EQUITY CROWDFUNDING HAS FINALLY ARRIVED – SEC ADOPTS FINAL RULES ON CROWDFUNDING

On October 30, 2015, the Securities and Exchange Commission (“SEC”), in a 3-1 vote of the SEC Commissioners, approved final rules to adopt Regulation Crowdfunding, which sets forth the framework by which companies can “equity crowdfund” – sell small amounts of securities (typically for a small purchase price) to a large number of investors over the Internet. The final rules, which will become effective 180 days after they are published in the Federal Register, follow the SEC’s adoption of proposed rules in October 2013 (which we previously blogged about). The SEC’s proposed rules were widely criticized as unworkable and elicited more than 480 comment letters that raised a host of concerns regarding, among other things, the effectiveness of the proposed rules in promoting capital formation and protecting investors.

Issuers and investors, particularly in the startup community, have been abuzz about equity crowdfunding since the Jumpstart Our Business Startups Act (“JOBS Act”) was enacted in April 2012.  Title III of the JOBS Act added Section 4(a)(6) to the Securities Act of 1933 (the “Securities Act”) to provide an exemption for equity crowdfunding transactions from the registration requirements of the Securities Act.  After seeing the success of non-equity crowdfunding – the Kickstarter fundraising campaigns of Pebble (~$20M raised) and Pono (~$6M raised) come to mind – it is understandable why issuers and investors have placed so much hope in the promise of equity crowdfunding.  With the SEC’s final rules in place, equity crowdfunding, with its numerous limitations and requirements, will shortly become a reality.

Under the final rules, an issuer may raise up to $1 million in a 12-month period in a crowdfunding offering conducted via a single intermediary – either a broker-dealer or a funding portal registered with the SEC.  An issuer engaging in a crowdfunding offering must complete and file with the SEC a newly-created Form C (similar to the Form 1-A offering statement under Regulation A, but with fewer required disclosures), which will require the disclosure of certain business and financial information including  financial statements of the issuer. Depending on the amount sought in the crowdfunding offering and whether an issuer has previously conducted a crowdfunding offering, the final rules will require that an issuer provide audited or reviewed financial statements.  For example, an offering of more than $500,000 of securities will require reviewed financial statements unless the issuer is not a first time issuer, in which case audited financial statements will be required.

The final rules also limit the amount of funds that an individual investor may invest in all crowdfunding offerings over a 12-month period, based on an investor’s annual income and net worth. Interestingly, despite criticism on the workability of the investment limitations set forth in the proposed rules, the final rules have more stringent limitations than those included in the proposed rules.  An investor with either annual income or net worth less than $100,000 can invest up to 5 percent of the lesser of annual income or net worth, or $2,000, whichever is greater, every 12 months. An investor with both annual income and net worth greater than $100,000 can invest up to 10 percent of the lesser of annual income or net worth every 12 months, subject to a cap of $100,000 in a 12-month period.   One effect of the limits will be that crowdfunding issuers may end up with numerous investors providing small investments – for example, an issuer raising $1 million would have 500 shareholders if the $2,000 limitation applied to those investors.

Only time will tell whether the regulatory environment created by the final rules will allow equity crowdfunding to reach the heights envisioned by many proponents. Among other reasons, the costs and compliance burden for issuers and the potential returns to investors are difficult to forecast at this time.  Regardless, many issuers, especially startups, now have an additional tool to raise capital in the United States. A more detailed summary of the final rules is provided below.

Sales Limitations

The following sales limitations apply to a crowdfunding offering:

  • An eligible issuer (see below for a description of ineligible issuers) is permitted to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period. In addition, entities controlled by, or under common control, with the issuer are aggregated for purposes of determining compliance with the offering ceiling.
  • Individual investors, over the course of a 12-month period, are permitted to invest in the aggregate across all crowdfunding offerings up to:
    • If either their annual income or net worth is less than $100,000, then the greater of: (1) $2,000, or (2) 5% of the lesser of their annual income or net worth.
    • If both their annual income and net worth are equal to or more than $100,000, then 10% of the lesser of their annual income or net worth, subject to a cap of $100,000 in a 12-month period.
  • The JOBS Act requires that the SEC adjust the issuer sales limitation and investor investment limitations not less than every five years to account for changes in the CPI.

Ineligible Issuers

The following issuers are not eligible to utilize a crowdfunding offering:

  • Non-U.S. companies.
  • Reporting companies under the Securities Exchange Act of 1934 (the “Exchange Act”).
  • Certain investment companies.
  • Companies that are disqualified under Regulation Crowdfunding’s disqualification rules (i.e., bad actors).
  • Companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement (i.e., Form C).
  • Companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Disclosure Requirements

An issuer conducting a crowdfunding offering is required to file certain information with the SEC on new Form C and to provide this information to investors and the applicable crowdfunding portal facilitating the offering. Among other things, in its offering documents, the issuer is required to disclose:

  • Information about officers and directors as well as owners of 20 percent or more of the issuer;
  • A description of the issuer’s business and the use of proceeds from the offering;
  • The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the issuer will accept investments in excess of the target offering amount;
  • Certain related-party transactions;
  • A discussion of the issuer’s financial condition; and
  • Financial statements of the issuer that are, depending on the amount offered and sold during a 12-month period:
  • If $100,000 or less, based on information from the issuer’s tax returns and certified by the principal executive officer,
  • If more than $100,000 and but not more than $500,00, reviewed by an independent public accountant, and
  • If more than $500,000, audited by an independent auditor, except that an issuer engaging in a crowdfunding offering for the first time would be permitted to provide reviewed rather than audited financial statements.
  • In any case, if audited financial statements of the issuer are available, then they must be provided.

Issuers are required to amend the offering document during the offering period to reflect material changes and provide updates on the issuer’s progress toward reaching the target offering amount.

In addition, issuers relying on the Regulation Crowdfunding exemption are required to file an annual report with the SEC and provide it to investors.  The reporting requirements will continue until:

  • the issuer is required to file reports under the Exchange Act;
  • the issuer has filed at least one annual report and has fewer than 300 holders of record;
  • the issuer has filed at least three annual reports and has total assets that do not exceed $10 million;
  • the issuer or another party purchases or repurchases all of the securities issued pursuant to the crowdfunding exemption), including any payment in full of debt securities or any complete redemption of redeemable securities; or
  • the issuer liquidates or dissolves in accordance with state law.

Crowdfunding Platforms

Each crowdfunding offering must be conducted exclusively through a single platform operated by an “intermediary” which is either a registered broker or a funding portal – a new type of SEC registrant. The rules require that such an intermediary:

  • Provide investors with educational materials;
  • Take measures to reduce the risk of fraud;
  • Make available information about the issuer and the offering;
  • Provide communication channels to permit discussions about offerings on the platform; and
  • Facilitate the offer and sale of crowdfunded securities.

The rules also prohibit a crowdfunding portal from:

  • Offering investment advice or making recommendations;
  • Soliciting purchases, sales or offers to buy securities offered or displayed on its platform;
  • Compensating promoters and others for solicitations or based on the sale of securities; and
  • Holding, possessing, or handling investor funds or securities.

The final rules provide a safe harbor under which crowdfunding portals can engage in certain activities, consistent with these restrictions.

Miscellaneous Restrictions

Securities acquired in a crowdfunding offering are generally subject to a one year holding period before they can be resold, subject to certain exceptions. Holders of securities acquired in a crowdfunding offering do not count toward the threshold that requires an issuer to register its securities with the SEC under Section 12(g) of the Exchange Act if the issuer is current in its annual reporting obligation, retains the services of a registered transfer agent and has less than $25 million in assets.

Sec Proposes Anticipated Rules on Pay-Versus-Performance Disclosure

On April 29, 2015, the SEC, in a 3-2 vote of the SEC Commissioners, approved proposed rules (the “pay-versus-performance disclosure”) that would require an issuer to disclose the relationship between the issuer’s executive compensation and the issuer’s financial performance. The proposed rules would implement a disclosure obligation required under Section 953(a) of the Dodd-Frank Act. Chair White noted, in the SEC press release announcing the proposed rules, that the pay-versus-performance disclosure “would better inform shareholders and give them a new metric for assessing a company’s executive compensation relative to its financial performance.”

In particular, the proposed rules would amend Item 402 of Reg. S-K by adding a new Item 402(v) which would require issuers to disclose, in each proxy or information statement requiring executive compensation disclosure under Item 402 of Reg. S-K, the following:

  • the executive compensation “actually paid” to the issuer’s principal executive officer (“PEO”);
  • the executive compensation “actually paid” to the issuer’s named executive officers (“NEOs” ), expressed as an average for all such NEOs;
  • the issuer’s total shareholder return (“TSR” ); and
  • the TSR of a peer group of issuers.

Like all disclosures required under Item 402 of Reg. S-K, the pay-versus-performance disclosure would be subject to the say-on-pay advisory vote.

Compensation Actually Paid

Under the proposed rules, the executive compensation “actually paid” by an issuer means the total compensation for a particular executive disclosed in the summary compensation table adjusted by certain amounts related to pensions and equity awards. The adjusted disclosure represents an attempt by the SEC to reflect the compensation awarded to, or earned by, such executive officer in a particular year of service. In order to calculate the compensation “actually paid” to a particular executive officer, the total compensation disclosed for such executive officer in the summary compensation table would be adjusted to:

  • deduct the aggregate change in the actuarial present value of all defined benefit and actuarial pension plans reported in the Summary Compensation Table;
  • add back the actuarially determined service cost for services rendered by the executive officer during the applicable year;
  • exclude the grant date value of any stock and option awards granted during the applicable year that are subject to vesting; and
  • add back the value at vesting of stock and option awards that vested during the applicable year, computed in accordance with the fair value guidance in FASB ASC Topic 718.

An issuer would need to include footnotes to the pay-versus-performance summary table (see below for the form table) which describes the amounts excluded from and added to the total compensation reported in the summary compensation and the issuer’s vesting date valuation assumptions used (if materially different from the grant date assumptions disclosed in the issuer’s financial statements).

In addition to the required disclosure, an issuer would be permitted to make disclosures to capture the issuer’s specific situation and industry, provided that any supplemental disclosure is not misleading and not presented more prominently than the required pay-versus-performance disclosure. Examples of supplemental disclosure provided in the proposed rules include the disclosure of “realized pay” or “realizable pay” or additional years of data beyond the time periods required.

Peer Group

The peer group utilized for the TSR comparison would be the same peer group used by the issuer in its stock performance graph or in describing the issuer’s benchmarking compensation practices in its CD&A.

Format

The pay-versus-performance disclosure must be provided in tabular form as set forth below.

Year(a) Summary Compensation Table Total For PEO(b) Compensation Actually Paid to PEO(c) Average Summary Compensation Table Total for non PEO Named Executive Officers(d) Average Compensation Actually Paid to non PEO Named Executive Officers(d) Total Shareholder Return(f)

Peer Group Total Shareholder Return

(g)

Following the pay-versus-performance disclosure table, the issuer would be required to describe the relationship between the issuer’s executive compensation actually paid and the issuer’s TSR and the relationship between the issuer’s TSR and the peer group’s TSR.

Issuers will generally need to make the pay-versus-performance disclosure for its five (or three years, in the first applicable filing following the effectiveness of the proposed rule) most recently completed fiscal years.  However, smaller reporting companies will only need to make the disclosure for three years (or two years, in the first applicable filing following the effectiveness of the proposed rule).  In addition, a smaller reporting company would not be required to (i) disclose amounts relating to pensions (consistent with current executive compensation disclosure obligations); nor (ii) present the TSR of a peer group in its pay-versus-performance disclosure.

XBRL

Companies would be required to tag the pay-versus-performance disclosure using XBRL.  Smaller reporting companies would not be required to comply with the tagging requirement until the third filing in which the pay-versus-performance disclosure is provided.

Companies to which Disclosure Requirement Applies

The proposed pay-versus-performance disclosure rules would apply to all reporting companies, except registered investment companies, foreign private issuers and emerging growth companies.

Conclusion

It is unclear whether the pay-versus-performance disclosure will be adopted (and in effect) in time for the 2016 proxy season.  The SEC is seeking comments on the proposed rules for 60 days following their publication in the Federal Register.

Withdrawal of Whole Foods No-Action Letter Leaves a Hole in Proxy Access Proposal Defense

On January 16, 2015, the Securities and Exchange Commission (SEC) announced  that, for the 2015 proxy season, the Division of Corporation Finance will not express any views as to whether a company may exclude a shareholder proposal from its annual meeting proxy statement based on Exchange Act Rule 14a-8(i)(9).   The announcement was issued in connection with a statement issued by Chair White that, in light of questions about the proper scope and application of the Rule, she directed the SEC staff to review the rule and report to the Commission.  As a result the Whole Foods no-action letter, discussed below, was withdrawn and issuers will not have an easy path in addressing “proxy access” proposals from their shareholders for the 2015 proxy season (and perhaps in subsequent proxy seasons).

Rule 14a-8(i)(9) permits a company to exclude a shareholder proposal that “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.”  The Staff has historically granted no-action relief under Rule 14a-8(i)(9) where a shareholder proposal and a company/management proposal present alternative and conflicting decisions for shareholders and where the inclusion of both proposals could lead to inconsistent and ambiguous results.

The SEC’s action comes on the heels of a letter, published  on January 4, 2015, by the Council of Institutional Investors asking the SEC staff to review the application of Rule 14a-8(i)(9) in light of the SEC staff’s issuance of the Whole Foods no-action letter.  In that letter, the SEC Staff took a no-action position to the exclusion of a shareholder proxy access proposal under Rule 14a-8(i)(9).  The shareholder proposal would have amended Whole Foods’ governance documents to allow shareholders holding 3% of the company’s stock for a period of three years to include in the annual meeting proxy statement nominees for up to 20% of Whole Foods’ directors. Whole Foods’ competing proposal would have provided shareholders holding 9% of the company’s stock for a period of five years the right to include such nominees.  Conveniently for Whole Foods, its proposal would have significantly limited the universe of its shareholders who would be entitled, in 2015 and in the future, to proxy access under its amendment. Following the issuance of the Whole Foods no-action letter, a number of companies sought no-action relief from the Staff in connection with similar shareholder proxy access proposals; however, the Whole Foods no-action letter was subsequently withdrawn in connection with the Staff’s announcement of its review of Rule 14a-8(i)(9) and the staff noted in its responses to the other Rule 14a-8(i)(9) requests that it could not express a view in light of the recent announcement.

Despite the lack of no-action relief from the SEC staff for the 2015 proxy season, companies may still utilize a number of mechanisms to exclude shareholder proposals:

  • A company may continue to rely on Rule 14a-8(i)(9) – including complying with the timing and notice requirements of Rule 14a-8 – to exclude the shareholder’s proposal, but without the comfort of a SEC no-action letter.
  • A company may seek judicial relief to exclude the shareholder’s proposal – a challenging path that will involve potentially significant expense and could also result in negative publicity.
  • In addition, a company could, in theory, choose to include its own proposal and the shareholder’s proposal in its annual meeting proxy. This, however, is a novel approach involving significant considerations (including practical and disclosure considerations).
  • Lastly, a company could adopt its own proxy access mechanism (assuming that the company’s board has the authority to amend the relevant portions of the company’s governance documents) and seek to exclude a shareholder’s proposal under Rule 14a-8(i)(10) on the grounds that the Company “has already substantially implemented the proposal.”  This exception is not subject to the SEC’s current suspension of no-action relief for Rule 14a-8(i)(9) matters; however this  alternative may strike some as waiving the white flag.

Consistent with Rule 14a-8, a company seeking to exclude a shareholder proposal under Rule 14a-8(i)(9) or (10) must still submit a no-action request to the SEC staff (technically, the company is required to submit to the SEC its reasons for excluding the proposal), with a copy of the request provided simultaneously to the proposing shareholder, at least 80 days before the company files its definitive proxy statement and form of proxy. A company seeking such relief should also be mindful that proposing shareholders may challenge the company’s exclusion of their proposals in federal court. Courts often give deference to SEC staff positions, including no-action letters, and, in the absence of such no-action letters for the 2015 proxy season, an institutional shareholder whose proposal is excluded from a company’s annual meeting proxy under Rule 14a-8(i)(9) may be more likely to initiate litigation to challenge the exclusion.

Spreading Sunshine in Private Equity

Title: Spreading Sunshine in Private Equity

On May 6, 2014, Andrew J. Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”), gave a speech entitled “Spreading Sunshine in Private Equity” to the Private Fund Compliance Forum (sponsored by Private Equity International) in New York.

The OCIE administers the SEC’s “examination and inspection” program, and oversees a multitude of registrants, including investment advisers, investment companies and broker-dealers. As a result of the Dodd-Frank Act, many private equity and other funds are now required to register with the SEC and are also subject to SEC inspection and certain other regulatory requirements. This statutory change brought an end to the minimal regulatory environment in which most private equity funds operated in for decades.

At the outset, Director Bowden presented an overview of the OCIE’s initial efforts to understand, and begin oversight of, the private equity industry. Director Bowden highlighted certain differences – some inherent and some borne of practice – in the private equity industry that pose different regulatory (including disclosure) challenges than those associated with regulating publicly-traded registrants. Some of these differences, certain of which have been addressed publicly by other SEC officials, include:

  • A private equity fund’s control over its privately-held portfolio companies, and the ability of the fund to influence the management and decision-making of such companies;
  • The typically “voluminous” limited partnership agreement that permits a fund a wide latitude of control and contains terms that are often subject to varying interpretations; and
  • That a fund typically is not subject to significant scrutiny by its limited partners (i.e., the lack of information rights).

Given these differences, Director Bowden described a number of observations from more than 150 examinations of private equity funds conducted by OCIE. In over half of the examinations, Director Bowden noted that OCIE found what it believes to be “violations of law or material weaknesses in controls” with respect to the treatment of fees and expenses. Director Bowden seemed to, at a fundamental level, take the position that private equity funds do not adequately disclose to investors the manner in which the funds allocate fees and expenses. For instance, the Director noted the typical practice of allocating “operating partner” expenses to a fund’s portfolio companies or to the fund itself, which the Director characterized as creating a “back door” fee that investors do not expect. In addition, Director Bowden spent some time discussing the inconsistent valuation methodologies that are sometimes used by a private equity fund, especially during the fundraising cycle, although he noted that OCIE only seeks to ensure consistency of valuation methodologies and has no intention of determining the type of methodologies employed by any particular fund.

In his concluding remarks, the Director stated that there is room for improvement in the overall compliance programs of many funds. In addition to promoting a culture of compliance, Director Bowden posited that funds would foster more effective compliance by involving compliance personnel in the deal-making process, including participating in investment committee meetings and reviewing deal memos.

SEC Announces the Agenda of Its Cybersecurity Roundtable; Target Corporation Files Form 10-K Bleeding out Disclosures about Its Data Breach

We have previously blogged about March 26 SEC cybersecurity roundtable and the SEC paying close attention to cybersecurity issues, especially on the heels of the cybersecurity breaches faced by Target and other retailers.  On March 19, 2014, the SEC issued a notice about the coming cybersecurity roundtable shedding light on the topics that will be discussed at the roundtable.

The panelists will have a well-rounded discussion of the cybersecurity issues faced by different constituencies, including:

  • exchanges and other key market systems;
  • broker-dealers;
  • investment advisers;
  • transfer agents; and
  • public companies.

Panelists will also be invited to discuss industry and public-private sector coordination efforts relating to assessing and responding to cybersecurity issues.

This roundtable discussion will be very timely.  On March 14, 2014, Target filed its Annual Report on Form 10-K, which reads as Exhibit A to the SEC’s 2011 guidance on cybersecurity disclosures (CF Disclosure Guidance: Topic No. 2, Cybersecurity).  Among other disclosures, the company beefed up the risk factors to talk about its data breach and included a detailed discussion of the ramifications of this breach into its “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 

Some details of Target’s disclosure are quite interesting.  As a result of the data breach, Target recorded $61 million of pretax data breach-related expenses, some of which may be offset by its network-security insurance coverage.  Such expenses include costs to investigate the data breach, provide credit-monitoring services to its customers, increase staffing in its call centers, and procure legal and other professional services. More than 80 actions have been filed and other claims may be asserted against Target on behalf of its customers, payment card issuing banks, shareholders or others seeking relief in connection with the data breach. In addition, State Attorneys General, the Federal Trade Commission and the SEC are investigating events related to the data breach. Probably, one of the most important ramifications is the effect of the data breach on sales as Target believes that the data breach adversely affected its fourth quarter U.S. Segment sales.

2013 SEC Government-Business Forum on Small Business Capital Formation

The SEC will hold its 2013 SEC Government-Business Forum on Small Business Capital Formation on November 21, 2013. A major purpose of the Forum is to provide a platform to highlight perceived unnecessary impediments to small business capital formation and address whether they can be eliminated or reduced. Each Forum seeks to develop recommendations for government and private action to improve the environment for small business capital formation, consistent with other public policy goals, including investor protection. Participants in the Forum typically have included small business executives, venture capitalists, government officials, trade association representatives, lawyers, accountants, academics and small business advocates. In recent years, the format of the Forum typically has emphasized small interactive breakout groups developing recommendations for governmental action

This year’s topics include:

• Panel discussion: Evolving practices in the new world of Regulation D offerings;
• Panel discussion Crystal ball: Now that you raised the money, what’s next for the company and the markets;
• Breakout session: Development of recommendations for securities-based crowdfunding offerings;
• Breakout session: Exempt securities offerings; and
• Breakout session: Securities regulation of smaller public companies.

The panel sessions will be webcast live on the SEC’s home page at http://www.SEC.gov beginning at 9:00 a.m. The afternoon breakout groups will not be webcast.  We will post on the results of the Forum when available.

Pay Ratio Rules to be Proposed this Week

On Wednesday, September 18, 2013 at 10:00 a.m. the SEC will hold an open meeting to consider whether to propose rules to require companies to disclose the median annual total compensation of all employees and the ratio of that median to the annual total compensation of the company’s chief executive officer as mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Focus on Business Continuity and Disaster Recovery

The Securities and Exchange Commission seems to be awfully worried about disasters lately.  On August 16, 2013, the SEC joined the Commodity Futures Trading Commission’s Division of Swap Dealers and Intermediary Oversight and the Financial Industry Regulatory Authority in issuing a Staff Advisory on business continuity and disaster recovery planning.  Less than two weeks later, the SEC issued a Risk Alert on investment advisers’ business continuity and disaster recovery planning.  This focus on the business continuity and disaster recovery is prompted by the coming one-year anniversary of Hurricane Sandy, which had a devastating effect on many businesses. 

As the SEC noted in its August 16, 2013 and August 27, 2013 press releases, the Staff Advisory and Risk Alert make observations and suggest effective practices to address:

  • Preparation for widespread disruption
  • Planning for alternative locations
  • Telecommunications services and technology
  • Communication plans
  • Regulatory and compliance considerations
  • Preparedness of key vendors
  • Reviewing and testing

While the Staff Advisory and Risk Alert focused on the financial industry, they do provide a helpful reminder for all businesses to consider how natural disasters and other disruptive events can impact their businesses as well as useful guidance for planning for potential disruptions.  In addition, the Staff Advisory and Risk Alert serve as a reminder for all public companies to consider whether their periodic reports and offering materials provide adequate disclosure, including risk factors, with respect to their exposure to natural disasters and other potential business disruptions.

Burn, Baby, Burn – Reg D Inferno*

A recent report issued by SEC’s Division of Economic and Risk Analysis shows that Regulation D remained “hot” as a means to raise capital – even before the recent amendments to that rule take effect. The report updates a 2012 SEC report that analyzed Form D filings from the beginning of 2009 through the first quarter of 2011. The updated report contains information through the end of 2012 and provides additional analysis.

Among the highlights of the report:

• Capital raised through Regulation D offerings continues to be sizeable – $863 billion reported in 2011 and $903 billion in 2012. By contrast, public equity offerings raised less than $250 billion in each of those years.

• Since 2009, hedge funds reported raising $1.3 trillion through Regulation D offerings. Private equity funds reported $489 billion; non‐financial issuers reported $354 billion. Foreign issuers account for 19% of the total amount sold.

• Since 1993, the number of Regulation D offerings fluctuates directly with the S&P 500, suggesting that the health of the private market is closely tied to the health of the public market (and thereby contradicting the view that the private capital markets step in during times of public market stress).

• Rule 506 accounts for 99% of amounts sold through Regulation D. More than two‐thirds of non‐fund issuers could have claimed a Rule 504 or 505 exemption based on offering size, indicating that issuers value the Blue Sky law preemption allowed under Rule 506.

• More capital was raised in Regulation D offerings in 2012 than in public equity offerings or Rule 144A offerings; public debt offerings raised slightly more capital than Regulation D, but, as the authors noted, public debt offerings include many refinancings of existing debt, while approximately two-thirds of Regulation D offerings represent new equity capital.

• There have been more than 40,000 Regulation D offerings by non‐financial issuers since 2009 with a median offer size of less than $2 million.

• Form D filings report that more than 234,000 investors participated in Regulation D offerings in 2012, of which 91,000 participated in offerings by non‐financial issuers, more than double the number of investors participating in hedge fund offerings.

• Nonaccredited investors were present in only 10% of Regulation D offerings (suggesting that the recent amendments permitting general solicitations, provided that there are no sales to nonaccredited investors, should have little adverse effect).

• Only 13% of Regulation D offerings since 2009 reported using a broker‐dealer or finder, which usage may decline after general solicitation becomes permissible.

• Nearly 10% of all SEC reporting companies raised capital through Regulation D offerings during the period 2009-1011, and about 6% in 2012.

The authors noted that the actual amount of capital raised through Regulation D offerings may be higher than reported because there is no requirement to file a final From D showing the total raised and, further, some issuers do not file a Form D at all.

The bottom line is that the recent Regulation D amendments permitting general solicitation will likely add additional fuel to this already hot market.

* With humble apologies to The Trammps and their 1976 hit, “Disco Inferno.”

Update to Nasdaq Proposed Rule Relating to Internal Audit Function

As we discussed previously in our recent Up to Date  issue, the Nasdaq Stock Market recently proposed a rule that would require Nasdaq listed companies to establish and maintain an internal audit function. The proposal provides that each company listed on Nasdaq on or before June 30, 2013 establish an internal audit function by no later than December 31, 2013. Companies listed after June 30, 2013 would be required to estab­lish an internal audit function prior to listing. The SEC was scheduled to approve or disapprove such proposed rule on or before April 22, 2013. However, on April 18, 2013, the SEC designated June 6, 2013, as the date by which the SEC should either approve or disapprove or institute proceedings to determine whether to disapprove the proposed rule change.