President Pushes for Reg A Increase

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President Obama is throwing his political weight behind a number of entrepreneur-friendly initiatives, including boosting the existing $5 million Reg A offering limit 10 fold to a total $50 million. According to the Washington Post:

One of the Obama provisions would increase the amount of money that can be raised through small public offerings that don’t require companies to undergo an extensive Securities and Exchange Commission registration process. The limit for such “mini public offerings” would increase from $5 million a year to $50 million.

via Obama to ask Congress for small business tax breaks, investment incentives.

This move is not surprising, as Reg A’s existing limit has been the subject of much prior discussion. President Obama’s suggested upward revision to $50 million, however, is aggressive on the upward side, and will likely be welcomed by a Congress anxious to help out ailing small businesses.

NASAA Proposes a Model Crowdfunding Exemption

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I wrote earlier this month that the urgent push for crowdfunding legislation has waned in the Senate. Well, it appears that the North American Securities Administrators Association (the “NASAA”) is using this window of opportunity to roll out a proposal of its own. NASAA’s proposal joins H.R. 2930, S. 1791, and S. 1970 as another possible alternative for handling crowdfunding under state and federal securities laws.

NASAA claims that its proposal represents a “compromise” between the competing federal proposals. Highlights of an early draft being circulated among NASAA members include the following key points:

  • A limit on the aggregate offering amount of $500,000 over any 12-month period;
  • A $1000 cap on the amount of investment raised from any single investor;
  • The use of an intermediary that, in turn, is registered as a broker-dealer (albeit one freed of certain restrictions);
  • A notice to be filed prior to the offering with the securities regulator of the issuer’s home state;
  • A disclosure document that informs investors about the issuer, the offering, and various risk factors; and
  • A ban on general advertising and investor communications, apart from reference to, and use of, an intermediary’s web site.

NASAA’s proposal, obviously, advocates retaining state authority to regulate securities offerings made pursuant to its proposed exemption. This is a significant difference between it and both H.R. 2930 and S. 1791, and will no doubt generate significant debate. But, as the proposal itself acknowledges, it is not viable without federal implementing legislation of some kind. A significant question therefore remains whether any such federal legislation will carve out an exemption that allows states to retain the control that NASAA’s proposal contemplates.

Stock Options Without Elaborate Stock Option Plans

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A colleague asks, can a closely held company in the State of Washington issue stock options to just a few employees without preparing and approving the kind of complex stock option plan that is typical of a large public company? Can the company instead simply enter into separate stock option agreements with each individual employee?

The short answer: Absolutely, but the Company will need to (1) put the option contracts into writing, (2) provide copies to securities regulators in the State of Washington 30 days ahead of time, and (3) ensure that there are enough shares authorized in its Articles to fulfill the options when exercised.

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Soliciting an End to the Ban on General Solicitations

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Jim Hamilton, the author of a leading blog on securities regulation, posts today on a petition by the Managed Funds Association (the “MFA”) asking the SEC to amend Regulation D, which would end a ban on “general solicitation or general advertising with respect to private funds.” Jim Hamilton writes:

[E]liminating the ban would reduce the cost of capital for private funds and lead to greater efficiency in private offerings, said the MFA, which in turn would facilitate the allocation of capital and investment by private funds throughout the financial markets. Private fund managers face significant costs in seeking to comply with the ban due to its broad application, the limited scope of existing guidance, and the severe consequences of an inadvertent violation. Managers expend considerable time and resources when making any sort of communications or participating in industry events, and often take a conservative approach and refrain from such activity. These effects impose administrative burdens for managers and unnecessarily limit communications with potential investors, increasing the cost of obtaining capital for private funds.

via Jim Hamilton

The Petition is in addition to pending House and Senate legislation that seeks, in effect, to achieve the same outcome, albeit by legislation rather than by agency rule making. Interestingly, however, today’s petition is made only on behalf of private investment funds (i.e., hedge funds), and apparently is not intended for application beyond “private funds.” By comparison, the proposed legislation, if passed, would have far more comprehensive effect.

Section 83(b) Mechanics

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This article is a follow-up to a previous one that introduced Section 83(b), a provision of the Internal Revenue Code that rescues individuals from having to pay unexpectedly high income taxes on shares of stock granted subject to vesting.

To begin, the most important thing anyone needs to know about making the election is that Section 83(b) is unforgiving in the extreme: An election not made on time is the same thing as not making the election at all. There are no exceptions.

(As an aside, because of the severe consequences of missing the filing deadline, I highly recommend to my client companies that they implement a system for obtaining from those to whom they grant restricted stock a written and signed acknowledgment of having been informed about the need to make an 83(b) election, if at all, within a short time period.)

So, how is this election actually made? Well, while the IRS is a forms-oriented agency, it does not have any special form for effecting an election under Section 83(b). Instead, in Publication 525, the IRS instructs taxpayers simply to prepare a “written statement” that contains the following information: Continue Reading

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