29 posts categorized "Emerging Companies"

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 Transcript: What Will the JOBS Act Mean for US Startups?

Yesterday's live chat on the Wall Street Journal, "What Will the JOBS Act Mean for U.S. Start-Ups," flew by quickly, but left a transcript in its wake.

The questions were fantastic. People are obviously reading and thinking about the the JOBS Act and what it means.

Among other points, we discussed the individual investment limits under the crowdfunding exemption, including the responsibility of funding portals to police the individual limits; the "daylight" afforded the SEC to make changes to current practices around verifying who is and is not an accredited investor, for purposes of Reg D Rule 506 offerings; and even differences between the crowdfunding exemption and the reformed Reg A, in terms of transferability of the purchased shares. All "inside baseball" stuff.

Screen shot 2012-04-13 at 4.49.09 AMI tried to lend my sense of how the JOBS Act was cobbled together, as well. That's reflected a bit in certain answers that were tweeted, as pictured here.

I see Eric Cantor's press office tweeted notice of the event.

I want to thank Angus Loten for moderating and Allison Lichter for producing. They got me trained on the system, called ScribbleLive, that the WSJ uses, and coached me through the event.

Props to Mr. Bay, his typing class I took in 8th grade, and the manual Underwood on which I learned to type. Can't think of any training that has been more useful for digital life in the early 21st Century.

WSJ Live Chat Today: What Will the JOBS Act Mean for US Startups?

Every law firm seems to be putting on a webinar about the recently passed JOBS Act.

But how many organizations are having live chat sessions where people can type in questions to be answered online in real time?

The Wall Street Journal is doing such a live chat. Today at 11 am Pacific, 2 pm Eastern. WSJ reporter Angus Loten will moderate, and I will be answering the questions. Please join in if you can!

President signs JOBS Act - cropped

Future programming note: Denise Howell, Joe Wallin, Doug Cornelius and I plan to have a Google+ hangout about the JOBS Act on April 25. Stay tuned for more details about that.

The Three Audiences of the JOBS Act

Today the House is expected to "concur in the Senate Amendment to H.R. 3606." After that happens, the Jumpstart Our Business Startups (JOBS) Act will go to President Obama, who is expected to sign it.

Three ring circus

As you know, the JOBS Act has been the focus of this blog this month. The JOBS Act is a big deal for entrepreneurs, startups, angel investors, venture capitalists, and would-be equity crowdfunders. Joe Bartlett, who chairs the advisory council to the public policy committee of the Angel Capital Association, said at the ACA Summit in Austin earlier this month that the Act represents the biggest set of changes to securities laws in over twenty years.

Debriefing will continue for some time. The SEC will have to engage in rulemaking that for some provisions will, and for other provisions may, make or break the intended reform.

You might note how different audiences are receiving and talking about the JOBS Act. There are three discernable audiences:

  • Angels and angel groups are focused on the lifting of the prohibition on general solicitation in Reg D Rule 506 offerings that are limited to accredited investors. Complementing this reform is a new safe harbor to federal broker-dealer registration requirements, which will let angels socialize deals online, and make it easier for startups to pitch at angel and incubator events.
  • VCs and serial entrepreneurs who can project taking their companies public are focused on the IPO on-ramp provisions, reforms that will delay some of the requirements imposed on companies after they go public. This initiative was lobbied for by the National Venture Capital Association. In GeekWire, John Cook wrote about how the VC lobying effort had the support of many prominent startup entrepreneurs.
  • Crowdfunding advocates, most of them, are ecstatic that a law has been made which would allow equity to be crowdfunded, with participation in such deals being open to everyone. I feel bad that I have been so negative about what the Senate did to the McHenry crowdfunding bill. Paul Spinrad, a huge leader in the equity crowdfunding movement and, in my opinion, the one who best articulates the rationale for equity crowdfunding, posted a remarkably objective assessment yesterday. 

At the beginning of this month, I posed questions in this GeekWire guest post about how angel financing and equity crowdfunding might co-exist: would deals overlap; would one kind of deal naturally follow the other; would crowdfunded deals and angel financed deals be mutually exclusive? No one can really know for sure, of course, but I would say that the changes made in the Senate to crowdfunding will make crowdfunding and angel financing mutually exclusive. It's a bit ironic, but Title II of HR 3606 in many ways puts true crowdfunding behind the accredited investor gate, while giving non-accrediteds a new kind of limited offering registration as an alternative to the others (little used) already out there.

As always, the best discussion of the implications of the JOBS Act is on Fred Wilson's blog. With regard to crowdfunding, Fred says to remember that a step in the right direction has been taken. I'm going to keep reminding myself to stay positive.

Photo: Three Ring Circus by scilina georgia / Flickr.

The Billion Dollar Emerging Company

What's your definition of an "emerging company?"

In my world, that phrase might fairly describe any growing company anywhere between Series B (possibly Series A) and Series D or later-lettered financings.

But in Chuck Schumer's bill, the "Reopening American Capital Markets to Emerging Growth Companies Act of 2011," S. 1933:

"The term 'emerging growth company' means an issuer that had total annual gross revenues of less than $1,000,000,000 during its most recently completed fiscal year."

A billion dollars!

6237834508_b343e416b7_zSchumer is the fellow who decided to address the problem of software patents by exempting the banking industry from them. (Not on Wall Street but have software patents that persecute you? Go fuck yourself.)

Well it's nice to see Schumer can sponsor legislation that has even handed applicability to everyone. You know, like, a law.

You'll hear some people grouping Schumer's bill, and a companion House bill, H.R. 360, with the cluster of exemption and private offering reform bills covered fairly faithfully on this blog, to wit:

  • a crowdfunding exemption, expressed differently in separate bills, one that passed the House already, another introduced in the Senate by Scott Brown;
  • House and Senate bills to repeal the prohibition on general solicitation in all-accredited offerings under Rule 506 of Reg D (this is the exemption relied upon in most angel financings today);
  • a bill to increase the 500 shareholder limitation; and
  • a bill expanding Regulation A (which no one uses today but might if you can raise $50 million with it?).

But really Schumer's bill is different. It's about reviving the IPO market. That's something important to Wall Street and VCs, no doubt. But on Main Street I gotta think expansion of exemptions and modernizing of Reg D are much more important.

Photo by Third Way.

Sramana Mitra on Indian Product Entrepreneurs

An opportunity to "interview" (by email exchange) Sramana Mitra fell into my lap this week. Mitra is an entrepreneur, consultant, and the founder of the "One Million by One Million" initiative. Among many other things, she is knowledgeable about Indian tech companies. Her recent post, "Indian Product Entrepreneurs: Your Time Has Come," is the backdrop for this Q&A.

Mitra preferred picQ: I've read your post about "product" companies in India, with interest. I don't know as much as I should about startups and emerging companies in India. Would you mind briefly putting India's venture and emerging company scene in a global context? Are the paradigms for starting, financing and exiting similar to those in the US, or like Europe, or unique to India?

Mitra: India now has a good sized venture industry with many global players operating in India. The seed capital / angel investment eco-system is quite immature. Cost-structures being low, and because of a legacy outsourcing industry, Indian entrepreneurs bootstrap more, which is a good thing.Exits are a more recent phenomenon, but not very different from the US, except, the Indian public markets tolerate much smaller deal sizes.

Q: You use the term "product companies" very deliberately, I think to distinguish them from businesses that provide staffing on an "outsourced" (a pejorative word for you, I take it) basis for others. Is there more to the term "product company" than that? Is there a US-equivalent to the term "product company?"

Mitra: Product company is a term applied to businesses that build one product and sell it to many people, as opposed to services which have to be repeated for every customer over and over again. The notion is the same in the US.

Q: Would the new class of product companies in India ever "outsource"anything to companies based in the US, Europe, or elsewhere?

Mitra: I doubt it. They may outsource to lower cost destinations within or outside India. They will sell to US, Europe.

Q: Your post suggests SaaS businesses based in India have a competitive advantage over American counterparts, in that Indian companies don't incur the same sales and marketing expenses. Why is that? Is it that customers in a given market, once established by venture backed US companies, will go looking for the lower cost provider? Is it because wages for sales and marketing talent in India are that much lower than in the US? Or is there something else unique about SaaS companies in India that make sales and marketing less relevant?

Mitra: I don't think I ever said that Indian companies don't incur the same sales and marketing expenses. But your second comment is true ... customers who have been sold higher priced solutions will be coming looking for lower cost providers, and this is a dynamic that is already playing out.

Q: You describe the current moment of opportunity for Indian entrepreneurs as one of arbitrage, of taking already successful SaaS concepts and executing them in lower-cost realizations. Longer term, do you envision Indian innovation to be more IP based? Or is IP not the future of innovation, broadly speaking?

Mitra: There is no lack of IP based innovation even if you execute on an existing idea. Technology is moving so fast, there is always opportunity for enhancing products. That applies for the Indian SaaS and other product companies as well.

Q: I know you are based in Silicon Valley. Do you think that geographic region's leadership, in terms of innovation and the ecosystem of education, talent and financing to nurture innovation, is sustainable long term, or will other regions supplant California? Put another way, will it remain Silicon Valley's birthright to generate IP and new and innovative business models for the rest of the world?

Mitra: Silicon Valley remains a unique place, the biggest cultural asset being that it is a culture that doesn't penalize failure, which is essential to encourage experimentation. I have never seen any other place like this.In theory, it can be supplanted. In practice, we are yet to see anything comparable.

Q: What kinds of investment opportunities are there for US based angels, in Indian SaaS companies?

Mitra: Huge opportunities. Investors interested can contact me, and I would be happy to plug them into such opportunities in our portfolio.

Bootstrapping to Success

Awesome to see John Cook's Q&A with Chad Brown of IdentityMine in TechFlash on Friday. 

Winphone twitter

This is the second time in a month that an IdentityMine founder has been featured in a PSBJ publication. A few weeks back, the focus was on Mark Brown, IdentityMine's CEO, in a piece about mobile apps. (Full article is behind a paywall, unfortunately.)

As is evident in both articles, IdentityMine (a client) is probably best known these days for their UX design and software on Windows Phone. I bought a Winphone last week just to enjoy IdentityMine's work on the Twitter app.

But the part I liked best about Friday's TechFlash Q&A is what Chad had to say about bootstrapping the company's growth:

"How did you finance the business in the early days? 'It was out of pocket. Thankfully, Mark and I were pretty successful -- not only in our (prior) businesses -- but also in saving money. And so we were able to go about eight months without any income, and that's what we did. We brought David Meunier on board, and we consider him one of the founders as well. And all three of us dipped into our finances to make it happen, and put our houses on the line and signed personal guarantees against credit and we made it happen. It was not easy.'

"So, did you ever consider taking outside funding? 'We really didn't want that. It would have been tough timing as well since there was a pull back around the same time. We didn't go out and pursue it. We felt optimistic.'"

Moral of the story for tech startupers: you can skip angel and VC financing and make it!

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