30 posts categorized "April 2012"

The IPO On-Ramp in the JOBS Act: Saviour, Scoundrel, or Hardly Relevant?

One of the key pieces of the recently passed JOBS Act - the one lobbied for by venture capitalists, and perhaps the only key piece  not waiting on SEC rulemaking before taking effect - has to do with lowering the burden of what is required for an emerging company to go public, and then to lowering the burden of compliance requirements, once the company has had its IPO.

The most rabid advocates for the IPO on-ramp herald it as the way to re-awaken IPO activity, as though regulation, not other market forces, pinched the flame. Some IPO on-ramp advocates think a vigorous IPO market is the very key by which to unlock the US economy. See for example this Seattle Times interview of Joe Shocken.

Saviours CometMuckraking journalists, on the other hand, mark the passage of the IPO on-ramp as one more shameful confirmation of Wall Street's unremitting control of national politics. See for example this NY Times piece by Andrew Ross Sorkin, which audaciously suggests that Groupon could have fooled more of the people more of the time, had the IPO on-ramp provisions been in effect a year or two ago.

There's a third hand to consider here, too. In this view, the IPO on-ramp provisions are neither panacea nor the product of plutocratic short-sightedness. In this view, the IPO on-ramp provisions are hardly relevant.

The best expression of this third view, I quoted at length in a prior post. But the remarks (from an experienced securities lawyers who wishes to remain anonymous) bear repitition:

"I personally think that the IPO changes are largely illusory. There has been a lot of noise about simplified regulation. But the SEC has done the equivalent of taking 1,000 pages of regulations and reducing them to 950. Big deal. Plus, the Sarbanes-Oxley stuff has become relatively routine. I also think that the decline in IPOs has little to do with over-regulation, even though it is a factor. It has more to do with what law firms and accounting firms are charging for routine SEC work.

"Tech companies that would have been a plum assignment for Alex. Brown or H&Q in 1999 wouldn’t come close to being eligible today. The boutique investment banks have largely disappeared, and the big ones want big deals. In 1999, $20 million in revenue and a good story was all it took. Plus I’m told the economics are radically different given the huge growth in off-market trading.

"The only way back for the small IPO is a change in the economics at investment banks, and a public resurgence in interest in buying those shares. Some of the changes eliminate much of the periodic SEC reporting regime. Brilliant. Who is going to buy shares in a company and how is it going to trade if there is inadequate public information?"

As if to ring a bell on this anonymous analyst's last point, check out this disclosure in ClearSign's IPO prospectus last week:

'We are an "emerging growth company" under the JOBS Act of 2012 and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

'We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

'In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards.

 

'We will remain an “emerging growth company” for up to five years, although we will lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30.

 

'Our status as an “emerging growth company” under the JOBS Act of 2012 may make it more difficult to raise capital as and when we need it.

 

'Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it.  Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry.  If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.'

Photo: "Saviours Comet" by Bridget Christian / Flickr.

The Heisenberg Principle of Information Technology

I read a small pamphlet the other day, Google: Words beyond Grammar, by Boris Groys. It makes the provocative claim that our generation's ubiquitous dependence on the Google search box results in the detachment of words from grammar.

You should read it yourself, because I'm not going to attempt to be faithful to the author's terminology - I'm going to use my own diction - but the basic point is that words become self sufficient units of cross-reference, rather than functions of arguments, propositions, understandings, all as made meaningful only through grammar and syntax.

Screen shot 2012-04-28 at 10.12.15 AM

A paradox surfaces from this development. If words become, not functions of books, chapters, paragraphs, conversations, individual sentences; if words instead become the catalogue of the infinity of their respective uses and references: how is it that we acknowledge that Google must necessarily serve us results from a finite sampling?

471px-Marinetti-MotagneThere is also a flaw in the author's argument, I think. The flaw arises from what I believe is his presupposition that Google searches are not overly dependent upon Google's presupposition about the persona it is serving (the person to whom it is delivering the search results). The author does allow that the Google search methods take into account the particular searcher's prior queries. But Google today does more than that. And in the future, search will not depend upon the deliberate or even unwitting actions of the searcher. Google, or it successors, will affirmatively bring to bear, or search for, information* about the searcher herself, before or in connection with her searches. That is, it may not be possible to perform a search that is not inflected by a constructed identity of the searcher. Will this be the Heisenberg principle for information technology?

But just as there is nothing new under the sun, there is nothing original in what Google hath wrought. The author brings up the word clouds assembled in the early 20th Century by Tommaso Marinetti. (Pictured here is "Assembly Vallate + x + Strade Joffre", 1915.)

Groys's pamphlet is cool because he brings together tech, art and the philosophy of science. It is one among "100 Notes," published in anticipation of the dOCUMENTA (13) art event, coming up in June in Kassel, Germany.

*"Information" here denoting a catalogue of cross-references, and perhaps inferences related to (affirmatively associated with) the searcher; but, again, not necessarily any "meaning" about the searcher.

2016 is just around the corner . . .

A recent piece in the Bits blog, about Google powering up to lobby in DC, made me visit the FEC website to poke around for what kind of campaign contributions Google's PAC might be making.

Pictured below is a detail from a "SCHEDULE B (FEC Form 3X) ITEMIZED DISBURSEMENTS" filed by Google Inc. NetPAC.

Screen shot 2012-04-23 at 9.21.40 PM

Now what's Rob Portman doing, in 2012, raising money to fight off a primary challenger to his Senate re-election in 2016? Hadn't he better be acting like he'd be running for re-election as Vice President in 2016? Might Google be going out of its way to get Portman's attention now?

Gotta admit that Google appears to be transparent about its politicking. It's sad, though, isn't it - something like a triumph of the intransigent - to think that Google is playing the same game as the telecom companies and the banks.

Might equity crowdfunding be about more than return on investment?

Those of us in enmeshed in the current angel and VC tech startup funding ecosystem have been having a hard time seeing how equity crowdfunding gets added to the seed and early stage fundraising menu.

We've been looking at it from the perspective of investors who, even when congenitally supportive of entreprenuers, want some return on investment and definitely don't want to be diluted out of existence in subsequent rounds.

Return on investment doodle by russell daviesBut there are other perspectives.

David Fisher, a loyal reader and commentator on this blog, has long been a proponent of local investment and local exchanges. And he keeps showing up, here and elsewhere, to say, look, question your assumptions just a bit about the functions and constituencies crowdfunding might serve.

And now Fred Wilson has articulated a clarifying insight that also serves as rallying cry, as only he can do. This from his post, "Can the Crowd Be More Patient?"

"When the Gotham Gal and I allocate our personal capital, we do it broadly. We give it away to good causes. We invest in things we want to see in the world regardless of whether there is a good return on it. We are driven by the outcome as much as the return. . . .

"[T]he advent of crowdfunding, for equity, for philanthropy, and for patronage, seems like a great fit with these capital and time intensive projects that the VC business has largely abandoned."

Let's call it the Wilson Crowdfunding Doctrine.

The social agenda and self-authentication aspects of the Wilson Crowdfunding Doctrine overlap values expressed by localism and community-based investing; but even as the Doctrine links to such values, it insists they are a necessary fuel for the engine that would tackle big problems with universal (extra-local) impacts.

Image: return on investment doodle by Russell Davies.

JOBS Act G+ Hangout Debrief

Well, we had our G+ hangout on the JOBS Act yesterday. Went well!

"We" means Denise HowellDoug CorneliusJoe Wallin and I. David Fisher, a regular commentator on this blog, joined as well.  A lawyer from Canada participated actively, and I thought I saw Ken Priore among those on the screen at different points during the hangout.

JOBS Act hangout screenshot 5

I can't say enough about what a difference Denise's participation made. She is a pro, and stepped right in to moderate and ensure the discussion kept moving, stayed at the right level, provided contrasts. As you probably know, Denise is the host of the This Week in Law webcast/podcast (next episode records tomorrow, Friday, also at 11 pm Pacific).

Screen shot 2012-04-26 at 7.54.03 AMI thought two new web video stars were born, in Doug Cornelius and Joe Wallin. Good screen energy, headset-pitched modulation, smart with the transitions, easy going but concise.

David I could tell was holding his tongue as some of us (me?) babbled on about the implications of crowdfunding for angel and venture-style entrepreneurs and investors. But then he also intervened and reminded us that an audience, perhaps THE actual audience, for crowdfunding, are local communities that want to support and sustain local businesses.

It's good to keep thinking about the JOBS Act, to try not to lose track of parts of it that could end up being the most significant, to try to look at pieces that don't make as much sense inside one's current frame of reference.

Here's an excerpt about regulation and crowdfunding from a comment that Kid Mercury left on Chris Dixon's blog this morning - well worth pondering:

"it is the job of the crowdfunding platform to protect its investors. i find it highly probable that the winner of the crowdfunding market will do a better job of protecting investors than the SEC does, which is captive to goldman, jpm, etc."

And to end this post by pulling the attention back from crowdfunding (so far, JOBS Act discussions I've participated in always end up keying on crowdfunding!), here's a terrific letter from an experienced, New York City securities lawyer. I read this on the hangout yesterday and everyone really got a kick out of it:

"I personally think that the IPO changes [in the IPO on-ramp portion of the JOBS Act] are largely illusory. There has been a lot of noise about simplified regulation. But the SEC has done the equivalent of taking 1,000 pages of regulations and reducing them to 950. Big deal. Plus, the Sarbanes-Oxley stuff has become relatively routine.I also think that the decline in IPOs has little to do with over-regulation, even though it is a factor. It has more to do with what law firms and accounting firms are charging for routine SEC work.

"Tech companies that would have been a plum assignment for Alex. Brown or H&Q in 1999 wouldn’t come close to being eligible today. The boutique investment banks have largely disappeared, and the big ones want big deals. In 1999, $20 million in revenue and a good story was all it took. Plus I’m told the economics are radically different given the huge growth in off-market trading.

"The only way back for the small IPO is a change in the economics at investment banks, and a public resurgence in interest in buying those shares. Some of the changes eliminate much of the periodic SEC reporting regime. Brilliant. Who is going to buy shares in a company and how is it going to trade if there is inadequate public information?

"Personally, I think the blockbuster change is the elimination of the prohibition on general solicitation [for 506 offerings which restrict purchasers to those who are accredited]. That may change the whole face of financing small companies."

JOBS Act G+ Hangout - TODAY

UPDATE 11:21 am Pacific : We are live now. Join us at https://t.co/uvmnaDjx.

Today's the day Joe Wallin, Denise Howell, Doug Cornelius and I plan to hangout on Google+ to talk about the JOBS Act and its implications for startups and emerging companies. We plan to start at 11 am Pacific.

GplusJOBSActHangoutPromoShotYesterday, Joe Wallin and I experimented with the "hangout with extras" version of G+ hangouts, and it seemed to work fine. But I couldn't figure out how to reserve a url to be able to post ahead of time as a signpost to the event. So I guess we'll hop on a bit before 11 am Pacific, establish the url, and tweet and post it then.

A few background points about the JOBS Act.

"JOBS" in the title of the Act stands for "Jumpstart Our Business Startups." The President signed it earlier this month, and it is now law.

President Obama Signing the #JOBSAct in the Rose Garden April 5 2012

But not all provisions of the JOBS Act are in effect. Some are; some became effective when the President signed the bill. Others changes will require rulemaking from the SEC before they are implemented.

The JOBS Act means different things to different people, largely dependent on how they self-identify within the startup/emerging company ecosystem. I'm sure we'll talk about that today. We'll also talk about whether some of the pieces of the JOBS Act are overblown.

On the About page of this blog, near the top, there is a "quick reference" overview of the JOBS Act, with links, internal and external, to further reading and some resources.

Drop in later today if you can!

One more reason Twitter may be reluctant to truly disarm . . .

The news that Facebook has acquired and licensed the patents Microsoft recently acquired from AOL comes at the same time Facebook added this sentence to its prospective IPO prospectus:

"In addition, in the future we may acquire additional patents or patent portfolios, which could require significant cash expenditures."

That's from a risk factor on page 20 of Amendment No. 4 to Facebook's Registration Statement on Form S-1, filed yesterday with the SEC.

6963814022_aa5242a603The amended prospective prospectus also illustrates the "MAD" or "mutually assured destruction" doctrine of "defense" that was successfully surfaced in the comment threads to earlier posts here and on GeekWire about Twitter's new "defensive only" stance toward patents.

Updating prior disclosure about the patent infringement suit brought by Yahoo, Facebook now says it will fight back, not simply by vigorously contesting Yahoo's claims, but by asserting counterclaims - that is, by bringing other patents into the mix, patents owned or controlled by Facebook, and asserting that Yahoo has infringed those different patents of Facebook. In other words, Facebook will escalate the hostilities. Here's a detail from the redline I ran against Amendment No. 3:

Counterclaims FB

Also of interest in Facebook's amended disclosure: concise, but seemingly precise, summaries of both the Instagram deal and the deal with Microsoft regarding the AOL patents. These two paragraphs are back-to-back on page 65 of Amendment No. 4:

"In April 2012, we entered into an agreement to acquire Instagram, Inc., which has built a mobile phone-based photo-sharing service, for approximately 23 million shares of our common stock and $300 million in cash. Following the closing of this acquisition, we plan to maintain Instagram's products as independent mobile applications to enhance our photos product offerings and to enable users to increase their levels of mobile engagement and photo sharing. This acquisition is subject to customary closing conditions, including the expiration or early termination of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (HSR), and is currently expected to close in the second quarter of 2012. We have agreed to pay Instagram a $200 million termination fee if governmental authorities permanently enjoin or otherwise prevent the completion of the merger or if either party terminates the agreement after December 10, 2012.

"Also, in April 2012, we entered into an agreement with Microsoft Corporation pursuant to which we will be assigned Microsoft's rights to acquire approximately 650 patents and patent applications that are subject to the agreement between AOL Inc. and Microsoft entered into on April 5, 2012, in exchange for a total cash payment of approximately $550 million. As part of this transaction, we will obtain a license to the other AOL patents and patent applications being purchased by Microsoft and will grant Microsoft a license to the AOL patents and patent applications that we acquire. In addition, we will be assigned Microsoft's rights to acquire the outstanding shares of a wholly-owned, non-operating subsidiary of AOL that holds a portion of the aforementioned patents and patent applications. The transaction is subject to the closing of Microsoft's transaction with AOL as well as customary closing conditions, including the expiration or early termination of all applicable waiting periods under HSR."

Pictured: Facebook's Seattle office (behind the light pole) this morning.

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