Monday, August 22, 2016
We are now more than three months into the Title III crowdfunding experiment. I have been wanting to get back to posting on Title III crowdfunding since my "LIVE" post back in May, but so much other fun stuff has been going on! So, to make me feel a bit better on that point, I will share some current crowdfunding data with you all in this post based on publicly available information obtained from a Westlaw search performed yesterday (Sunday, August 21, 2016). [Note to the powers that be at the SEC: EDGAR makes it hard to find the aggregated set of Form C filings unless you are collecting data on an ongoing basis. I hope that changes as EDGAR continues to improve . . . .]
At the outset, I will note that others have offered their own reports on Title III crowdfunding since I last posted (including here, here, and here). These reports offer some nice summaries. This post offers a less comprehensive data dump focusing in on completed offerings and withdrawn offerings. At the end, I offer some limited observations from the information provided here about crowdfunding as a small-business capital-raising alternative, the need for EDGAR adjustments, inferences about the success of Title III crowdfunded offerings, and platform disclosure about withdrawn offerings.
First, however, the top-level Westlaw-based summary:
Total Form C filings: 85 (275 filings show on Westlaw, but only 85 are non-exhibit filings representing distinct offerings)
Total Form C/A filings (amendments, including exhibit filings): 153
Total Form C-U filings (updates): 4
Total Form C-W filings (withdrawals): 2
The remainder of this post takes a shallow dive into the updates and withdrawals. Filings in each case are presented in reverse chronological order by filing date. All referenced dates are in 2016. Issuer names are copied from filings and may not be the actual legal names of the entities.
Wednesday, August 17, 2016
If it is true that “a good thing cannot last forever,” the recent turn of events concerning appraisal arbitrage in Delaware may be a proof point. A line of cases coming out of the Delaware Court of Chancery, namely In re Appraisal of Transkaryotic Therapies, Inc., No. CIV.A. 1554-CC (Del. Ch. May 2, 2007), In re Ancestry.Com, Inc., No. CV 8173-VCG (Del. Ch. Jan. 5, 2015), and Merion Capital LP v. BMC Software, Inc., No. CV 8900-VCG (Del. Ch. Jan. 5, 2015), have made one point clear: courts impose no affirmative evidence that each specific share of stock was not voted in favor of the merger—a “share-tracing” requirement. Despite this “green light” for hedge funds engaging in appraisal arbitrage, the latest case law and legislation identify some new limitations.
What Is Appraisal Arbitrage?
Under § 262 of the Delaware General Corporation Law (DGCL), a shareholder in a corporation (usually privately-held) that disagrees with a proposed plan of merger can seek appraisal from the Court of Chancery for the fair value of their shares after approval of the merger by a majority of shareholders. The appraisal-seeking shareholder, however, must not have voted in favor of the merger. Section 262, nevertheless, has been used mainly by hedge funds in a popular practice called appraisal arbitrage, the purchasing of shares in a corporation after announcement of a merger for the sole purpose of bringing an appraisal suit against the corporation. Investors do this in hopes that the court determines a fair value of the shares that is a higher price than the merger price for shares.
In Using the Absurdity Principle & Other Strategies Against Appraisal Arbitrage by Hedge Funds, I outline how this practice is problematic for merging corporations. Not only can appraisal demands lead to 200–300% premiums for investors, assets in leveraged buyouts already tied up in financing the merger create an even heavier strain on liquidating assets for cash to fund appraisal demands. Additionally, if such restraints are too burdensome due to an unusually high demand of appraisal by arbitrageurs seeking investment returns, the merger can be completely terminated under “appraisal conditions”—a contractual countermeasure giving potential buyers a way out of the merger if a threshold percentage of shares seeking appraisal rights is exceeded. The article also identifies some creative solutions that can be effected by the judiciary or parties to and affected by a merger in absence of judicial and legislative action, and it evaluates the consequences of unobstructed appraisal arbitrage.
The Issue Is the “Fungible Bulk” of Modern Trading Practices
In the leading case, Transkaryotic, counsel for a defending corporation argued that compliance with § 262 required shareholders seeking appraisal prove that each of its specific shares was not voted in favor of the merger. The court pushed back against this share-tracing requirement and held that a plain language interpretation of § 262 requires no showing that specific shares were not voted in favor of the merger, but only requires that the current holder did not vote the shares in favor of the merger. The court noted that even if it imposed such a requirement, neither party could meet it because of the way modern trading practices occur.
August 17, 2016 in Anne Tucker, Business Associations, Case Law, Corporate Finance, Corporate Governance, Corporations, Delaware, Financial Markets, Private Equity, Shareholders | Permalink | Comments (0)
Monday, August 1, 2016
I was recently invited to write a short piece on crowdfunding and investor protection for a special issue of one of the publications of the CESifo Group Munich, the CESifo DICE Report--"a quarterly, English-language journal featuring articles on institutional regulations and economic policy measures that offer country comparative analyses." The group of authors for this publication (present company excluded) was truly impressive, and I have enjoyed reading their submissions. My contribution is published here on the CESifo website and here on SSRN, for those who care to look it over.
I did not hesitate to accept the CESifo Group's invitation to publish this paper, even though it is not primary scholarship and the deadline was tight for me given other professional obligations. (The editors did allow me to negotiate a bit on the timing, however.) The purpose of my post today is to explain why I decided to take this opportunity. With the limited time that we all have to produce research papers, why would I invest in this kind of an "extra" publication--one that is not likely to get me full scholarly credit (whatever that may mean) in a critical assessment of my body of work? Here are four reasons why I value this kind of project (if I can fit it in with my primary professional obligations).
- A publication with an interdisciplinary international research group puts a scholar's name and pre-existing scholarship (some of which typically is cited in the piece) in front of a new audience.
- A short, summary research paper of this kind offers the opportunity to synthesize or re-synthesize ideas from prior research and writing--a skill that (in my experience) improves with practice and is useful in other writing as well as in teaching.
- The reductive, focused writing process may reveal fresh insights, and these may lead to new research, writing, or teaching.
- Leveraging prior research by using it for multiple, distinct projects is efficient--and smart.
You may or may not agree with these reasons. You may have other reasons for publishing this kind of work--or reasons for not doing so. I invite you to add them in the comments. And if you are untenured, not yet fully promoted, or otherwise subject to adverse employment action relating to scholarship activity, you'll likely want to check with your dean and trusted senior members of your faculty (including any associate dean for faculty development) before accepting a publication invitation of this kind. Each institution honors these "extra" publications differently . . . .
Tuesday, June 28, 2016
SEC Chair Mary Jo White yesterday presented the keynote address, for the International Corporate Governance Network Annual Conference, "Focusing the Lens of Disclosure to Set the Path Forward on Board Diversity, Non-GAAP, and Sustainability." The full speech is available here.
In reading the speech, I found that I was talking to myself at various spots (I do that from time to time), so I thought I'd turn those thoughts into an annotated version of the speech. In the excerpt below, I have added my comments in brackets and italics. These are my initial thoughts to the speech, and I will continue to think these ideas through to see if my impression evolves. Overall, as is often the case with financial and other regulation, I found myself agreeing with many of the goals, but questioning whether the proposed methods were the right way to achieve the goals. Here's my initial take:
June 28, 2016 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Securities Regulation, Shareholders, Social Enterprise | Permalink | Comments (1)
Monday, June 27, 2016
I am still at Berle VIII with Haskell Murray and Anne Tucker. One more day of my June Scholarship and Teaching Tour to go--and I have a final presentation to do. Then, back to Knoxville to stay until late in July. Whew!
As you may recall or know, my Berle appearance this week follows closely on the heels of a talk on the same work (on corporate purpose and litigation risk in publicly held U.S. benefit corporations) that I made at last week's 2016 National Business Law Scholars conference. While I am thinking about this conference, please join me in saving the date for the next one: the 2017 National Business Law Scholars conference. Next year's conference will be held June 8-9 at The University of Utah S. J. Quinney College of Law, with Jeff Schwartz hosting. I will post more information and the call for papers, etc. once I have it.
June 27, 2016 in Anne Tucker, Business Associations, Conferences, Corporate Finance, Corporate Governance, Corporate Personality, Corporations, CSR, Haskell Murray, Joan Heminway, Research/Scholarhip, Teaching | Permalink | Comments (0)
Saturday, June 11, 2016
A colleague sent me a link to a White House blog post focusing on Title III of the Jumpstart Our Business Startups Act (JOBS Act), known as the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act (CROWDFUND Act). The main theme of the blog post, entitled The Promise of Crowdfunding and American Innovation, is stated in its summary: ''Crowdfunding' rule makes it possible for entrepreneurs across the country to raise small-dollar investments from ordinary Americans." This much is true. And the post accurately notes that "previous forms of crowdfunding" also already did this.
But the post goes on to extol the virtues of the CROWDFUND Act, which offers (among other things) a registration exemption for investment (or securities) crowdfunding--a very special type of crowdfunding involving the offer or sale of debt, equity, investment contracts, or other securities. Or at least the blog post tries to extol the virtues of the CROWDFUND Act. I am not buying it. In fact, the post doesn't come up with much of substance to praise . . . .
The coauthors focus a key paragraph on explaining why the CROWDFUND Act is heavy on investor protection provisions. But they do not talk about the costs of the legislation in relation to its potential benefits, except in the most superficial way--mentioning "risks" without classifying them and outlining the "multiple layers of investor protections." Although it was written before the final Securities and Exchange Commission rules were adopted under the CROWDFUND Act, my article for the Kentucky Law Journal offers a more detailed picture of benefits and costs and shares my view that the costs are likely to outweigh the benefits for many market participants.
Maybe sensing this (and the possible lack of success of the CROWDFUND Act that may result from this imbalance), the coauthors of the White House blog post offer the following:
One encouraging recent sign is not only the launch of many new regulated crowdfunding platforms, but also the growing ecosystem of “startups helping startups” to provide services for this new marketplace—making it easier for entrepreneurs to fulfill disclosure requirements, verify investor credentials, educate investors, and more. Over time, these new tools may increase transparency and provide strong accountability not only for “the crowd,” but also for the “family and friends” that have long served as entrepreneurs’ first source of seed capital.
This is a super effect of crowdfunding generally and of securities crowdfunding under the CROWDFUND Act specifically--the emergence of new services and market participants to support crowdfunding and small capital raising more generally. I predicted this in my first article on crowdfunding (co-authored with one of my former students) : "Because '[c]rowdfunding is a market of and for the participants,' some traditional financial intermediaries may be shut out of this sector of the capital formation process. No doubt, however, new support roles for crowdfunding will develop as the industry matures." [(p. 930, n.263) (citations omitted)] But these market innovations would be more pronounced, imv, if the CROWDFUND Act provided participants with a more balanced set of costs for the benefits provided. As the blog post notes, "it’s still a fact that not every entrepreneur has access to needed capital." More can be done to solve this problem with a registration exemption that allows for small capital raising--funding at well less than the $1 million level set under the CROWDFUND Act--at less cost.
The blog post concludes with more platitudes. ("America’s entrepreneurs are our engines of economic growth, innovation, and job creation . . . .") Really, this blog post is a bit of a puff piece--manifesting both good marketing (for those who read and believe it) and overoptimism.
But then again, what did I expect from a blog post put out by White House staff? I suppose, given the President's support for the CROWDFUND Act (and the JOBS Act overall--which the coauthors also praise more generally in a paragraph of the post), I should expect the White House to promote the use of the CROWDFUND Act through these kinds of public relations messages. OK. I get that. Nevertheless, I admit to being disappointed that more is not being done in the Executive Branch and elsewhere to point out the shortcomings of the CROWDFUND Act and fine tune the regulation of securities crowdfunding so that it can have its maximum positive impact on business and project innovators and investors alike. Instead, I fear that well intending proponents are over-promoting the CROWDFUND Act, which may ultimately sour folks on securities crowdfunding as a capital raising alternative if few are able to take advantage of the current regulatory exemptions. We'll see. I hope I am wrong in worrying about this. Time will tell.
Monday, May 30, 2016
This year, my research and writing season has started off with a bang. While grading papers and exams earlier this month, I finished writing one symposium piece and first-round-edited another. Today, I will put the final touches on PowerPoint slides for a presentation I give the second week in June (submission is required today for those) and start working on slides for the presentation I will give Friday.
All of this sets into motion a summer concert conference, Barbri, and symposium tour that (somewhere along the line) got a bit complicated. Here are the cities and dates:
New Orleans, LA - June 2-5
Atlanta, GA - June 10-11
Nashville, TN - June 17
Chicago, IL - June 23-24
Seattle, WA - June 27
I know some of my co-bloggers are joining me along the way. I look forward to seeing them. Each week, I will keep you posted on current events as best I can while managing the research and writing and presentation preparations. The topics of my summer research and teaching run the gamut from insider trading (through by-law drafting, agency, unincorporated business associations, personal property, and benefit corporations) to crowdfunding. A nice round lot.
This coming week, I will be at the Law and Society Association annual conference. My presentation at this conference relates to an early-stage project on U.S. insider trading cases. The title and abstract for the project and the currently envisioned initial paper (which I would, of course, already change in a number of ways) are as follows:
May 30, 2016 in Business Associations, Conferences, Corporate Finance, Corporate Governance, Corporations, Joan Heminway, Research/Scholarhip, Securities Regulation, Social Enterprise, Teaching, White Collar Crime, Writing | Permalink | Comments (0)
Monday, May 23, 2016
Well, given that I just spent several hours constructing a somewhat lengthy post that I apparently lost (aargh!), I will keep this relatively short.
This summer, I am working on a benefit corporation project for the Annual Adolf A. Berle Symposium on Corporation, Law and Society (Berle VIII) to be held in Seattle next month. In that connection, I have been thinking about litigation risk in public benefit corporations, which has led me to consider the specific litigation risks incident to mergers and acquisitions ("M&A"). I find myself wondering whether anyone has yet done a benefit corporation M&A transaction and, if so, whether a checklist might have been created for the transaction that I could look at. I am especially interested in understanding the board decision-making aspects of a benefit corporation M&A transaction. (Haskell, maybe you know of something on this . . . ?)
Preliminarily, I note that fairness opinions should not carry as much weight in the benefit corporation M&A approval context, since they only speak about fairness "from a financial point of view." Benefit corporation boards of directors must consider not only the pecuniary interests of shareholders in managing the firm, but also the firm's articulated public benefit or benefits (which is/are set forth in its charter). Will legal counsel pick up the slack and render an opinion that the board's consideration of the public benefit(s) complies with law? What diligence would be required to give that opinion? I assume in the absence of interpretive decisional law, any opinion of that kind would have to be qualified. I also assume that legal counsel will not readily volunteer to give this kind of opinion.
However, even in the absence of an opinion, legal counsel will have to offer advice on the matter, since the board of a benefit corporation has the legal obligation to manage the firm consistent with its public benefit(s) in any case. Moreover, M&A agreements typically include representations (on transactional consents, approvals, and governance/legal compliance) affirming that the requisite consents and approvals for the transaction have been obtained and that the agreement and consummation of the transactions contemplated by it do not violate the firm's charter or applicable law. Legal counsel will be responsible for counseling the client on these contractual provisions.
At first blush, the embedded issues strike me as somewhat complex and fact-dependent. Important facts in this context include the precise language of the applicable statutory requirements, the nature of the firm's public benefit or benefits, the type of M&A transaction at issue and the structure of the transaction (including which entity survives in a merger), and the identity of the other party or parties to the transaction (especially whether, e.g., a merger partner is organized as a public benefit corporation or another form of entity). As I continue to ponder these and related matters in the benefit corporation M&A setting, I invite your comments on any of this--or on broader aspects of litigation risk in the public benefit corporation environment.
Tuesday, May 3, 2016
What factors generate a healthy secondary market in securities? That is my question for this week. I have found myself struggling with this question since I was first called by a reporter writing a story for The Wall Street Journal about a work-in-process written by one of our colleagues, Seth Oranburg (a Visiting Assistant Professor at Chicago-Kent College of Law). The article came out yesterday (and I was quoted in it--glory be!), but the puzzle remains . . . .
Secondary securities markets have been hot topics for a while now. I followed with interest Usha Rodrigues's work on this paper, for example, which came out in 2013. Yet, that project focused on markets involving only accredited investors.
Seth's idea, however, is intended to prime a different kind of secondary market in securities: a trading platform for securities bought by the average Joe (or Joan!) non-accredited investor in a crowdfunded offering (specifically, an offering conducted under the CROWDFUND Act, Title III of the JOBS Act). [Note: I will not bother to unpack the statutory acronyms used in that last parenthetical expression, since I know most of our readers understand them well. But please comment below or message me if you need help on that.] Leaving aside one's view of the need for or desirability of a secondary market for securities acquired through crowdfunding (which depends, at least to some extent, on the type of issuer, investment instrument, and investor involved in the crowdfunding), the idea of fostering a secondary securities market is intriguing. What, other than willing buyers and sellers and a facilitating (or at least non-hostile) regulatory environment, makes a trading market in securities?
Wednesday, April 20, 2016
As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the US Commodity Futures Trading Commission (CFTC) promulgated rules to regulate the swaps marketplace, securities trades that were previously unregulated and a contributing factor in the 2008 financial crisis. The CFTC oversees the commodity derivatives markets in the USA and has dramatically increased regulations and enforcement as a result of Dodd-Frank. As of January 2016, the CFTC finalized Dodd-Frank Rules exemptive orders and guidance actions. Commodity derivatives market participants, whether acting as a commercial hedger, speculator, trading venue, intermediary or adviser, face increased regulatory requirements including:
- Swap Dealer Regulation such as De Minimis Exceptions, new capital and margin requirements to lower risk in the system, heightened business conduct standards to lower risk and promote market integrity, and increase record-keeping and reporting requirements so that regulators can police the markets.
- Derivative Transparency and Pricing such as regulating exchanges of standardized derivatives to increase competition, information and arbitrage on price.
- Establishing Derivative Clearinghouses for standardized derivatives to regulate and lower counter party risks
The full list of CFTC Dodd Frank rulemaking areas is available here. In conjunction with the new regulations, the CFTC has stepped up enforcement actions according to a 2015 CFTC enforcement report detailing 69 enforcement actions for the year. Through these enforcement actions, the CFTC collected $2.8 billion in fines (outpacing SEC collections of $2 billion with a much larger agency budget and enforcement docket).
Tuesday, March 22, 2016
Jet lag prevented me from posting this yesterday. (Yes, I am scheduled to be the BLPB every-Monday blogger going forward.) But at least I am awake enough now to post a bit more on the 7th International Conference on Innovative Trends Emerging in Microfinance (ITEM 7 Conference) I attended last week in Shanghai, China. My initial post on Wednesday provided some information on Chinese microfinance and the initial day of the conference. This week, my post focuses on definitional questions that I have been pondering relating to my participation in this series of conferences. Specifically, I have been sorting through the relationship between microfinance and crowdfunding. My understanding continues to evolve as I become more familiar with the literature on and practice of microfinance internationally.
At the conference, one of the participants noted that while microfinance and crowdfunding appear to be mutually reinforcing, they still do not enjoy comfortable relations in scholarship and practice. After weighing that statement for a moment, I had to agree. I actually have been personally struggling with the nature of the relationship between the two for a few years now. (I often wonder whether folks like co-blogger Haskell Murray who commonly work in the social enterprise space have this issue in talking about the relationship between social enterprise and corporate social responsibility . . . .)
Two years ago at the ITEM 5 Conference, I posited that crowdfunding could be a vehicle for microfinance. The establishment of this point required defining both microfinance and crowdfunding--in each case, no small task. To enable the audience to understand my observation, I used a broad definition of microfinance that focuses on financial inclusion (like the one found here). I believed after my presentation that I had made the point well enough.
Yet, something still niggled at me after the presentation and conference were long gone. I kept feeling as if I had inserted a square peg into a round hole. Something was just a bit off. Part of the issue is, no doubt, the fact that my observation was incomplete. Microfinance is bigger than crowdfunding, and not all crowdfunding is microfinance, even under a broad definition. So, picture a venn diagram like the one below.
The red point of intersection illustrates crowdfunding's place as a means of conducting microfinance. This leaves part of microfinance to be handled through other types of financing (e.g., microcredit). It also leaves part of crowdfunding to other capital-raising uses. This conception of the relatonship between microfinance and crowdfunding is undoubtedly more complete.
The importance to microfinance of the non-microfinance part of crowdfunding was confirmed at our microfinance site visit last week in Shanghai. Our host for the visit explained, in response to my question about the relationship of microfinance to crowdfunding in China, that crowdfunding typically is seen as an alternative to, rather than a means of, microfinance in China. He noted that equity crowdfunding is uncommon (although growing) in Chinese small business finance overall because the number of shareholders of Chinese limited liability companies is statutorily capped. Specifically, Article 20 of the Companies Law of the People's Republic of China provides that "[a] limited liability company shall be jointly invested in and incorporated by not less than two and not more than fifty shareholders." I made a mental "note to files" that crowdfunding might get crowded out of microfinance or other types of financing--intentionally or unintentionally--by positive regulation.
I invite any readers who are more familiar with world-wide microfinance than I to comment further on its relationship to crowdfunding. Do I have the principal story right, in your view, based on your experience? Can you provide examples from your work or life that help me to see new aspects of the relationship between the two? I invite any related thoughts.
Wednesday, March 16, 2016
Between jet lag and the comprehensive conference proceedings and activities here in Shanghai, it’s all I can do to stay awake to finish this post . . . . But I am not complaining. Shanghai is a wonderful city, and the 7th International Conference on Innovative Trends Emerging in Microfinance (ITEM 7 Conference) has been a super experience so far.
Given my sleep-deprived state, I will just share with you here today a few key outtakes from the presentations we had yesterday (at a pre-conference site visit to the largest microfinance lender in Shanghai) and earlier today (at the conference itself) on microfinance in China. Here goes.
- Chinese microfinance is not really microfinance, in major part. It is SME (small and medium enterprise) lending. MSE loans are loans up to 30,000,000 Yuan RMB (about $4,600,000), and the average single loan amount for MSE lending is about 5,000,000 Yuan RMB (just under $770,000).
- Unlike those in archetypal microfinance and those involved in actual micro-credit lending transactions in many other countries, borrowers in Chinese microfinance lending (such as it is) are largely men rather than women.
- Despite these and other marked differences between Chinese microfinance and global microfinance, Chinese microfinance data does not affect global studies of microfinance in a statistically significant way. However, Chinese microfinance data does influence study results for the East Asia and Pacific region to a statistically significant degree.
Most of this was “new news” to me, given that Chinese microfinance is not at the center of my work. I am sure that I will know even more about it by the end of the conference tomorrow. In the mean time, however, I also enjoyed presentations today about:
- the willingness of rural Ethiopian farmers to pay for insurance to cover the risks of their business (given by an Italian scholar, for which I was an assigned discussant);
- a rural microfinance program in Nigeria (given by a research fellow affiliated with the Central Bank of Nigeria);
- gender-based microfinance lending in Canada (given by a faculty member/Ph.D. student at the University of New Brunswick in Canada);
- the utility of employing joint use of credit scoring and profit scoring in microfinance (given by a Ph.D. student currently serving as the research associate of the Microfinance Chair at the Burgundy School of Business in Dijon, France);
- the relationship between financial and social objectives of microfinance (given by a Ph.D. student from the Centre for European Research in Microfinance at the Université de Mons in Belgium); and
- Participants’ perceptions of two separate microlending programs in Australia, one involving no-interest microloans and the other offering matched savings (given by a Ph.D. student from the University of Queensland in Australia).
I speak tomorrow on crowdfunding intermediation and litigation risk and comment on a paper on crowdfunding and corporate governance. Fingers crossed that I can stay awake long enough to give my presentation . . . . :>)
Monday, February 22, 2016
“[T]he effective date of a registration statement shall be the twentieth day after the filing thereof.” That statement, in section 8(a) of the Securities Act of 1933, makes the process seem so reassuringly quick and simple. If I want to offer securities to the public, I file a registration statement with the SEC and, less than three weeks later, I’m ready to go. But, as every securities lawyer knows, it isn’t really that easy.
It can take months for the registration statement in an IPO to become effective. The statutory deadline is circumvented through the use of a delaying amendment, a statement in the registration statement that automatically extends the 20-day period until the SEC has finished its review. See Securities Act Rule 473, 17 C.F.R. § 230.473.
But wouldn’t it be so much more conducive to capital formation if there really was a hard 20-day deadline? I understand that the SEC doesn’t have the staff to complete a full review in that time frame, but it would force them to focus on the important disclosure issues rather than some of the trivialities one sees in the current comment letters.
I’d like to see someone test that automatic 20-day effectiveness—file a complete registration statement without the delaying amendment and wait to see what happens. The issuer would, of course, be stuck with a price set 20 days before sale, because section 8(a) provides that amending the registration statement resets the 20-day clock. But that’s not the biggest problem.
The biggest problem is that the SEC would undoubtedly seek a stop order under section 8(d) of the Act. It’s only supposed to do that if it appears the registration statement contains a materially false statement or omits a material fact required to be included or necessary to keep the registration statement from being misleading. But I have no doubt that the SEC staff would argue that something in the registration statement was materially misleading, no matter how complete and carefully crafted it was.
Still, it would be nice to see someone try, just to see the SEC scramble to deal with such an unprecedented lack of obeisance. Unfortunately, no one would risk it—unless . . . Mr. Cuban?
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.)