31 posts categorized "Emerging Companies"

Circling back to find the IPO on ramp

In the newsprint edition of the Seattle Times this morning (what a pleasure to get to flip copy in three dimensions, as well as to fold and to snap: paper papers are underrated), I read an article (detail pictured) about how Impinj has formally pulled its stale IPO filing, and has simultaneously announced the closing of a significant round of private financing.

Circling back to find the IPO on ramp

The article says that Impinj means to try again later to go public. But next time, it intends to use the IPO on-ramp provided by the JOBS Act.

I went to GeekWire to see what John or Todd have to say on the subject, and this piece by John reports the same. John says Trulia is doing the same thing, i.e., circling back so it can exit via the IPO on ramp.

One thing I find interesting is that Impinj relied on Rule 506 and so filed a Form D in connection with the recent private capital raise. Both the Times and GeekWire report that the round was subscribed by existing investors. John's piece names them, all institutional.

There's a trend among some VC-backed companies to skip Form D filings - or I should say, to rely on 4(2) or another exemption that does not require an SEC filing.

Not so here.

The Impinj Form D reports that $21,648,933 has been raised so far, and $6,110,942 remains available.

C Class Citizens

One way for founders or inside groups to retain control of a growing company is to cause the company to authorize "Class B" Common shares, with supervoting rights.

Another way is demonstrated by what Google has just done: amend the company charter to establish a "Class C" of non-voting shares.

Novotes

Google's newly amended charter calls the new class, not "Class C Common," but "Class C Capital Stock." This perhaps emphasizes that the stock is not to have voting rights.

Here's the key, operative provision from the amended charter:

"Except as otherwise required by applicable law, shares of Class C Capital Stock shall have no voting power and the holders thereof, as such, shall not be entitled to vote on any matter that is submitted to a vote or for the consent of the stockholders of the Corporation."

At the same time, the amended charter goes on to spell out rights of the Class C, to make clear that the holders have economic rights comparable to those of voting common stock. Here's a general statement of fundamental equality (qualified, of course, by the proviso at the beginning of the sentence):

"Except as expressly provided in this Article IV, Class C Capital Stock shall have the same rights and privileges and rank equally, share ratably and be identical in all respects to the Common Stock as to all matters."

There's even a kind of backstop protection, in that the Class C Capital Stock is made to convert into Class A Common Stock in certain circumstances:

"Immediately prior to the earlier of (i) any distribution of assets of the Corporation to the holders of the Common Stock in connection with a voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the Corporation pursuant to Section 2(c) or (ii) any record date established to determine the holders of capital stock of the Corporation entitled to receive such distribution of assets, each outstanding share of the Class C Capital Stock shall automatically, without any further action, convert into and become one (1) fully paid and nonassessable share of Class A Common Stock."

Should you value a non-voting share differently to a share with a vote?

Photo: gaelx / Flickr.

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.

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