Reverse Mergers

SEC Veteran Returns to Run All-Important Division of Corporation Finance

Reprinted from our sister blog, www.reversemergerblog.com.

Meredith Cross, an SEC staffer through the 1990s, has been selected by Chairman Mary Schapiro to return and run the all-important Division of Corporation Finance. “Corp Fin,” as it is known, oversees every public company’s disclosure.

It took a little longer than expected for this spot to be filled. Ms. Cross has a strong background, having been a lawyer in Corp Fin’s chief counsel’s office, and worked her way up to Chief Counsel. She also worked in the Office of Small Business, which bodes well for those of us focusing on that area. Sometimes we find that the backgrounds of Corp Fin directors did not provide them with sufficient ability to truly understand the unique needs of smaller public companies.

Now that this important role has been filled, we hope the Division can begin to turn its attention to matters that have been on the table for awhile, including our request for the SEC to consider reversing the ill-advised “evergreen” requirement limiting shareholders of former shell companies in their ability to sell shares without registration.

Best of luck Ms. Cross.

“Crowd Funding” Starts Gaining Traction

I was a speaker on a panel sponsored by www.ibreakfast.com yesterday on “alternate funding sources.” Most of you know I have written a book on reverse mergers and other alternatives to traditional IPOs as a way to take a company public and help move it to the next level. In these difficult times, it is interesting to look at alternate ways to find capital and grow.

Several of the speakers are involved with websites where groups of investors or lenders individually agree to give some money to a company. One site, www.loanio.com, specializes in “peer lending.” As a lender you can go on and offer to lend as little as $50. If you are a borrower, you can set your terms and different lenders bid on the right to lend you the money. It’s a very cool idea. They have suspended operations while they get SEC approval of the securities they issue. But keep an eye on that one.

Another speaker does something similar with receivables at www.receivablesxchange.com. You upload your receivables and well qualified investors buy them, providing 80% of the face amount of the receivable immediately and the rest upon collection. The buyer gets about 1% per month on the money, and a small fee to the site. Much simpler than doing factoring or other ways to finance receivables. Very very interesting.

Thanks to my law colleague Larry Langs for helping arrange the talk.

Great Update on Securities Issues for Smaller Companies

Reprinted from our sister blog at www.reversemergerblog.com

I was again honored to be part of an amazing panel of prominent lawyers at the American Bar Association spring meeting of the Section of Business Law at the spanking new convention center in Vancouver. Here are a few interesting highlights:

• SEC Director of Small Business Policy Gerald Laporte indicated it is not likely there will be any further delay in implementing Sarbanes-Oxley Section 404 compliance for smaller public companies.
• The SEC is pushing the “compliance and disclosure interpretations” (CD&Is) as a place where previously interpretations mixed with no-action letters and the like. Keep an eye on these.
• One CD&I makes clear, for example, that vested unexercised stock options can be included in net worth to determine accredited status.
• Mr. Laporte addressed the fact that there may be some technical amendments to the smaller public company reporting regime rulemaking that eliminated Regulation S-B. Included in this might be clarifying that a no revenue company (such as a shell company) can include a “plan of operation” rather than full management’s discussion and analysis section. But he all but said it appears you can do it based on existing regulations, but they might want to clarify.
• A senior PCAOB representative gave a good tip for issuers: in your audit engagement, have the auditor promise to infom the company if its engagement is ever reviewed by the PCAOB. Without that they have no obligation to tell the company.
• Mary Schapiro of the SEC is not the biggest fan of IFRS (conforming all accounting standards to one).
• Update on Regulation D and pending proposal:
  • The effort on getting the 2007 proposal passed may have “run out of steam” according to Laporte. They are waiting to see what appetite Schapiro and other new commissioners have for finishing it.
  • Congress recently encouraged the SEC to address qualification standards for accredited investors in hedge funds, and since the SEC probably won’t single them out, it might be the impetus to finalize the Reg. D proposal.
  • The SEC Inspector General recently recommended reinstating the requirement that Form D be filed as a condition to receiving the Reg. D exemption. Staff is not thrilled.
  • It will take awhile before “one stop” filing of Form D with SEC and the states will be accepted (if ever) and implemented. There is a consultant working on it but that seems to be about it. For now, it’s still electronic with SEC and paper with the states.
  • Changes to new Form D: when is first sale? Seems to suggest if you take someone’s money and they give it to you irrevocably, even if not closed, that it counts as a sale and the Form D has to be filed within 15 days thereafter. Problem is whether you then have to pre-file in states.

Thanks to moderator and friend Lee Liebolt for arranging this very interesting and dynamic panel.

Whither the Small Caps?

I am headed to Vancouver to speak at the American Bar Association’s spring meeting on “hot securities law issues for small companies.” As many of you know, the bulk of my law practice involves representing small and middle market companies, both public and private, in a variety of transactions and matters. I help take companies public through nontraditional means such as reverse mergers, which is the subject of my 2006 book. Thus, I care a great deal about the state of the small and midcap markets, representing many thousands of smaller public companies, any one of which could be the next Microsoft or Google.

Without a lot of data, so far the smallcap stocks have been performing as you might expect in the latest craziness. They tend to drop faster when things are bad and rise faster when things are good compared with the largecap stocks. They did so in the crash this past fall and rose faster than the Dow in the last month or so.

So what does this mean? American investors still believe in the longterm potential rewards to be had in betting on entrepreneurial growth companies. It is also good whenever the market behalves pretty much as expected, which brings less uncertainty.

It also means that financings and other activities for these companies, that had come to a virtual halt, could indeed commence, and have done so a bit already. Anecdotally I can tell you that we are looking at a number of potential projects that did not exist even a month ago.

Signs of hope in a Spring that still frustratingly feels like Winter!

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