under the JOBS Act will apply as much to FPIs as domestic companies, but with one big difference. Assuming the staff applies the act to the disclosure regime for FPIs on the F-Forms, FPIs will be able to benefit from existing concessions to FPIs as well as those under the JOBS Act. For example, the executive compensation disclosure for FPIs is already much lighter than even relief under the JOBS Act. The relief from say-on-pay and say-on-golden-parachute votes, and pay-versus-performance and CEO/median employee compensation comparison tables relate to provisions that do not apply to an FPI because FPIs are already exempt. Financial disclosure under the JOBS Act (financial statements, MD&A, and selective financial data) is reduced under the JOBS Act, but presumably an FPI still will be able to present the reduced financial statements prepared in accordance with IFRS (or U.S. GAAP or local GAAP with a U.S. reconciliation). No doubt foreign EGCs as much as domestic issuers will welcome relief for up to five years from auditor internal control attestation.
Global ECMRule 144A/Regulation S Offerings
May 2012
efforts under Regulation S in side-byside offerings. The issue is whether a now permitted general solicitation in the United States under Rule 144A might be considered a prohibited directed selling effort under Regulation S. The staff informally has indicated that guidance may be issued, perhaps with the rule eliminating general solicitation that the SEC is required to adopt by July 4. Assuming that issue is resolved, the elimination of the prohibition on general solicitation may reinforce the growing practice of early marketing (pilot fishing) but otherwise seems unlikely to have much immediate impact on the 144A/Regulation S global equity market. Because Title II is limited to Rule 506 and Rule 144A, much else may not change in offshore equity capital markets. Offerings conducted under Securities Act Section 4(a)(2) (formerly Section 4(2), frequently used by foreign issuers in rights offerings) and under the so-called Section 4(1) doctrine (frequently used in block trades where Rule 144A is not available) will continue to be subject to the prohibition on general solicitation and general advertising. Market participants are also considering state blue sky laws. Although securities offered under Rule 506 are covered securities for the exemption from state blue sky laws contained in Securities Act Section 18, securities offered in Rule 144A transactions are not. States over the years have adopted their own exemptions for Rule 144A type transactions. But virtually all states have their own prohibition on the equivalent of general solicitation and so it would appear that either individual states will need to adopt their version of Title II, or Rule 144A securities need to become covered securities under Section 18. The greatest impact of the JOBS Act on the global Rule 144A ECM market may be indirect, arising from Title I and its reduced disclosure requirements in an SEC registered context. Because mandated registration statement disclosure provides critical guidance to practitioners on what is appropriate disclosure (including for purposes of 10b-5 disclosure letter coverage) in an unregistered Rule 144A/Regulation S offering, the reduced financial information permitted under Title I may offer greater flexibility, especially in the context of disclosure on a target for raising acquisition financing.
The Future Impact Abroad?
Title II (Access to Capital for Job Creators) directs the SEC to remove the prohibition on general solicitation and general advertising in offerings under Rule 506 and Rule 144A, as long as sales are limited to accredited investors and QIBs, respectively. Like Title I, this law seems intended to facilitate the private placement market that has been a foundation supporting U.S. EGCs, before they step through the threshold of a public offering. There seems to have been no particular consideration of the impact overseas, where private placement exemptions play a key role for Rule 144A/Regulation S global equity offerings. The immediate issue is the relationship between Rule 144A and directed selling
The relative quick passage of the JOBS Act has caught markets outside the United States a bit off guard. Crowd-funding and the expanded ability of companies to issue securities under Section 3(b) of the Securities Act (up to $50 million) are subject to substantial rule-making, and in any event seem unlikely to promise much impact on foreign markets, either because the amounts are too small or because the source of capital in the United States supporting those exemptions is unclear, and may have to develop. In particular, crowdfunding is only available for domestic companies, so any foreigner would have to re-incorporate in the United States. The greatest impact of the JOBS Act seems likely to be to strengthen the growing trend for FPIs to access U.S. investors through an SEC registered IPO. The IPO On-Ramp Report refers to the golden era of U.S. IPOs, and in that era, before Sarbanes-Oxley, FPIs were active participants in the U.S. IPO market. Perhaps that will happen again. And if the JOBS Act proves successful, especially in attracting FPIs to the U.S. IPO market, its legacy abroad could be as a catalyst to foreign markets peeling back some of their burdensome regulation.
Daniel Bushner is a partner of Jones Day in London.
Business Law Today
May 2012
Keeping Current: UCC

Food Truck Regulations Drive Controversy By Keith H. Berk and Alan D. Leib
Are food trucks the underdog of the food industry or are they a force to be reckoned with? In recent years, food trucks have been hitting city streets in record numbers. This trend is driven, not only by the food industrys desire to provide new and innovative dining options, but by individuals desire to achieve economic independence. For many, mobile vending is an entry point to entrepreneurship and a way to establish a living. Social media tools, such as Facebook and Twitter, have greatly impacted the way that many food trucks market to customers. Food trucks rely almost exclusively on social media to advertise their brand, maintain customer relationships, and increase their accessibility. It is now possible for a food truck to tweet locations in advance so that customers can be waiting when the trucks arrive. The rise in popularity of food trucks has not gone unnoticed. Opponents have attacked the mobile vending industry by arguing that food trucks are unfairly stealing customers away from brick-and-mortar businesses. To many opponents delight, various cities have imposed a myriad of regulations on food trucks. In some cases, these regulations make mobile vending an impossible or unprofitable business. The purpose of this article is to provide a brief general overview of the types of regulations imposed on mobile vending operations as well as to highlight some recent developments surrounding these regulations.
Overview of Mobile Vending Regulations
Food truck operators must comply with a variety of regulations. Not surprisingly, food truck operators are typically subject to a variety of state and local health and food safety regulations including (1) approval of food truck design, (2) approval for in-truck cooking equipment/configuration, (3) vending permits, (4) requirement for food truck personnel to obtain food safety certification, (5) periodic health inspections and (6) food safety requirements for depots where food stocks are replenished. More controversial, however, are local regulations that dictate how, where and when food trucks can sell food. These types of sale regulations include: Public Property Bans. More than 10 major cities ban vending on public property, such as on streets and sidewalks. Vendors subject to such bans must contract with private property owners to vend on their property. Restricted Zones. Many cities restrict the areas in which food trucks may operate. Restricted zones often include potentially lucrative areas, such as downtown commercial districts. Proximity Bans. Proximity bans limit how close street vendors can park to certain types of businesses, typically brick-and-mortar restaurants. Proximity bans address the complaints of
certain businesses who do not wish to have food trucks park near their place of business. Stop-and-Wait Restrictions (Ice Cream Truck Rules). A handful of cities make it illegal for food trucks to stop and park in order to wait for customers. Instead, food trucks must be flagged down by a customer before they can park and serve the customer. Stop-and-wait restrictions make it difficult for food trucks to establish regular stops and develop relationships with customers. Duration Restrictions. Food trucks that are allowed to stop and wait for customers may be limited in the amount of time they can remain in one spot. For instance, in Chicago, a food truck may not sell food for more than two hours on any one block.
Recent Developments in the Mobile Vending Industry Lawsuit Against the City of El Paso
In Castenada v. City of El Paso, No. 3:11-CV-00035-KC (W.D. Tex) (Jan. 26, 2011), four food truck vendors sued the City of El Pasos regulations over a regulation that banned food trucks from operating within 1,000 feet of restaurants, grocers, and other food-service establishments. These vendors argued that the regulation made it nearly impossible to operate profitably anywhere within El
Business Law Today

Paso. As a result, many mobile vendors in El Paso faced the possibility of losing their primary source of income. The food vendors argued that the regulations only purpose was to protect established businesses, which is not a legitimate government interest that would allow the government to infringe upon the constitutional rights of food vendors. As a result of the lawsuit, El Paso agreed to repeal the regulations.
California Bill Prohibiting School Trucks Near Schools Impact of Regulating the Mobile Vending Business
May 2012
A proposed California bill recently sparked intense debate over the mobile vending industry. (California Assembly Bill No. 1678.) The bill, spearheaded by Assemblyman Bill Monning, would have prohibited food trucks from vending within 1,500 feet (approximately three blocks) of any elementary, middle, or high school. Opponents of the bill argued that it would eliminate the food truck industry in populated urban areas, where almost the entire city is within 1,500 feet of a school. On the other hand, supporters argued that the presence of mobile food trucks at schools would undermine state efforts to establish nutritious school food programs. On March 29, 2012, after intense pressure from industry groups, Monning released a statement taking the bill out of consideration.
City of Chicago Regulations
The food truck industry has thrived in cities like Los Angeles, New York, San Francisco, and Austin. This is not the case in Chicago where food trucks are subject to a wide array of legal restrictions imposed by the city. These restrictions include prohibitions on preparation of food on a truck or cart, serving customers before 10:00 a.m., and stopping within 200 feet of a restaurant. A bill, which was introduced in the city in June 2011, would lift the ban on food preparation in mobile food vehicles. Mayor Rahm Emanuel originally supported the bill but has recently equivocated on his support. The bill has been tied up in various committees for nearly a year and its future is uncertain at this point.
Supporters of the mobile vending industry view food trucks as an avenue to entrepreneurship and a way to provide consumers with innovative products. Opponents, on the other hand, cite two primary arguments as reasons for eliminating the industry: health concerns and unfair competition to brick-and-mortar restaurants. For instance, critics of the industry question whether food can be prepared safely and whether health regulations can be properly enforced on a food truck. Health concerns can be addressed by appropriate regulations. The real issue is whether food trucks unfairly steal customers from brick-and-mortar restaurants. This issue has become a political football in a number of municipalities as politicians attempt to regulate to protect brickand-mortar restaurants that often have political clout and generate significant sales tax revenues. On the other side, civil liberty groups have taken up the cause of the food truck vendors and have become emboldened by their successful litigation in El Paso. In light of these competing interests, we expect that the regulation of food trucks will continue to generate controversy and litigation. Hopefully, the result will be that regulations strike a balance between fostering entrepreneurship and protecting the interests of those with significant investments in established businesses.
Keith H. Berk and Alan D. Leib are partners at the Chicago law firm Horwood, Marcus & Berk Chartered. Mr. Berk works with the firms food and beverage industry clients. Mr. Leib is chair of the firms Food and Beverage Industry Group. The authors were assisted in the preparation of this article by Anne K. Rolwes, a law clerk with their firm.
Business Law Today
May 2012
Keeping Management in the Game without Tainting the Sale Process By Janine M. Salomone and Dawn M. Jones
The Court of Chancery has recently restated its skepticism with respect to sales processes that, while overseen by an independent board, may nonetheless be said to have been influenced by senior executives whose personal financial interests could be implicated, even tangentially, by the nature or terms of any resulting business combination. The concept itself is not entirely new, but it appears that in this most recent iteration, a little can go a long way. For example, in In re El Paso Corporation Shareholder Litig., C.A. No. 6949-CS, mem. op. (Del. Ch. Feb. 29, 2012), judicial suspicion was engendered with respect to the objectivity of a sales process where stockholders alleged that the CEO of El Paso Corporation, who had been commissioned by the companys independent board of directors to head up negotiations for the sale of El Paso to Kinder Morgan, failed to acknowledge to his board his expression of interest in pursuing a post-closing management-led purchase of an El Paso business unit that Kinder Morgan had declared an intention to put up for sale after the proposed merger. No secret deal or method by which the CEO would translate a less than rigorous negotiation of the merger into a discounted price for the asset post-closing was uncovered by plaintiffs. Yet the Court of Chancery found the nascent conflict sufficient to support the conclusion that plaintiffs challenge to the fairness of the process would probably succeed at trial. Were it not for the absence of any challenge to the sufficiency of the disclosures, an unaffiliated stockholder constituency and the absence of a competing proposal, the transaction presumably would have been enjoined. To similar effect was the Court of Chancerys decision in In re Delphi Financial Group Shareholder Litig., C.A. No. 7144VCG, mem. op. (Del. Ch. March 6, 2012). The challenge to the proposed merger in Delphi was complicated by the fact that Delphis CEO and controlling stockholder did not wish to sell his high-vote shares without receiving a control premium. Moreover, he was the sole beneficiary of certain contracts Delphi had entered into with entities that he owned and that would be reduced in value if the purchaser did not retain and extend them posttransaction. Given the fact that the process was being overseen by an independent committee of the board and that the CEO had no connection with the buyer, these potential conflicts with the interests of his fellow shareholders likely would have counted for little were it not for the fact that he was a central participant in the negotiation process. This invited the allegation that secret deals regarding the coincident contracts had been reached, an allegation that troubled the court even when the buyer flatly declared that no such deals existed. From the boards perspective, a process that relies upon conflicted or potentially conflicted individuals, even where the target has an entirely unconflicted board, invites judicial scrutiny and suspicion and enhances the risk of an injunction precluding the deal or liability for potential claims for damages. This article examines recent opinions and rulings of the Court of Chancery scrutinizing the conduct of conflicted fiduciaries and provides some guidelines and alternative approaches a board and its advisors should consider to address management conflicts in a sale transaction and to ensure that managements personal interests do not undercut the boards duty to obtain the best available transaction for stockholders.
Benching Your Best Player?
Delaware Insider:
At first blush, the solution for a board of directors may seem simple: bench the conflicted executives. Recently, this approach worked for Barnes and Noble. Its former CEO, Stephen Riggio, was dismissed from shareholder litigation regarding Barnes and Nobles purchase of a company controlled by his brother, Len Riggio. In re Barnes & Noble Stockholder Deriv. Litig., C.A. No. 4813-CS (March 27, 2012). The board promptly identified Stephen Riggio as irretrievably conflicted in the transaction and essentially benched him from negotiations regarding the sale, assigning other members of management to communicate with the boards special committee when necessary. The court noted that this technique was a sanctioned, long-standing, and responsible
Business Law Today

method to prevent conflicted management from tainting the process. In the context of granting a motion for summary judgment, Chancellor Strine found that Stephen Riggio did not breach his fiduciary duties because there was no evidence that he influenced the flow of information to the special committee or otherwise inserted himself into the committees process. He obeyed the boards instruction and stayed out of the negotiations completely. At the same time, there was no indication that he failed to remain available to address any inquiry from the special committee. But, quarantining key management from a buyer, while a dependable means of preserving a pristine sale process, may not be simple and may not always be the best alternative for a corporation. From a legal perspective, excluding such members of management from the sale process may be sanctioned and responsible. From a business perspective, however, as the Chancellor recognized in Barnes & Noble, the CEO can be a dangerous person to take out of the game, due, in large part, to the wealth of important business and financial information regarding the company that the CEO typically possesses. Of course, senior officer involvement is often crucial to the negotiation process. A buyer often seeks access to a key executives knowledge of the company, or in more delicate circumstances, a buyer may seek to purchase the executives controlling interest, to retain the executive for a prominent role in the surviving entity, or to join in an endless array of post-closing side transactions. Thus, as negotiations unfold, the board must remain ever vigilant in probing those members of management on the front lines regarding the dynamics of the negotiations to prevent such overtures from tainting the sales process.
Establish Policies in Advance
May 2012
Drexler, was viewed as an industry icon and indispensable to the company. In re J. Crew Group, Inc. Shareholders Litigation, C.A. No. 6043 (Del. Ch. Dec. 14, 2011). Recognizing that any purchase of J. Crew would necessarily require his support, an interested buyer met with Mr. Drexler for several weeks to discuss a potential going private transaction involving the rollover of Mr. Drexlers equity and an ongoing leadership role for him post-acquisition. After weeks of discussions, Mr. Drexler revealed the discussions to the J. Crew board. Immediately thereafter, the board launched a full sale process and promptly established an independent committee to negotiate with Mr. Drexler for the sale of his shares. The committee appropriately implemented guidelines that restricted Mr. Drexler from discussing retention or equity participation with potential buyers without committee authorization. Unfortunately, it was too late. By the time the board learned of the potential for a sale transaction and could establish an independent committee, the CEO had already discussed his own retention with the buyer, thereby potentially tainting the process. While the board acted promptly and took appropriate steps to protect the process as soon as it was able, the court observed that the board should have been able to do so sooner. In fact, the court found that it was outrageous for a board to be the last to know when the chief executive officer changes the fundamental strategic direction in his own mind. At the settlement hearing, the court explained that it should not be a surprise to directors that CEOs often initiate changes of control. For this reason, well before any strategic chit chat is even contemplated, the board should implement policies to prevent interested executives from usurping control of a sale process. In particular, the Chancellor stated that it is inexcusable for a board not to have a policy in place that requires: when the CEO changes in his own mind that its a viable option [to sell the company], the board hears first. The companys advisors belong to the company. You dont talk to employees. You dont share confidential information. You dont make promises to work for anybody else, or anything like that, without talking to us. Implementing such policies on the front end will help ameliorate adverse litigation consequences.
Be Wary of Common Conflicts
Directors should be mindful of common recurring scenarios that create conflicts for management. In addition to negotiating the sale of the company, an executive may be negotiating (or hoping to negotiate) any combination of: (1) continuing employment (and new compensation) with the surviving entity, (2) a purchase of all or part of the target company, or (3) sale of a controlling interest. Once the board becomes aware of an executives conflicting self-interest, the directors should take immediate steps to rehabilitate the process. If a company adopts a policy that requires at least one disinterested and independent director or advisor to participate in every conversation between the buyer and management, it will be easier to protect against potentially troubling side negotiations. The absence of such a chaperone was cited repeatedly by the court as a troubling aspect of the process in Delphi. As noted above, however, this fact alone will not suffice to counter judicial suspicion if it is not instituted on a timely basis. Once the Delphi board recognized its CEOs conflict its special committee requested that a representative of the committees financial advisor accompany him to negotiate with the buyer, yet the delay left room for concern. As noted above, it is important to anticipate such conflicts from the outset and to establish a policy that effectively addresses them.
Be Up Front About Conflicts
As previously noted, it is not uncommon for a buyer, particularly a financial buyer, to seek to retain management for the surviving entity in exchange for a compensation package that may include an equity rollover. In J. Crew, for example, the companys long-time CEO and nearly 12 percent shareholder, Mickey
Frequently, the difficulty for the board can be identifying the conflict before management has an opportunity to taint the process. Thus, it is incumbent upon management to disclose any potential conflict to the board as soon as possible. A conflicted negotiator may make matters worse if he or she is not upfront about the potential conflict. When a key negotiator in a transaction
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conceals a potential conflict, the court will be less inclined to credit the partys later assertion that the potential conflict did not affect his or her judgment. The presence of a self-interested executive can significantly affect the courts view of a deal, causing it to question whether a weak negotiator is intentionally calling plays that are bad for the stockholders because they are in the negotiators best interest. Absent a conflict, the court tends to avoid second-guessing on the theory that reasonable minds are likely to differ at any given turn in a strategic process. Where a conflict presents, however, ordinarily debatable business choices are no longer afforded the courts deference and must be viewed more skeptically.
Disclosure Can Disinfect a Flawed Process
May 2012
Fourth, management should be up front about any actual or potential conflicts. Finally, fully disclose the process, warts and all, to shareholders.
Janine M. Salomone is a partner and Dawn M. Jones is an associate in the Wilmington, Delaware, law firm of Potter Anderson & Corroon LLP. The views expressed are solely those of the authors and do not necessarily represent the views of the firm or its clients.
Disclosures that detail negotiations, warts and all, can serve to disinfect a flawed process, but only to a point. In Delphi, the court ultimately concluded that Delphis disclosures sufficiently informed shareholders of the possibility that the negotiators left money on the table. Under these circumstances, the court concluded an injunction could do more harm than good, depriving shareholders of the ability to choose to receive the premium. Thus, adequate disclosure can cleanse a tainted process. While adequate disclosure of the warts can avoid an injunction, it may not eliminate the personal liability risk faced by the alleged wrongdoers. At best, reputations can be tarnished; at worst, a conflicted negotiator may be liable for significant monetary damages. In Delphi, for example the court suggested disgorgement of any improper consideration its CEO reaped from the deal could serve as readily ascertainable postclosing damages. In sum, the foregoing decisions provide a few valuable lessons for corporate boards and their advisors. First, before any strategic activity is on the horizon, implement a policy to keep the board promptly informed of any conversations touching on strategic options. Second, once strategic talks are on the horizon, be wary of common conflict scenarios. Third, monitor the negotiations.
Business Law Today
May 2012
ABA Military Pro Bono Project: An Opportunity to Serve Those Who Serve Us
By Mary C. Meixner
Many of our junior-enlisted servicemembers, who have left their families, homes, and jobs for years at a time to serve their country, are troubled with legal needs that can distract them from their missions and make their already difficult daily lives even more challenging. Mark Smiths story is an example, and it demonstrates how ABA Business Section members can get involved with the ABA Military Pro Bono Project to help ensure that our servicemembers receive the legal help that they need. Sergeant Mark Smith was inspired to join the Marine Corps to serve our country and make a difference in our world. As a very young man, Smith also viewed a Marine Corps career as a way to gain professional skills and become financially independent and responsible. Despite his modest salary as a junior-enlisted Marine, with the goal of establishing long-term financial stability, Smith signed up for a savings allotment to directly deposit over $200 from each paycheck into a savings account under his name. Over the next few years after setting up the account, Smith diligently reviewed his paystubs to confirm that the proper deductions were made for direct deposits into a savings account. After Smith returned from a tour in Afghanistan, he contacted the bank to inquire about his saving account balance, anticipating that he had successfully saved about $10,000. However, Smith was shocked to discover that his savings account did not exist. After the bank informed Smith that it had no account under his name, Smith met with a military legal assistance attorney at his Camp Lejeune office, who contacted the bank and its affiliates about the problem. However, after the military attorney spent months attempting to receive a refund of Smiths savings, the bank denied responsibility and the parties were at a standstill. The military attorney faced legal roadblocks that were beyond the scope of legal services that military attorneys are permitted to provide, such as in-court representation for potential litigation. Additionally, although Smith had attempted to be fiscally responsible, with his limited income and lost savings account, he could not imagine how he could hire an attorney to untangle his problems with the bank. What the military attorney was able to do, however, was refer Smith to the American Bar Associations Military Pro Bono Project. Once referred, Smiths case was matched up with an attorney who volunteered with the project to handle cases for servicemembers pro bono. It was discovered that Smiths savings allotment was deposited into an account of another individual with a similar Social Security number. The volunteer attorney was able to successfully resolve the matter by retrieving Smiths saved money from the bank without litigation. As a result, Smith was able to focus on his duties as a Marine without concern for any unresolved financial and legal issues. Although the names and locations in this story have been changed, it is based on a real case and it illustrates how the ABA Military Pro Bono Project and its volunteers help our servicemembers receive the legal help that they need.
Connecting Servicemembers with Volunteer Attorneys
As in the above example, servicemembers stationed across the country and around the world often have legal problems that fall outside the scope of the assistance provided by military legal assistance attorneys (JAGs). Junior-enlisted servicemembers often have difficulty affording legal representation, and they frequently encounter legal problems that arise in locations far from where they are stationed. These servicemembers legal needs are arising in the areas of consumer law, family law, landlord-tenant, employment law, and others. Recognizing these issues, the ABA Military Pro Bono Project, an initiative of the ABA Standing Committee on Legal Assistance for Military Personnel, was launched in late-2008 with the mission of connecting junior-enlisted, active-duty servicemembers who have civil legal matters with civilian attorneys who will provide pro bono assistance. The project,
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a web-based program on www.militaryprobono.org, accepts case referrals from military attorneys across the country and around the world, and connects the referred servicemembers with pro bono attorneys throughout the United States. The project also includes Operation Stand-By, through which attorneys may volunteer to provide lawyer-to-lawyer consultations to military attorneys, so the military attorneys can further assist their servicemember clients. Since the projects establishment in 2008, it has secured pro bono assistance for hundreds of servicemembers in 45 states, averaging about 150 case placements per year. Many of these were referred while the servicemembers were deployed in combat zones. The projects current volunteer roster includes over 1,600 civilian attorneys and pro bono coordinators throughout the country who have registered on the project website with an interest in providing pro bono legal assistance to junior-enlisted servicemembers and/or volunteering time to provide general legal advice to military attorneys through the projects Operation Stand-By. Based on data provided by the volunteer attorneys, the aggregate value of the referred cases represent over $2.5 million in donated billable hours by the projects volunteers. The total value of donated billable hours represents a return of about eight times the actual cost of the projects operation. The projects success has, understandably, resulted in ever-increasing demands for pro bono help for servicemembers in need. Recognizing these needs, the ABA Business Law Section is a sponsor of the ABA Military Pro Bono Project to help sustain the projects success and growth to ensure that our servicemembers receive the legal help that they need.
Register to Help Our Servicemembers
May 2012
project roster or making a tax-deductible financial contribution. Although signing up with the project does not obligate you to take any particular case, it is hoped that you will give consideration to the pro bono case opportunities that arise in your geographic area and substantive legal area of expertise. Alternatively, joining Operation Stand-By to provide lawyer-to-lawyer consultations to military attorneys gives you an opportunity to help our servicemembers with a very small time commitment, as participation in Operation Stand-By itself does not entail client representation or litigation. Lend a hand to our military personnel and their families, recognizing the sacrifices they make on behalf of us all.
Mary C. Meixner is chief counsel, Legal Services, at the American Bar Association in Chicago.
If you are an attorney interested in giving back to the men and women of the armed forces, please visit www.militaryprobono. org to further explore how you can help our servicemembers receive the legal representation that they need by joining the
Business Law Today
May 2012
Focus on the Commercial Finance and Uniform Commercial Code Committees May 2012
The Spring 2012 issue of the Commercial Law Newsletter, published by the Commercial Finance and Uniform Commercial Code Committees, contains a wealth of timely and outstanding content. The newsletters many significant articles include: Lisa Schweitzer and Robin Baik provide a detailed analysis of a recent Second Circuit opinion regarding the statutory requirement for a federal district court to abstain from hearing state law claims that are related to a bankruptcy case when those claims can be timely adjudicated in a state court in Second Circuit Holds District Court Must Mandatorily Abstain From Deciding Parmalat State Court Action Related to U.S. Ancillary Bankruptcy Proceeding. Carol Tello provides an excellent summary of recent regulations proposed by the IRS regarding the Foreign Account Tax Compliance Act in FATCA Proposed Regulations Confirm Revolving Credit Facilities Covered By Grandfather Provision. Thomas S. Hemmendinger, Kieran Marion, and R. Wilson Freyermuth have authored an important update entitled Uniform Law Commissions Study Committee on Real Estate Receiverships: Project Update and Request for Comments, and they need your help! Heres the background: in 2011 the Uniform Law Commission established a study committee to review whether a Uniform Act on the appointment and powers of real estate receivers would be appropriate and well-accepted by U.S. states. The study committee has identified seven broad issue areas. The linked update describes those seven areas and, if you have relevant knowledge, seeks your input. If you have input, please contact these authors and share it with them!
Community Economic Development
Inside Business Law
exempt Section 501(c)(3) organizations. With a substantial number of community economic development organizations qualified as Section 501(c)(3) organizations, compliance with tax laws related to donations and unrelated business income is essential. If you represent a tax-exempt community development organization, April Fabregat-LeBlancs recent article, Accountability in the Non-Profit Community: A Look at the Potential for 501(c)(3) Tax Evasion and Misused Donations, is a must-read.
Private Equity and Venture Capital Update
The Spring 2012 Community Economic Development Committee Newsletter is out, and contains some fabulous content: Are you representing a community economic development project involving federal funding? If so, the Davis-Bacon Act of 1931 is something you will need to understand. Davis-Bacon ensures that federal construction contracts pay laborers a fair wage, and Jared Kellys recent article, Deciphering DavisBacon: Suggestions for Developers and Contractors on How to Avoid a Larger Than Anticipated Construction Budget provides a superb overview of Davis-Bacon requirements and compliance. Federal regulators are increasingly concerned with the potential for tax evasion schemes involving tax-
If your practice includes private equity and venture capital transactions, you wont want to miss the Spring 2012 edition of Preferred Returns, the newsletter of the Private Equity and Venture Capital Committee. This most recent edition provides summaries of M&A and capital markets trends in 2011 Market Overview, venture capital trends in the life sciences sector in Trends in Terms of Venture Financings for the Life Sciences Sector (Fourth Quarter, 2011), and other superb articles, including: Jeremy D. Glasers timely, clientfocused overview on What You Need to Get Done Now If You Want to Sell Your Company in 2012.
Business Law Today
May 2012
Bruce W. Burton and Scott Weingusts thought-provoking explanation of Why Private Equity and Venture Capital Firms Should Care About Intellectual Property Assets. Andrew M. Johnston and Ryan J. Greechers VC-centric analysis of Managing Secondary Market Transactions With Transfer Restrictions, with a particular focus on Delaware law.
tising, and business development. How exactly can business lawyers rely on this new technological paradigm to grow their practice while remaining within the bounds of existing ethics regulations? For a thoughtful, provocative answer to this question, be sure to check out the Career and Practice Development Committees presentation from the Business Law Sections Spring 2012 meeting entitled Saints and Sinners: Ethical Issues and Dilemmas in Client and Practice Development. (Audio)
Class Actions and Stockholder Derivative Suits for Boards of Directors
Class action and stockholder derivative suits present companies with the real potential of significant monetary damages and major changes to corporate governance structures, and the wise corporate counsel knows that one of the best ways to avoid and deal with such challenges is through educating the board of directors. To help with such education, this critical compendium of recent trends and case law related to both class action and stockholder derivative suits is an essential tool: A Spoonful of Sugar: Educating Boards of Directors About Class and Derivative Action Exposure, Avoidance and Procedure. The linked materials and audio, jointly provided by the Corporate Counsel and Corporate Governance Committees at the Business Law Sections Spring 2012 meeting, provide a vital means to educate directors on class and derivative action exposure, avoidance, and procedures.
Contemporary Ethical Dilemmas in Client and Practice Development
Todays media- and technology-rich environment has greatly expanded the potential for attorney networking, adver-

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