Regulation A+: Capital Raise of the Future? LendIT 2016 April 12, - PowerPoint PPT Presentation


 Regulation A+: Capital Raise of the Future? 
 LendIT 2016 April 12, 2016 Brian S. Korn

Structure of US Securities Laws � 2 ▪ Securities Act of 1933 ▪ Securities Exchange Act of 1934 ▪ Trust Indenture Act of 1939 ▪ Investment Company Act of 1940 ▪ Investment Advisers Act of 1940 ▪ Private Securities Litigation Reform Act of 1995 ▪ Sarbanes Oxley Act of 2002 ▪ Jumpstart Our Business Startups Act of 2012 ▪ FAST Act of 2015

No Offerings Unless Registered or Exempt 
 � 3 ▪ Exempt Securities (Section 3) – Government bonds – Commercial paper – Issued by bank – Charitable purpose and not for profit – Exchange Securities – Intrastate ▪ Exempt Offerings (Section 4) – Not involving an issuer, underwriter or dealer – Not involving a public offering – Broker’s transactions acting on customer orders – Crowdfunding – *New* Section 4(a)(7) – private transfers among accredited investors

April 5, 2012 – President signs the JOBS Act � 4

JOBS Act Overview � 5 “To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.” ▪ IPO On-Ramp and Emerging Growth Companies – effective immediately ▪ Private Placement Reforms – effective September 23, 2013 – General Solicitation relaxed – Enhanced verification of Accredited Investors if Soliciting ▪ Crowdfunding – national online fundraising – effective May 2016 ▪ Regulation A+ - from $5mm to $50 mm – effective June 19, 2015 ▪ “Go Public” Shareholder Thresholds Increased ▪ Relaxation on Research Restrictions ▪ Decimalization – possible move to $.09 tick increments ▪ Prospective Issuer Outreach ▪ Signed into law April 5, 2012

� 6 TITLE IV: REGULATION A+ Manatt Corporate & Securities Group | Manatt, Phelps & Phillips, LLP

(Old) Regulation A � 7 ▪ Small offering exemption ▪ Up to $5 million may be offered to the public regardless of accredited investor status ▪ Offering Circular must be used and filed with the SEC ▪ SEC must approve OC before offering is priced ▪ Seldom used because: – no state securities law preemption – for nearly the same effort, one can do an IPO and qualify for reduced reporting under the Smaller Reporting Company Rules ▪ JOBS Act 2012 - Title IV – increased to $50 million and enabled SEC to grant state law preemption ▪ Regulation A+: Effective June 19, 2015

Unregistered Offering Exemptions � 8 Feature Public Crowdfunding Regulation A+ 
 Regulation A+ 
 Private Placements Including (Title III) (Tier 1) (Tier 2) Title II Crowdfunding (Regulation D Rule 506 (b/c)) Maximum Total $1 million per 12 month $20 million per 12 $50 million per 12 month period; Unlimited Raised period month period; including including up to $15 million for ☑ up to $6 million for selling shareholders selling shareholders Number of Unlimited but subject to Unrestricted Unrestricted Unlimited accredited investors; up Investors maximum total raised to 35 non-accredited investors ☑ ☑ unless soliciting (if soliciting- 0 non-accreds) ☑ Investment Per Restricted by income/net Unrestricted Restricted by income/net worth Unrestricted Investor worth ☑ ☑ Investor Required, must be filed Required, must be filed Required, must be filed with SEC Not required if all accredited Disclosure with SEC with SEC investors; Form D filing proposed ☑ Intermediary Yes – broker/dealer or No No No Required funding portal ☑ ☑ ☑ Subject to Yes, at least annually No; as long as exit Yes; audited financials filed No ongoing SEC report is filed not later annually; annual, semi-annual, ☑ reporting than 30 calendar days current reporting required following raise after termination or May file exit report, so long as completion issuer meets certain qualifications

Regulation A+ vs. Other Exemptions � 9 Feature Public Crowdfunding Regulation A+ 
 Regulation A+ 
 Private Placements (Tier 1) (Tier 2) (Regulation D Rule 506 (b/c)) Disclosure Liability Yes, full disclosure Yes, full disclosure liability Yes, full disclosure liability with a Only anti-fraud liability liability with a with a knowledge exception knowledge exception ☑ knowledge exception Shares restricted Yes, for one year No No Yes, for public companies most can sell under Rule 144 after ☑ ☑ six months Notice filings State Filing Not exempt from state Exempt from state securities law Usually no if only offering to securities law registration registration and qualification if accredited investors; notice and qualification sold to “qualified purchasers,” filings defined to include all offerees in ☑ a Regulation A offering and all purchasers in a Tier 2 offering; notice filings, some in advance Advertising and Not allowed "Testing the waters" "Testing the waters" permitted Allowed if sales are made only general solicitation permitted before filing; before filing; general solicitation to accredited investors and general solicitation permitted after qualification issuer takes reasonable steps permitted after qualification to verify accredited status ☑ ☑ Can public cos., No No public companies No public companies Yes foreign issuers, ☑ investment companies and exempt inv. companies issue

Feature Regulation A+ 
 Regulation A+ 
 � 10 (Tier 1) (Tier 2) 2,000 Stockholder •Tier 1 shares count towards forced public cap •Tier 1 shares count towards forced public cap of 2,000 of 2,000 maximum holders/500 maximum non- maximum holders/500 maximum non-accredited (must also “Forced Public” Rule accredited (must also have $10 million of total have $10 million of total assets to be “forced public”) Tier 2 (Section 12(g)) assets to be “forced public”) Tier 2 shares are shares are disregarded provided the issuer: continues to disregarded provided the issuer: continues to make Tier 2 reports and is current in such reports; make Tier 2 reports and is current in such •engages a transfer agent; and reports; •has less than $75 million public float at end of last •engages a transfer agent; and semiannual period, or if no float, revenues below $50 •has less than $75 million public float at end of million as of most recently completed fiscal year last semiannual period, or if no float, revenues below $50 million as of most recently completed fiscal year Form 1-A, filed publicly on EDGAR at least 21 Same at Tier 1 Offering Circular days prior to solicitation; SEC clearance required before sales can be made Exit, Annual, 1-Z exit report 30 days after termination 1-Z – Exit Report 1-K – Annual Report Semiannual and 1-SA – Semiannual Report Current Event Reports 1-C – Current Report Financial Statements Two years, audit not required Two years, audit required

Sample Marketplace Lending Structure � 11 1 BPDN 
 SPV Investors - Borrower Payment Participations Dependent Notes Loan 
 - Investment Agreement - Private Placement Monthly Payments Memorandum $ GP 2 GP LLC Borrower Platform Fund Loan 
 LP Investors Participations - Loan - Marketing - Collateral Participations - Origination Loan 
 - Licensing - Loan Custody Arrangements - Servicing ▪ Bills Borrower 3 ▪ Pays Investors Sidecar Investors

Regulation A+ and Marketplace Lenders � 12 ▪ Equity or Debt ▪ Can round out your investor portfolio ▪ Offering must be Continuous ▪ Recourse Notes or BPDN – BPDN have special considerations ▪ Cost similar to credit facility ▪ Time to qualification – approx. 4 months ▪ Remember ongoing filing requirements ▪ Accounting ▪ Liquidity considerations – OTC or Nasdaq Impact Investing | Manatt, Phelps & Phillips, LLP

� 13 ABOUT THE PRESENTER Impact Investing| Manatt, Phelps & Phillips, LLP

Brian Korn � 14 PROFESSIONAL EXPERIENCE Brian S. Korn is a partner in the Capital Markets practice group and is resident in the New York office. His practice focuses on corporate finance transactions, including initial public offerings (IPOs), early-stage and start up venture financings, and mature corporate and high-yield debt finance. He also advises clients on SEC compliance, broker-dealer compliance and corporate swap transactions. He is also a recognized thought leader in the marketplace online lending (or peer-to- peer lending) and crowdfinance fields and is a prolific speaker and writer in the field. Mr. Korn has previously served as head of Equity Capital Markets and Syndicate Compliance at Brian Korn Barclays Capital and as senior vice president and assistant general counsel at Citigroup Global Markets, Inc. He has extensive experience representing issuers and underwriters in investment Partner banking and capital markets transactions, including transactions involving equity, debt, hybrid/ • Capital Markets convertible and preferred securities, derivatives and foreign exchange. He has executed several IPOs and other equity value monetization transactions, such as spin-offs, split-offs and carveout • Peer-to-Peer Lending and transactions. He also has extensive experience in sponsor-leveraged buyouts and bank/bond Crowdfunding acquisition financing. 212.790.4510 bkorn@manatt.com EDUCATION ▪ Northwestern University School of Law, J.D., 1997. 
 Note and comment editor, Northwestern Journal of International Law & Business . ▪ University of California, Berkeley, B.A., with honors and distinction, 1993.