Wednesday, January 27, 2016
As many of you know, I teach both traditional doctrinal and experiential learning courses in business law. I bring experiential learning to the doctrinal courses, and I bring doctrine to the experiential learning courses. I see the difference between doctrinal and experiential learning courses as a matter of emphasis. Among other things, this post explores the intersection between traditional classroom-based law teaching and experiential law teaching by analogizing business law drafting to yoga practice principles. This turned out to be harder than it "felt" when I first started to write it. So, the post may be wholly or partially unsuccessful. But I persevere . . . .
I begin by noting that we are, to some extent, in the midst of a critical juncture with respect to experiential learning in legal education. Some observers, including both legal practitioners and faculty, criticize the lack of experiential learning, noting that legal education is too theoretical and policy-oriented, resulting in the graduation of students who are ill-prepared for legal practice. Yet, other commentators note that too great an emphasis on experiential learning leaves students without the skills in theory and policy that they need to make useful interpretive judgments and novel arguments for their clients and to participate meaningfully in law reform efforts. Of course, different law schools have different programs of legal education (something not noted well enough, or at all, in many treatments of legal education). But even without taking that into account, many in and outside legal education (including, for example, in articles here and here) advise a law school curriculum that merges the two. I think about and struggle with constructively effectuating this all merger the time.
Now, about the yoga . . . . Most of you likely do not know that, in addition to teaching law, being a wife and mom, and other stuff, I enjoy an active yoga practice. As I finished a yoga class on Sunday afternoon, I realized that yoga has something to say about integrating doctrinal and experiential learning, especially when it comes to instruction on legal drafting in the business law area. Set forth below are the parallels that I observe between yoga and business law drafting. They are not perfect analogs, but they are, in my view, instructive in a number of ways important to the teaching mission in business law. The first two bullet points are, as I see it, especially important as expressions of the idea that law teaching is more complete and valuable when it holistically integrates doctrine, policy, theory, and skills. The rest of the bullets principally offer other insights.
Monday, December 28, 2015
Andrew Schwartz, a professor at the University of Colorado, has recently published an interesting article discussing how crowdfunding deals with the fundamental problems of startup finance: uncertainty, information asymmetry, and agency costs. His article, The Digital Shareholder, 100 MINN. L. REV. 609 (2015), is available here.
Here’s the abstract:
Crowdfunding, a new Internet-based securities market, was recently authorized by federal and state law in order to create a vibrant, diverse, and inclusive system of entrepreneurial finance. But will people really send their money to strangers on the Internet in exchange for unregistered securities in speculative startups? Many are doubtful, but this Article looks to first principles and finds reason for optimism.
Well-established theory teaches that all forms of startup finance must confront and overcome three fundamental challenges: uncertainty, information asymmetry, and agency costs. This Article systematically examines this “trio of problems” and potential solutions in the context of crowdfunding. It begins by considering whether known solutions used in traditional forms of entrepreneurial finance—venture capital, angel investing, and public companies—can be borrowed by crowdfunding. Unfortunately, these methods, especially the most powerful among them, will not translate well to crowdfunding.
Finding traditional solutions inert, this Article presents five novel solutions that respond directly to crowdfunding’s distinctive digital context: (1) wisdom of the crowd; (2) crowdsourced investment analysis; (3) online reputation; (4) securities-based compensation; and (5) digital monitoring. Collectively, these solutions provide a sound basis for crowdfunding to overcome the three fundamental challenges and fulfill its compelling vision.
Andrew was kind enough to share a draft of this article with me earlier this year, and I’ve been waiting for him to make it publicly available so I could bring it to your attention. I’m not quite as optimistic as Andrew that crowdfunding will solve the problems he identifies, but it’s a good piece and worth reading.
Monday, December 21, 2015
I mentioned back in October that I spoke in Munich on Regulating Investment Crowdfunding: Small Business Capital Formation and Investor Protection. I discussed how crowdfunding should be regulated, using the U.S. and German regulations as examples.
If you’re interested, that talk is now available here. I expect this to be the top-rated Christmas video on iTunes.
If you want to know more about how Germany regulates crowdfunding, I strongly suggest this article: Lars Klöhn, Lars Hornuf, and Tobias Schilling, The Regulation of Crowdfunding in the German Small Investor Protection Act: Content, Consequences, Critique, Suggestions (June 2, 2015).
Thursday, December 10, 2015
A few days ago, co-blogger Steve Bradford posted on law professor complaints about grading under the title Warning: Law Professor Whine Season. OK. I typically am one of those whiners. But today, rather than noting that grading is the only part of the semester I actually need to be paid for (and all that yada yada), I want to briefly extoll one virtue of exam season: the positive things one sees in students as they consciously and appropriately struggle to synthesize the material in a 14-week jam-packed semester.
My Business Associations final exam was administered on Tuesday. Like many other law professors, I gave my students sample questions (with the answers), held a review session, and responded to questions posted to the discussion board on our class course management site. Sometimes, I dread any and all of that post-class madness. This year, I admit that there were few of the thinly veiled (and, by me, expressly discouraged and disdained) "is this on the exam?" or "please re-teach this part of the course . . ." types of questions or requests in any of the forums that I offered for post-class review and learning. That was a relief.
The students' final work product for my Corporate Finance planning and drafting seminar was due Monday. I met with a number of students in the course about that drafting assignment and about the predecessor project in the final weeks before each was due. I watched them work through issues and begin to make decisions, uncomfortable as they might be in doing so, that solve real client problems. Satisfying times . . . .
In fact, there have been a number of moments over the past week in which I was exceedingly proud of the learning that had gone on and was continuing to go on during the post-class exam-and-project-preparation phase of the semester. I offer a few examples here to illustrate my point. They come from both my Business Associations course, for which students take a comprehensive written final examination, and my Corporate Finance planning and drafting seminar, for which students solve a corporate finance problem through planning and drafting and write a review of a fellow student's planning and drafting project.
Wednesday, December 9, 2015
Divestment campaigns have been a popular form of corporate activism. With divestment pensions, institutions, endowments and funds withdraw investments from companies to encourage and promote certain social/political behaviors and policies.
Erik Hendey in his article Does Divestment Work (in the Harvard Political Review) recounted recent divestment campaigns including:
"sweatshop labor, use of landmines, and tobacco advertising. But undoubtedly the best known example of divestment occurred in the 1970s and ’80s in response to the apartheid regime of South Africa. Retirement funds, mutual funds, and investment institutions across the country sold off the stocks of companies that did business in South Africa."
A current divestment campaign is focused on guns. In the wake of the San Bernardino, California mass shooting, this issue is poised to gain momentum. The widespread investment in gun manufacturers will also make this campaign relevant to many investors. Andrew Ross Sorkin at the NYT DealBook writes in Guns in Your 401(k)? The Push to Divest Grows:
"If you own any of the broad index funds or even a target-date retirement fund, you’ve got a stake in the gun industry. Investments in gun makers, at least over the past five years, have performed well. Shares of Smith & Wesson are up nearly 400 percent since 2010. On Monday, shares of Smith & Wesson reached their highest price since 2007 after President Obama called for more gun control laws, leading investors to anticipate a rush of gun sales ahead of any restrictions."
If you are curious/concerned, Unload Your 401(k) is a website where you can check and see if you are personally invested, through your retirement savings plan, in one of the three major gun manufacturers.
Individuals may allocate their personal 401(k) money to socially responsible investment funds or in traditional funds that do not include gun manufacturers. A traditional fund is a hard bet because even if the fund doesn't currently invest in a gun manufacturer at the time of the individual's investment, it could become a part of the portfolio. Only funds with investment parameters that specifically exclude gun manufacturers can provide such a guarantee.
But what about endowments and pension funds-- large institutional investors who are often the target of divestment campaigns because when they choose to divest (or simply not to invest in the first place) this is where the real pressure can be applied to companies. Many stewards of such funds manage them according to certain social principles, especially if those principles are advocated by the beneficiaries of the funds (as is the case with student activists behind the fossil fuel divestment campaigns). Applying social pressure through such funds and on behalf of beneficiaries raises question of whether such actions are in appropriate fidelity to the trust position over the money (not the morals) the trustees are appointed to preserve. Bradford Cornell, at California Institute of Technology published a 2015 paper estimating the cost of fossil fuel divestment of major educational endowments, which for Harvard he figured to be over $100 million.
Friday, November 27, 2015
Please accept my apologies for not posting this notice sooner. I received the call for papers a few weeks ago and meant to post it then. But I now see that the deadline for abstract submissions is Monday! Mea culpa. Please feel free to post a comment here or contact me by email for more information if you want to submit. I have a more full-blown version of the call for papers that I can send by email to those who are interested in more information. (I omitted here prior conference locations as well as the names and affiliations of members of the conference academic and practice review boards and organizing committee.)
I have participated in this conference for the past two years. While there are few law academics in attendance, I have found the work of our international colleagues from the business side of the aisle to be both very informative to my work and interesting in many other respects. This conference also has enabled me to forge new relationships that have positively impacted my scholarship.
Call for Papers
7th Conference on Innovative Trends Emerging in Microfinance (ITEM-7)
Pumping up Innovations In and Around Microfinance
(Microfinance, Crowdfunding and Community Development Finance)
Organized by the
Banque Populaire Chair in Microfinance of the Burgundy School of Business, Dijon, France
In collaboration with
The Chinese Association of Microfinance
Shanghai Jiao Tong University Centre for Financial Inclusion
March 15-17, 2016
In Shanghai, China
Poverty is a deep-rooted problem. Science magazine has published research indicating that poverty is even associated with cognitive problems. One hope to eradicate poverty is to provide the poor with the resources necessary to cope with it, the resources being specific to their situation. One possible resource is microfinance. Today, more and more researchers are getting involved in research that makes a difference to practitioners who want to create a new world of hope for the poor. Although it is too early to prove either a positive or a negative impact of financial leverage on the poor, other financial products are being offered to the poor so that they are financially included.
The international conference on Innovative Trends Emerging in Microfinance (ITEM) is aimed at researchers, both from academic field and from the industry, who are looking at institutional and technological environmental factors that could increase outreach or reduce costs or both. Previous editions of this conferences have been held in India, France and Morocco.
The 7th edition brings together researchers from three areas: Microfinance, Crowdfunding and Community Development Finance. However, the conference is open to other closely related microfinance fields and papers on impact measures, social governance, innovation, and sustainable development are welcomed.
The ITEM conference provides a forum for both researchers and practitioners to discuss and exchange on financial inclusion. The conference in March 2016 seeks quantitative, qualitative and experience-based papers from industry and academia. Case studies and PhD research-in-progress are also welcomed. It encourages reflections on the potential and use of technology in microfinance in developed and developing countries.
Papers can be in English, French and Chinese. Normally, there is no provision for translations. So, English is preferred.
The conference invites both professional presentations and research papers. Since we are all aiming for high level publications, we do not publish books or copyrighted proceedings. It is expected that the review process and the partnerships developed would help the researchers develop the paper towards a high impact journal and that, perhaps, they would think of acknowledging their participation in the conference. However, if researchers want, their papers are directly considered for journal special issues or books that the organizers or other participants may be associated with. These journals include Strategic Change (Wiley) and Cost Management (Thomson-Reuters).
Proposals: All contribution types require a proposal in the first instance, including a short abstract between 300 and 500 words, up to five keywords, the full names (first name and surname, not initials), email addresses of all authors, and a postal address and telephone number for at least one contact author.
The abstract should indicate:
Title of the paper
Track of the paper (see below)
Authors and affiliations
Impact: (on new research or on new practices, policies)
Stream 1: Microfinance
Track 10: Microfinance (all other)
English / French
Track 11: Communication and Microfinance
Track 12: Experiments in Microfinance
Track 13: Market research in microfinance
Track 14: Microfinance in China
Stream 2: Crowdfunding
Track 20: Crowdfunding (all other)
English / French
Track 21: Communication et crowdfunding
Track 22: Regulation in Crowdfunding
English / French
Track 23: Engaging the crowd
Track 24: Strategies of crowdfunding
Track 25: Governance in Crowdfunding
English / French
Stream 3 : Community Development Finance
Track 30: Community Development (all other)
English / Chinese
Track 31: Impact Investment Funds
Track 32: Community Development Funds
Track 33: Slow Money / Agricultural Investment
Full Papers are only required after acceptance of abstract. Papers should not to be more than 5000 words including abstract, keywords and references. Submission period for the full papers is till December 31st, 2015. These will be sent for review after the registration fee has been paid. Each author of a full paper will also be required to review a paper and be a discussant at the conference.
Deadline / Timeline
November 30, 2015: Submission of abstract of proposals
December 10, 2015: Confirmation of acceptance
December 31, 2015: Early-bird registration ends
January 15, 2015: Full papers for those who want their papers reviewed
January 31, 2016: Normal registration ends
March 15-17, 2016: Conference
Registration and Payment: instructions will be sent at the time of confirmation of acceptance of abstract.
There are special discounts available for early-bird registration and for students. These will be posted on the conference website.
Web site: http://www.bmicrofinance.org/item7.html
Monday, November 16, 2015
One final post on the SEC’s proposed changes to Rule 147 and I promise I’m finished—for now. Today’s topic is the effect the proposed changes will have on state crowdfunding exemptions. If the SEC adopts the proposed changes to Rule 147, many state legislatures will have to (or at least want to) amend their state crowdfunding legislation.
As I explained in my earlier posts here and here, the SEC has proposed amendments to Rule 147, currently a safe harbor for the intrastate offering exemption in section 3(a)(11) of the Securities Act. If the proposed amendments are adopted, Rule 147 would become a stand-alone exemption rather than a safe harbor for section 3(a)(11). There would no longer be a safe harbor for intrastate offerings.
That creates some issues for the states. Many states have adopted state registration exemptions for crowdfunded securities offerings that piggyback on the federal intrastate offering exemption. That makes sense, because, if the offering isn’t also exempted at the federal level, the state crowdfunding exemption is practically worthless. (An offering pursuant to the federal crowdfunding exemption is automatically exempted from state registration requirements, but these state crowdfunding exemptions provide an alternative way to sell securities through crowdfunding.)
The SEC’s proposed amendments would actually make it easier for a crowdfunded offering to fit within Rule 147. (In fact, the SEC release says that’s one of the purposes of the amendments.) Most importantly, the SEC proposes to eliminate the requirement that all offerees be residents of the state. That change would facilitate publicly accessible crowdfunding sites which, almost by definition, are making offers to everyone everywhere. The securities would still have to be sold only to state residents, but it’s much easier to screen purchasers than to limit offerees.
Problem No. 1: Dual Compliance Requirements
Unfortunately, many state crowdfunding exemptions require that the crowdfunded offering comply with both section 3(a)(11) and Rule 147 in order to be eligible for the state exemption. Here, for example, is the relevant language in the Nebraska state crowdfunding exemption: “The transaction . . . [must meet] . . . the requirements of the federal exemption for intrastate offerings in section 3(a)(11) of the Securities Act of 1933 . . . and Rule 147 under the Securities Act of 1933.” (emphasis added).
Currently, that double requirement doesn’t matter. An offering that complies with the Rule 147 safe harbor by definition complies with section 3(a)(11). That would no longer true if the SEC adopts the proposed changes. Since Rule 147 would no longer be a safe harbor, an issuer that complied with Rule 147 would still have to independently determine if its offering complied with section 3(a)(11). Because of the uncertainty in the case law under 3(a)(11), that determination would be risky. (But see my argument here.) The leniency the SEC proposes to grant in the amendments to Rule 147 would not be helpful unless state legislators amended their crowdfunding exemptions to eliminate the requirement that offerings also comply with section 3(a)(11).
Problem No. 2: State-of-Incorporation/Organization Requirements
There’s another potential issue. Many state crowdfunding exemptions include an independent requirement that the issuer be incorporated or organized in that particular state. That’s inconvenient, and reduces the value of the state crowdfunding exemption, because corporations and LLCs are often incorporated or organized outside their home states. But, until now, that state requirement hasn’t mattered because both section 3(a)(11) and Rule 147 also impose such a requirement.
The SEC proposes to eliminate that requirement from Rule 147, so it now matters whether the state crowdfunding exemption independently imposes such a requirement. Issuers won’t be able to take full advantage of the proposed changes to Rule 147 unless states eliminate the state-of-incorporation/organization requirements from their state crowdfunding exemptions as well.
On to More Important Things
That’s the end of my Rule 147 discussion for now. I promise! Now, we can turn to more important questions, such as why your favorite team belongs in the college football playoff. (I know for sure that my college football team won't be there. I would be happy just to have my college football team in a bowl game.)
Wednesday, November 11, 2015
My recent article: Locked In: The Competitive Disadvantage of Citizen Shareholders, appears in The Yale Law Journal’s Forum. In this article I examine the exit remedy for unhappy indirect investors as articulated by Professors John Morley and Quinn Curtis in their 2010 article, Taking Exit Rights Seriously. Their argument was that the rational apathy of indirect investors combined with a fundamental difference between ownership of stock in an operating company and a share of a mutual fund. A mutual fund redeems an investor’s fund share by cashing that investor out at the current trading price of the fund, the net asset value (NAV). An investor in an operating company (a direct shareholder) exits her investment by selling her share certificate in the company to another buyer at the trading price of that stock, which theoretically takes into account the future value of the company. The difference between redemption with the fund and sale to a third party makes exit in a mutual fund the superior solution over litigation or proxy contests, they argue, in all circumstances. It is a compelling argument for many indirect investors, but not all.
In my short piece, I highlight how exit remedies are weakened for citizen shareholders—investors who enter the securities markets through defined contribution plans. Constrained investment choice within retirement plans and penalties for withdrawals means that “doing nothing” is a more likely option for citizen shareholders. That some shareholders are apathetic and passive is no surprise. The relative lack of mobility for citizen shareholders, however, comes at a cost. Drawing upon recent scholarship by Professors Ian Ayres and Quinn Curtis (Beyond Diversification), I argue that citizen shareholders are more likely to be locked into higher fee funds, which erode investment savings. Citizen shareholders may also be subsidizing the mobility of other investors. These costs add up when one considers that defined contribution plans are the primary vehicle of individual retirement savings in this country aside from social security. If the self-help remedy of exit isn’t a strong protection for citizen shareholders, then it is time to examine alternative remedies for these crucial investors.
Wednesday, November 4, 2015
The Department of Labor issued new interpretive guidelines for pension investments governed by ERISA. A thorny issue has been to what extent can ERISA fiduciaries invest in environmental, social and governance-focused (ESG) investments? The DOL previously issued several guiding statements on this topic, the most recent one in 2008, IB 2001-01, and the acceptance of such investment has been lukewarm. The DOL previously cautioned that such investments were permissible if all other things (like risk and return) are equal. In other words, ESG factors could be a tiebreaker but couldn't be a stand alone consideration.
What was the consequence of this tepid reception for ESG investments? Over $8.4 trillion in defined benefit and defined contribution plans covered by ERISA have been kept out of ESG investments, where non-ERISA investments in the space have exploded from "$202 billion in 2007 to $4.3 trillion in 2014."
The new guidance admits that previous interpretations may have
"unduly discouraged fiduciaries from considering ETIs and ESG factors. In particular, the Department is concerned that the 2008 guidance may be dissuading fiduciaries from (1) pursuing investment strategies that consider environmental, social, and governance factors, even where they are used solely to evaluate the economic benefits of investments and identify economically superior investments, and (2) investing in ETIs even where economically equivalent."
Under the new interpretive guidelines, the DOL takes a much more permissive stance regarding the economic value of ESG factors.
"Environmental, social, and governance issues may have a direct relationship to the economic value of the plan's investment. In these instances, such issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary's primary analysis of the economic merits of competing investment choices. Similarly, if a fiduciary prudently determines that an investment is appropriate based solely on economic considerations, including those that may derive from environmental, social and governance factors, the fiduciary may make the investment without regard to any collateral benefits the investment may also promote. Fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors."
In other words, ESG factors may be economic factors and such investments are not automatically suspect under ERISA fiduciary duty obligations.
Monday, November 2, 2015
Here’s something everyone who has ever taken Securities Regulation should know: Section 3(a)(11) of the Securities Act, the intrastate offering exemption, has a safe harbor, Securities Act Rule 147.
As Lee Corso would say, “Not so fast, my friend.” The SEC is proposing to overturn that longstanding wisdom. If the SEC’s proposed changes to Rule 147 are adopted,Rule 147 would no longer be tied to section 3(a)(11) and section 3(a)(11) would no longer have a safe harbor. The intrastate nature of Rule 147 would be preserved, but the proposed changes would be adopted under the SEC’s general exemptive authority in section 28 of the Securities Act.
Here are the most significant changes that the SEC has proposed:
Tied to State Regulation
The premise of section 3(a)(11) and its Rule 147 safe harbor is to relegate purely intrastate offerings to state regulation. But there’s currently nothing in Rule 147 to enforce that premise; federal exemption does not depend on state regulation of the offering.
The SEC proposal would expressly tie the federal Rule 147 exemption to state regulation. An offering would qualify for the federal exemption only if it was (1) registered at the state level or (2) sold pursuant to a state exemption that imposes investment limits on purchasers and limits the amount of the offering to $5 million in any 12-month period. (This second possibility is clearly aimed at the crowdfunding exemptions that many states have recently enacted.)
Rule 147 does not currently limit the amount of the offering. The SEC proposal would limit the offering amount to $5 million in any 12-month period, unless the offering is registered at the state level.
State of Incorporation
Rule 147 currently requires that the issuer be incorporated or organized in the state in which the securities are sold. Because of that, even a corporation or LLC with all of its business in a single state cannot use Rule 147 if it happens to be incorporated or organized in another state, such as Delaware.
The SEC proposes to eliminate the focus on state of incorporation or organization, and require instead that the issuer’s “principal place of business” be within the state in which the offering is made. This would be defined as the state where “the officers, partners or managers . . . primarily direct, control and coordinate” the issuer’s activities.
Doing Business in the State
Under the current rule, the issuer must meet four requirements to establish that it is doing business in the state:
- It must derive at least 80% of its gross revenues from operations within the state;
- At least 80% of its assets must be located within the state;
- It must intend to use and actually use at least 80% of the offering proceeds in connection with operations in the state; and
- Its principal office must be located in the state.
All four of those requirements must be met.
The proposed rule is much less restrictive. An issuer only has to meet any one of the following requirements:
- It derives at least 80% of its gross revenues from operations in the state;
- At least 80% of its assets are located in the state;
- It intends to use and uses at least 80% of the offering proceeds in connection with operations in the state; or
- A majority of its employees are based in the state.
(Notice the addition of the new fourth test.) It will obviously be easier to satisfy a single one of the new requirements that it is to satisfy all four of the requirements under the current rule.
Intrastate Offers and Sales
Rule 147 currently provides that the securities must be offered and sold only to state residents. In other words, it’s not enough to screen out non-residents before sale. You can’t even solicit non-residents.
The SEC proposes to eliminate the restriction on offerees. An issuer could make a general public solicitation to the world, as long as it only sells the securities to state residents. This obviously makes it much easier to make Rule 147 offerings on the Internet.
Reasonable Belief Standard
The current rule requires that all of the purchasers (and offerees) be residents of the state. If one of them is a non-resident, the exemption is lost, even if the issuer thought the person was a resident.
The proposed rule adds a reasonable belief standard. The exemption is protected as long as the issuer had a reasonable belief that the non-resident purchaser was a resident.
Resales and the Issuer’s Exemption
Both the current rule and the SEC’s proposal limit resales to non-residents. However, there’s a crucial difference between the two.
The current rule makes the exemption dependent on meeting all of the terms and conditions of the rule, including the resale limit. Thus, if a purchaser immediately resold to a non-resident, the issuer could lose the exemption.
The proposed rule, like the current rule, requires the issuer to take certain precautions to prevent resales to non-residents, but the prohibition on resales is no longer a condition of the issuer’s exemption. Thus, if the issuer took the required precautions and a purchaser resold to a non-resident anyway, the issuer would not lose the exemption.
Protection from Integration
Rule 147 currently has a provision that protects the Rule 147 offering from integration with sales pursuant to certain other exemptions six months prior to or six months after the Rule 147 offering.
The SEC proposal offers a much broader anti-integration safe harbor, similar to the integration safe harbor included in Regulation A. Offers or sales under the amended Rule 147 exemption would not be integrated with any prior offers or sales. And Rule 147 offerings would not be integrated with subsequent offers or sales that are (1) federally registered; (2) pursuant to Regulation A; (3) pursuant to Rule 701; (4) pursuant to an employee benefit plan; (5) pursuant to Regulation S; (6) pursuant to the crowdfunding exemption in section 4(a)(6); or (7) more than six months after completion of the Rule 147 offering.
There is also some protection against integration when an issuer begins an offering under Rule 147 and decides to register the offering instead.
Section 3(a)(11) Remains Available
As I mentioned earlier, the amended Rule 147 would no longer be a safe harbor for section 3(a)(11) of the Securities Act. But Section 3(a)(11) would remain available. It just wouldn’t have a safe harbor.
An issuer would be free to use the section 3(a)(11) statutory exemption, but I wouldn’t recommend it unless everything is unquestionably intrastate. It was the uncertain interpretations of section 3(a)(11) that led to Rule 147 in the first place.
A Move in the Right Direction
I think the proposed exemption is a move in the right direction. Rule 147, one of the SEC’s earliest surviving safe harbors, was a little long in the tooth. The proposed changes will make it a little more viable.
Friday, October 30, 2015
Tuesday, October 27, 2015
This hit my mailbox this morning. If the report is correct, we'll know in a few days whether we have a path to unregistered, broad-based securities crowdfunding in the United States. More as news is reported . . . .
[Additional information: Based on the link to the SEC's notice of meeting in Steve Bradford's comment to this post, it also appears that the SEC is considering amendments to Rules 147 (intrastate offerings) and 504 (limited offerings under Regulation D of up to $1,000,000).]
Wednesday, October 21, 2015
As Steve Bradford mentioned in his post on Monday (sharing his cool idea about mining crowdfunded offerings to find good firms in which to invest), our co-blogger Haskell Murray published a nice post last week on venture capital as a follow-on to capital raises done through crowdfunding. He makes some super points there, and (although I was raised by an insurance brokerage executive, not a venture capitalist), my sense is that he's totally right that the type of crowdfunding matters for those firms seeking to follow crowdfunding with venture capital financing. I also think that, of the types of crowdfunding he mentions, his assessment of venture capital market reactions makes a lot of sense. Certainly, as securities crowdfunding emerges in the United States on a broader scale (which is anticipated by some to happen with the upcoming release of the final SEC rules under Title III of the JOBS Act), it makes sense to think more about what securities crowdfunding might look like and how it will fit into the cycle of small business finance.
Along those lines, what about debt crowdfunding as a precursor to venture capital funding? Andrew Schwartz has written a bit about that. Others also may have taken on this topic. Professor Schwartz may be right that issuers will prefer to issue debt than equity--in part because it may prove to be less of an impediment to later equity financings. But I don't necessarily have a warm feeling about that . . . .
And what about the crowdfunding of investment contracts (e.g., what I have previously called "unequity" in this article (and elsewhere, including in this further article) and perhaps even the newly popular SAFEs)? There is no equity overhang with unequity and some other types of investment contract, but crowdfunded SAFEs, which are convertible paper, may be viewed negatively in later financing rounds--especially if the conversion rights are held by a wide group of investors. While part of me is surprised that people are not taking the investment contract part of the potential securities crowdfunding market seriously (since folks were crowdfunding investment contracts before the JOBS Act came along--not knowing it was unlawful), the other part of me says that crowdfunded investment contracts would have a niche market at best.
So, thanks, Haskell, for the food for thought. No doubt, more will be written about this issue as and if the market for crowdfunded securities develops. Coming soon, says the SEC . . . .
Wednesday, October 7, 2015
As some of you may know, I have been focused on crowdfunding intermediation in my research of late. My articles in the U.C. Davis Business Law Journal and the Kentucky Law Journal both touch on that topic, and a forthcoming chapter in an international crowdfunding book and several articles in process follow along that trail. (I also have the opportunity to look into gatekeeper intermediary issues outside the crowdfunding context at an upcoming symposium at Wayne State University Law School, about which I will say more in a subsequent post.) The underlying literature on financial intermediation is super-interesting, and it continues to grow in breadth and depth as I research and write.
Given my interest in this area, I was delighted to see that Larry Cunningham is contributing to the debate, following on his already-rich work relating to Warren Buffett and Berkshire Hathaway. As you may recall, Larry was our guest here at the Business Law Prof Blog back in 2014. You can read my Q&A with him here and his posts here and here.
Larry recently posted an essay responding to Kathryn Judge's Intermediary Influence, 82 U Chi L Rev 573 (2015). In her article, Professor Judge shows "how intermediaries acquire influence over time and how they have used that influence to promote high-fee arrangements." She then uses this descriptive analysis both to explain existing phenomena in the financial markets and to identify significant implications for the same.
Forthcoming in the University of Chicago Law Review Dialogue, Larry's responsive essay, Berkshire versus KKR: Intermediary Influence and Competition, compares the infamous private equity firm Kohlberg Kravis Roberts to his beloved Berkshire Hathaway. His focus? The M&A market. His bottom line?
I have extended Judge’s insights with an illustration from the acquisitions market, depicting one firm (KKR) that epitomizes intermediary influence, in contrast to a rival (Berkshire)—the anti-intermediary par excellence. The juxtaposition affirms the portrait of intermediary influence that Judge paints as well as the potential for correction through lower-priced competition and fee disclosure she posits.
I have given Larry's essay a skim, and that quick pass has enticed me into giving both it and Professor Judge's article a good, thorough read in the not-too-distant future.
Monday, October 5, 2015
Alicia Plerhoples (Georgetown) has the details about the first benefit corporation IPO: Laureate Education.*
She promises more analysis on SocEntLaw (where I am also a co-editor) in the near future.
The link to Laureate Education's S-1 is here. Laureate Education has chosen the Delaware public benefit corporation statute to organize under, rather than one of the states that more closely follows the Model Benefit Corporation Legislation. I wrote about the differences between Delaware and the Model here.
Plum Organics (also a Delaware public benefit corporation) is a wholly-owned subsidiary of the publicly-traded Campbell's Soup, but it appears that Laureate Education will be the first stand-alone publicly traded benefit corporation.
*Remember that there are differences between certified B corporations and benefit corporations. Etsy, which IPO'd recently, is currently only a certified B corporation. Even Etsy's own PR folks confused the two terms in their initial announcement of their certification.
October 5, 2015 in Business Associations, Corporate Finance, Corporate Governance, Corporations, CSR, Delaware, Haskell Murray, Research/Scholarhip, Securities Regulation, Social Enterprise | Permalink | Comments (0)
Friday, September 25, 2015
Regular readers of this blog know that I have chastised the SEC on several occasions for its lengthy delay in adopting rules to implement the exemption for crowdfunded securities offerings. (It has now been 1,268 days since the President signed the bill, 998 days past the statutory rulemaking deadline, and 702 days since the SEC proposed the rules.)
The long wait may soon be over. According to BNA, SEC Chair Mary Jo White said yesterday that the SEC will finish adopt its crowdfunding rules in the "very near term."
I don't know exactly what "very near term" means to a government official. Given my luck, it probably means immediately prior to the two crowdfunding presentations I'm scheduled to give in October. Nothing like a little last-minute juggling to keep me on my toes.
Thursday, September 24, 2015
This comes to us courtesy of Rachel Ezrol at Emory Law:
A Vulnerability and the Human Condition Initiative & Feminism and Legal Theory Workshop Project
A Workshop on Vulnerability at the Intersection of the Changing Firm and the Changing Family
When: October 16-17, 2015
Where: Emory University School of Law
Registration is FREE for Emory students, faculty, and staff.
From the Call for Papers:
Theories of dependency situate the limitations that attend the caregiving role in the construction of the relationship between work and family. The “worker,” defined without reference to family responsibilities, becomes capable of autonomy, self-sufficiency, and responsibility through stable, full-time employment. The privatized family, created by the union of spouses, is celebrated in terms of a self-sufficient ideal that addresses dependency within its own ranks, often through the gendered assumptions regarding responsibility for caretaking. The feminist project has long critiqued these arrangements as they enshrine the inequality that follows as natural and inevitable and cloak the burdens of caretaking from examination or critique. The interpenetrations of the family and the firm have thus been understood as both multiple and wide-ranging. Both this system and the feminist critique of it, however, are associated with the construction of wage labor that arose with industrialization. This workshop will apply the lens of vulnerability to consider the implications that arise from large scale changes in the structure of employment - changes that place this prior ideal of stable self-sufficiency beyond the reach of much of the population.
Issues For Discussion May Include:
This workshop will use vulnerability theory to explore the implications of the changing structure of employment and business organizations in the information age. In considering these changes, we ask in particular:
- How does the changing relationship between employment and the family, and particularly the disappearance of the breadwinner capable of earning a stable “family wage,” affect our understanding of the family and its association with care and dependency?
- How does the changing structure of employment and business organization affect possibilities for reform? What should be the role of a responsive state in directing these shifting flows of capital and care?
- How might a conception of the vulnerable subject help our analysis of the changing nature of the firm? What relationships does it bring into relief?
- What kind of legal subject is the business organization? Are there relevant distinctions among business and corporate forms in regard to understanding both vulnerability and the need for resilience?
- How are business organizations vulnerable? The family? Have these vulnerabilities shifted over time, and what forms of resilience are available for both institutions to respond to new economic realities?
- What, if any, should be the role of international and transnational organizations in a neoliberal era? What is their role in building both human and institutional resilience?
- Is corporate philanthropy an adequate response to the retraction of state regulation? What forms of resilience should be regulated and which should be left to the ‘free market’?
- How does the Supreme Court's willingness to assign rights to corporate persons (Citizen's United, Hobby Lobby), affect workers, customers and communities? The relationship between public and private arenas?
Program Coordinator | Emory University School of Law
1301 Clifton Road | Atlanta, GA 30322 | Room G500 Gambrell Hall
404-712-2420 (t) | 404-727-1973 (f)
Vulnerability and the Human Condition Initiative
Feminism and Legal Theory Project
Wednesday, September 23, 2015
As I earlier noted, I participated in a continuing legal education program at The University of Tennessee College of Law last Friday on the basics of crowdfunding. My partners in crime for the last hour of the event were two folks from Chattanooga, Tennessee (yes, home of the famous choo choo) who have been involved in crowdfunding efforts for local businesses. One used crowdfunding to finance a change in the location of a business; the other used crowdfunding to gauge interest in his business concept and raise seed capital. They described their businesses and financing efforts in the second segment of the program (after a foundational hour on crowdfunding from me).
The business location change was for The Camp House, a coffeehouse owned and operated as part of The Mission Chattanooga, a local church. Private events, including music performances, also take place at the venue. The Camp House raised over $32,000 through a crowdfunding campaign on Causeway. Matt Busby, Director of The Camp House, educated us on donation crowdfunding through a non-profit platform.
The new business concept and capital raise was for Treetop Hideaways (a/k/a, The Treehouse Project), a business that designed, built, and rents time in a luxury treehouse. The principals raised over $34,000 on Kickstarter. One of the two men behind this project, Enoch Elwell, offered us practical information about reward crowdfunding. Enoch also told attendees about his work with local entrepreneurs through CO.LAB and CO.STARTERS.
In the last hour of the program, the three of us reflected on crowdfunding successes and failures and speculated about the future of crowdfunding (using their experiences and my research as touchstones). It was a wide-ranging discussion, filled with disparate tidbits of information on business formation, finance, and governance, as well as professional responsibility and the provision of practical, cost-sensitive legal advice. Both Matt and Enoch turned out to be great folks to talk to about business finance, choice of entity, and the role of lawyers in small business formation and operation. Their observations were thoughtful and sensible. I learned a lot from them, and participants (practitioners and students) also indicated that they learned a lot. Everyone had fun. It was pure business lawyer/law student joy on a Friday afternoon! :>)
For those who were not at the program on Friday and would have liked to have been there, all is not lost. We plan to post a recorded version of all three program segments here in a few weeks. Continuing legal education credit will be available in Tennessee for viewing the online recording, upon completion of the test provided and payment of the applicable fee.
Thursday, September 10, 2015
Transactions: The Tennessee Journal of Business Law is sponsoring a continuing legal education program on the afternoon of Friday, September 18 entitled "Crowdfunding: The Basics." If you will be in or near Knoxville at the end of next week (maybe because you're arriving early for a certain football game on Saturday night versus Western Carolina . . . ), come on over and check it out. I am presenting for the introductory session. The second session will feature entrepreneurs from two local (Chattanooga-based) crowdfunded social enterprises, and the third session will be a discussion among the three of us about successful and unsuccessful crowdfunding efforts.
I am excited to be able to participate in this program with local entrepreneurs and have the opportunity to talk to them about the future of crowdfunding. I will post important out-takes from the program in the future. I assume there will be a number of them . . . .
Wednesday, September 9, 2015
A while back, the CLS Blue Sky Blog featured a post by Michael Peregrine on an article authored by Delaware Supreme Court Chief Justice Leo Strine (Documenting The Deal: How Quality Control and Candor Can Improve Boardroom Decision-making and Reduce the Litigation Target Zone, 70 Bus. Law. 679 (2015)) offering pragmatic advice to corporate directors in deal-oriented decision making. Michael's post summarizes points made by Justice Strine in his article, including (of particular importance to legal counsel) those set forth below.
- "Counsel can play an important role in assuring the engagement of the strongest possible independent financial advisor, and structuring the engagement to confirm the provision of the full breadth of deal-related financial advice to the board; not simply the delivery of a fairness opinion or similar document."
- "[I]n the M&A process, it is critical to be clear in the minutes themselves about what method is being used, and why."
- "Lawyers and governance support personnel should be particularly attentive to documenting in meeting minutes the advice provided by financial advisors about critical fairness considerations or other transaction terms, and the directors’ reaction to that advice."
- "[P]laintiffs’ lawyers are showing an increasing interest in seeking discovery of electronic information that may evidence the attentiveness of individual directors to materials posted on the board portal."
Michael concludes by noting the thrust of Justice Strine's points--that "a more thoughtful approach to the fundamental elements of the M&A process will enhance exercise of business judgment by disinterested board members, and their ability to rely on the advice of impartial experts." All of the points made reflect observations of the Chief Justice emanating from Delaware jurisprudence. Michael also notes that the points made by Justice Strine have application to decision making in other forms of business association as well as the corporation.
I could not agree more with the thesis of the post and the article. Maybe it's just my self-centered, egotistical, former-M&A-lawyer self talking, but good lawyering can make a difference in M&A deals and the (seemingly inevitable) litigation that accompanies them. I wrote about this in my article, A More Critical Use of Fairness Opinions as a Practical Approach to the Behavioral Economics of Mergers and Acquisitions, commenting on Don Langevoort's article, The Behavioral Economics of Mergers and Acquisitions. We should be teaching this in the classroom as we frame the lawyer's role in M&A transactions. I use a quote from Steve Bainbridge to introduce this matter to my Business Associations, Corporate Finance, and Cross-Border M&A students:
Successful transactional lawyers build their practice by perceptibly adding value to their clients’ transactions. From this perspective, the education of a transactional lawyer is a matter of learning where the value in a given transaction comes from and how the lawyer might add even more value to the deal.
Stephen M. Bainbridge, Mergers and Acquisitions 4 (2003). Great stuff, imv. I am sure this quote or one like it is in the current version of this book somewhere, too. But I do not have that with me as I write this. Perhaps if Steve reads this he will add the current cite to the comments . . . ?
At any rate, I want to make a pitch for highlighting the role of the lawyer in guiding the client through the legal minefields--territory that only we can help clients navigate most efficaciously. As business law educators, we have a podium that enables us to do this with law students who are lawyers-in-training about to emerge from the cocoon-like academic environment into the cold, cruel world in which fiduciary duty (derivative and direct) and securities class action litigation is around every transactional corner. Let's give them some pointers on why and how to take on this task!