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LP Corner: US Private Equity Fund Structure - The Limited Partnership

6/3/2017

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For investors new to investing in private equity funds, the mechanics of how funds work can be a bit confusing.  This post introduces the typical private equity fund structure that's used in the United States - the limited partnership.

Basic Limited Partnership Structure
In a basic limited partnership, there are several passive investors (known as "Limited Partners" or "LPs") and the manager of the fund, (known as the "General Partner" or "GP").  The diagram below illustrates this basic structure.
Picture
To read more, please click "Read More" to the right below.

Read More
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Startup Financial Disclosure Laws

5/24/2016

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The Wall Street Journal has two articles today that are of interest to shareholders of startup companies, primarily former employees who hold shares of these startups.  The articles "Startup Employees Invoke Obscure Law to Open Up Books" and "Own Startup Shares? Know Your Rights to Company Financials" discuss laws that may require some startup companies to deliver certain financial data to shareholders which may help these shareholders value their stock.  

Specifically, the articles reference Section 220 of the Delaware General Corporations Law, Section 1501 of the California Corporations Code and Rule 701 of the Federal Securities Act of 1933.  These provisions may provide certain shareholders of some private companies the ability to obtain selected financial statements.

Links:
http://www.wsj.com/articles/startup-employees-invoke-obscure-law-to-open-up-books-1464082202

http://www.wsj.com/articles/own-startup-shares-know-your-rights-to-company-financials-1464082203

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Private Equity Fund Liability for Portfolio Company Pension Fund Debt

4/22/2016

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The NY Times has an interesting article "Ruling on Pension Fund Debt Could Shake Up Private Equity Industry" that is worth a read.  A federal District Court in Massachusetts has held that two separate private equity funds were jointly liable for the pension fund debt of one of their portfolio companies Scott Brass.  The case revolves around some unique facts and some interpretations of ERISA, the law governing these retirement plans, but it could deter private equity firms from acquiring companies with unfunded pension liabilities.  Time will tell.

Links:
NY TImes (general overview):
http://www.nytimes.com/2016/04/22/business/dealbook/ruling-on-pension-fund-debt-could-shake-up-private-equity-industry.html

White & Case article (legal analysis):
http://www.whitecase.com/publications/alert/private-equity-funds-held-liable-pension-obligations-portfolio-company


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New SEC Fundraising (General Solicitation) Rules Take Effect

9/23/2013

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New rules relating to fundraising take effect today.  These rules were issued by the Securities and Exchange Commission ("SEC") as required by the Jumpstart Our Business Startups Act ("JOBS Act") that was enacted last year.

My advice to companies and entrepreneurs: Talk with a corporate securities attorney before you start any fundraising activity.  The rules are complex and it would be easy to violate them.  Violating these rules could carry pretty significant consequences, including possibly unwinding the fundraising after it is completed, civil lawsuits, SEC penalties, and potential criminal punishment.

Here are links to two articles covering these new rules.
The Wall Street Journal: 
http://blogs.wsj.com/venturecapital/2013/09/23/startups-vcs-now-free-to-advertise-their-fundraising-status/

Forbes: 
http://www.forbes.com/sites/tanyaprive/2013/09/23/general-solicitation-ban-lifted-today-three-things-you-must-about-it/

Here's a link to the SEC press release relating to the rules: 
http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539707782#.UkBkOoYsk_Y

Link to the rules:  http://www.sec.gov/rules/final/2013/33-9415.pdf

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The Unexpected Outcomes of the JOBS Act - peHUB Article

8/2/2012

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The Jumpstart Our Business Startups (JOBS) act was passed earlier this year, with the intent of making it easier for "emerging growth companies" to raise money in an initial public offering and through private placements.  The peHUB article "The Unexpected Outcomes of the JOBS Act" provides some insight as to the unexpected consequences of the Act.  The article identifies the following:
  • Special purpose acquisition vehicles are taking advantage of the confidential S-1 filing provisions of the Act.  The Act was meant to help emerging growth companies, not SPAVs.
  • Registration statements will add risk factors to address the reduced financial disclosures required by the Act.  Basically, reduced disclosure means greater risk that some investors may not find the stock an attractive investment.
  • The "testing the waters" provision of the Act, which allows companies to talk to investors prior to publicly filing an IPO registration statement, has mixed results so far.

Link to the article:  http://www.pehub.com/161586/the-unexpected-outcomes-of-the-jobs-act/
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Lawmakers Push For Overhaul Of IPO Process

6/21/2012

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The Wall Street Journal article "Lawmakers Push for Overhaul of IPO Process" reports that lawmakers are calling on the SEC to overhaul the initial public offering process in the wake of the Facebook IPO.  The crux of the letter seems to be that underwriters are able to "dictate" the price at which IPO shares are first sold to investors.

In my opinion, this is incorrect.  The purpose of the IPO roadshow is to market the issue to institutional investors and to build the order book.  Building the book is a process whereby the institutional investors give orders for a number of shares at a certain price.  It is this process that the book-running underwriter determines the "market" price for the IPO.  At the beginning of the roadshow, the underwriters establish a pricing range for the IPO, but this initial range is often shifted higher or lower depending on road show demand, and the final pricing is dictated by supply and demand.  It is true that the price at which institutional investors buy IPO shares usually contains an "IPO discount" but this discount provides an incentive to all IPO investors to invest in these risky propositions.  Also, in my view, investors purchasing stock in an IPO once it starts trading are basically bettors and are gambling that the stock price will go up.  Stock prices are typically very volatile after an IPO and so these IPO speculators should bear the risks of their bet.

I believe the IPO process generally works well, and my thoughts on how to improve it relate to disclosure.  I'm a big believer in disclosure as it helps the markets operate more efficiently.  The more information, the better.  To improve the IPO process, I would have all of the underwriting syndicate's  projected revenue and earnings estimates for the company disseminated publicly so that all institutional and retail IPO investors are working with the same information.  In addition, if the company revises guidance during the IPO process, this information should also be made public.  Finally, while I'm on a roll, I believe that every IPO should disclose at least five years of annual and three years of quarterly financial and operating data, and that the metric "free cash flow" should be a required reporting metric.

Link to The Wall Street Journal article:  
http://online.wsj.com/article_email/SB10001424052702304441404577479024205961592-lMyQjAxMTAyMDIwMTEyNDEyWj.html#project%3DSECIPO%26articleTabs%3Darticle 

The letter from Congress to the SEC can be found here:  
http://online.wsj.com/article_email/SB10001424052702304441404577479024205961592-lMyQjAxMTAyMDIwMTEyNDEyWj.html#project%3DSECIPO%26articleTabs%3Dinteractive 

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Dewey LeBoeuf Files Bankruptcy

5/29/2012

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As a former corporate lawyer, it pains me to see esteemed law firms crumble.  Dewey & LeBoeuf has filed for bankruptcy, in what is apparently the largest law firm bankruptcy in history.  According to the press release, Dewey will wind down as opposed to restructuring.  According to Bloomberg, the firm had debts of $245 million and assets of $193 million.  After the 2007 merger of Dewey Balantine and LeBoeuf, Lamb, Green & McRae, the firm had over 1,300 attorneys in 12 countries.

Link to press release:  http://www.prnewswire.com/news-releases/dewey--leboeuf-llp-files-for-chapter-11-protection-seeks-orderly-wind-down-of-business-155192345.html 

LInk to Bloomberg article: 
http://www.bloomberg.com/news/2012-05-29/dewey-leboeuf-files-for-bankruptcy-fails-to-save-firm.html 


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Startup Investors May Request 'Acqui-Hires' Protections: Michael Arrington

4/26/2012

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"Aqui-Hires" are acquisitions where the acquiring company (usually a larger company) is primarily acquiring the talent at the smaller company, usually a start-up.  Michael Arrington, the founder of TechCrunch and now the founder of venture fund Crunch Fund, has written a very good article that is posted on From the Crowd discussing a component of Aqui-Hires, being stock grants issued by the acquiring company to the key employees of the start-up at values that are often much greater than the acquisition price.  The issue is whether the stock grants should be considered part of the overall price of the acquisition.

Why is this an issue?  Because these Aqui-Hires often end in losses to investors of the start-up, and the start-up's investors may feel that they should share in the value of these stock grants.

It's an interesting issue, and Mr. Arrington's column explains it well.  Here's the link:  http://finance.fortune.cnn.com/2012/04/25/startup-investors-may-request-acqui-hire-protections/ 

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How Will the JOBS Financing Act Affect Tech IPOs? AllThingsD.com

4/6/2012

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AllThingsD.com has a good article about the impact of the new Jumpstart Our Business Startups (JOBS) Act on the tech IPO market.  The article discusses how the Act relaxes certain regulations for "emerging growth companies" when going public, and explores other things like whether companies will ease the use of restricted stock grants.  It also has links to summaries of the JOBS Act.  Useful reading.  Here's the link:   http://allthingsd.com/20120405/how-will-the-jobs-act-affect-tech-ipos/

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Crowdfunding Platforms To Create Self-Regulatory Body: JOBS Act

4/5/2012

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With the Jumpstart Our Business Startups (JOBS) Act expected to be signed into law today, restrictions on fundraising for private companies will be loosened, and "crowdfunding" will become legal.  The new law allows companies to raise up to $1 million per year from individuals, subject to certain limits, through crowdfunding portals that are both registered with the SEC and members of a national securities association.  Efforts to create this national organization, which will be a self-regulatory body, are examined in the TechCrunch article "With JOBS Act Becoming Law, Crowdfunding Platforms Look to Create Self-Regulatory Body."  Here's the link:  http://techcrunch.com/2012/04/05/with-jobs-act-becoming-law-crowdfunding-platforms-look-to-create-self-regulatory-body/


Prior posts on the JOBS Act:

Wall Street Examining JOBS Financing Act:
http://www.allenlatta.com/1/post/2012/04/wall-street-examining-jobs-financing-act-ny-times-dealbook.html 

JOBS Act Jeopardizes Safety Net For Investors: Andrew Ross Sorkin
http://www.allenlatta.com/1/post/2012/04/jobs-act-jeopardizes-safety-net-for-investors-andrew-ross-sorkin.html 

JOBS Fundraising Act to be Signed into Law on Thursday
http://www.allenlatta.com/1/post/2012/03/jobs-fundraising-act-to-be-signed-into-law-on-thursday-venturebeat.html

The JOBS Act is Good, But SarbOx Shouldn't Get All the Blame:  
http://www.allenlatta.com/1/post/2012/03/the-jobs-act-is-good-but-sarbox-shouldnt-get-all-the-blame-greg-gretsch-post.html 

Unintended Consequences of the JOBS Act: 
http://www.allenlatta.com/1/post/2012/03/unintended-contradictions-of-the-jobs-act-dan-primack.html 

Fundraising Bill Passes Senate:  
http://www.allenlatta.com/1/post/2012/03/fundraising-bill-passes-senate-enables-crowdfunding-and-eases-ipo-regulations.html 
   

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Wall Street Examining JOBS Financing Act: NY Times DealBook

4/5/2012

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The Jumpstart Our Business Startups (JOBS) Act, which makes it easier for smaller companies to raise money privately and to go public, is expected to be signed into law today.  This could mean big business for investment banks, as more companies may move forward with initial public offerings.  In "Wall Street Examines Fine Print in a Bill for Start-Ups," the way investment banks are approaching the new opportunity is examined.  Here's the link:  http://dealbook.nytimes.com/2012/04/04/wall-st-examines-fine-print-in-a-new-jobs-bill/ 


Here are links to prior posts on the JOBS Act:

JOBS Act Jeopardizes Safety Net For Investors: Andrew Ross Sorkin
http://www.allenlatta.com/1/post/2012/04/jobs-act-jeopardizes-safety-net-for-investors-andrew-ross-sorkin.html 

JOBS Fundraising Act to be Signed into Law on Thursday
http://www.allenlatta.com/1/post/2012/03/jobs-fundraising-act-to-be-signed-into-law-on-thursday-venturebeat.html

The JOBS Act is Good, But SarbOx Shouldn't Get All the Blame:  
http://www.allenlatta.com/1/post/2012/03/the-jobs-act-is-good-but-sarbox-shouldnt-get-all-the-blame-greg-gretsch-post.html 

Unintended Consequences of the JOBS Act: 
http://www.allenlatta.com/1/post/2012/03/unintended-contradictions-of-the-jobs-act-dan-primack.html 

Fundraising Bill Passes Senate:  
http://www.allenlatta.com/1/post/2012/03/fundraising-bill-passes-senate-enables-crowdfunding-and-eases-ipo-regulations.html 
  

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JOBS Act Jeopardizes Safety Net For Investors: Andrew Ross Sorkin

4/3/2012

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Andrew Ross Sorkin, the Editor-at-Large of NY Times DealBook, has a post discussing some of the potential downsides of the Jumpstart Our Business Startups (JOBS) Act, which when signed into law by President Obama, will make it easier for smaller private companies to go public by easing some of the requirements of Sarbanes-Oxley and other regulations.  It's an interesting article that provides a different perspective on the JOBS Act.  Here's the link:   http://dealbook.nytimes.com/2012/04/02/jobs-act-jeopardizes-safety-net-for-investors/

Here are links to prior posts on the JOBS Act:

JOBS Fundraising Act to be Signed into Law on Thursday
http://www.allenlatta.com/1/post/2012/03/jobs-fundraising-act-to-be-signed-into-law-on-thursday-venturebeat.html

The JOBS Act is Good, But SarbOx Shouldn't Get All the Blame:  
http://www.allenlatta.com/1/post/2012/03/the-jobs-act-is-good-but-sarbox-shouldnt-get-all-the-blame-greg-gretsch-post.html 

Unintended Consequences of the JOBS Act: 
http://www.allenlatta.com/1/post/2012/03/unintended-contradictions-of-the-jobs-act-dan-primack.html 

Fundraising Bill Passes Senate:  
http://www.allenlatta.com/1/post/2012/03/fundraising-bill-passes-senate-enables-crowdfunding-and-eases-ipo-regulations.html 
 

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JOBS Fundraising Act to be Signed into Law on Thursday: VentureBeat

3/31/2012

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The JOBS Act, which will make a number of changes to securities laws to make it easier for smaller companies to go public and to raise money privately will be signed into law this Thursday, according to VentureBeat.  Here's the link:   http://venturebeat.com/2012/03/31/jobs-act-law/

Here are links to prior posts on the JOBS Act:

The JOBS Act is Good, But SarbOx Shouldn't Get All the Blame:  
http://www.allenlatta.com/1/post/2012/03/the-jobs-act-is-good-but-sarbox-shouldnt-get-all-the-blame-greg-gretsch-post.html 

Unintended Consequences of the JOBS Act: 
http://www.allenlatta.com/1/post/2012/03/unintended-contradictions-of-the-jobs-act-dan-primack.html 

Fundraising Bill Passes Senate:  
http://www.allenlatta.com/1/post/2012/03/fundraising-bill-passes-senate-enables-crowdfunding-and-eases-ipo-regulations.html 

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Startup Pitches in the New Era: CNET Article

3/26/2012

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With the upcoming passage of the Jumpstart Our Business Startups (JOBS) Act, the way companies raise money is about to change.  The long-standing prohibition on general solicitation for financing is about to go away.  What this actually means in the future is that start-ups will now be able to publicly promote their financing.  While there are limits on what companies can say publicly, they can still market to a broad audience.  In "Start-up Pitches Post-JOBS Act: Pump Up the Volume," Paul Sloan, Editor of CNET, explores how companies might market their financings, and includes a great YouTube clip from .  It's a good article and worth a read:  http://news.cnet.com/8301-32973_3-57404184-296/startup-pitches-post-jobs-act-pump-up-the-volume/ 

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Unintended Contradictions of the JOBS Act: Dan Primack

3/24/2012

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Dan Primack, Senior Editor of Fortune Magazine, has posted an article on the Term Sheet website discussing the Jumpstart Our Business Startups (JOBS) Act that was passed this week by the US Senate, after previously being passed by the House of Representatives.  The JOBS Act is now back with the House for reconciliation and then will be signed into law by the President.  Dan's article is a response to a post written by Josh Kopelman, a Managing Partner at First Round Capital, supporting the JOBS Act.  Both articles are worth reading as they give two perspectives on the Act.

Here's a link to Dan's post at Term Sheet:  
http://finance.fortune.cnn.com/2012/03/23/unintended-contradictions-of-jobs-act/ 

Here's a link to the post by Josh Kopelman:  
http://redeye.firstround.com/2012/03/unintended-consequences.html 

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Fundraising Bill Passes Senate - Enables Crowdfunding and Eases IPO Regulations

3/22/2012

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The US Senate has passed an amended version of the Jumpstart Our Business Startups Act (JOBS Act), which legalizes crowdfunding for start-ups and also loosens regulations for initial public offerings of  smaller "emerging growth companies."  The House previously passed a similar bill, and the two versions will now have to be reconciled and then signed by the President.

The crowdfunding provisions of the Senate bill will enable companies to raise up to $1 million per year from "small-dollar investors" through SEC-approved crowdfunding portals.  "Small-dollar investors" are able to invest a small portion of their annual income in these companies.

The IPO portion of the bill creates a new group of "emerging growth companies," which are companies that have less than $1 billion in annual revenue, and for up to five years exempts these companies from some of the provisions of the Sarbanes-Oxley act.  In addition, the bill relaxes the 500 shareholder rule, which requires companies with over 500 shareholders to make public disclosures, by increasing the number from 500 to 2,000.  The bill also loosens restrictions on equity research reports, and relaxes other requirements for the IPO process.

Here are links to a couple of stories on the bill:
WSJ - All Things D:  
http://allthingsd.com/20120322/senate-passes-crowdfunding-bill-with-added-protections-for-non-accredited-investors/?mod=tech 

NY Times: 
 http://www.nytimes.com/2012/03/23/business/senate-passes-start-ups-bill-with-amendments.html?_r=1&ref=business 

CNNMoney:
http://money.cnn.com/2012/03/22/smallbusiness/ipo-bill/index.htm?iid=HP_LN 

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How Wall Street Deals With Conflicts: NY Times DealBook

3/19/2012

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In his article "How Wall Street Deals With Conflicts," on NY Times Dealbook, author Peter J. Henning discusses the conflicts of interest that may exist at full-service investment banking firms, and how other industries deal with conflicts.  Here's the link:  http://dealbook.nytimes.com/2012/03/19/how-wall-street-deals-with-conflicts/

When I was a practicing attorney, we were required by state law to disclose any conflict of interest to all parties involved and to obtain written consents prior to continuing with the representation.  No such requirement exists in investment banking.  Perhaps it's time that investment banking begins to do something similar?
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Crowdfunding Bill Moving Forward

3/1/2012

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Crowdfunding is a funding mechanism for small companies to raise capital from a group of individuals who each contribute a small amount of money; this financing is contemplated to occur over the internet.  Currently illegal, there is a bill winding its way through the legislative process that would enable companies to raise either $1 million (without audited financials) or $2 million (with audited financials) from investors who each can contribute in any 12 month period up to $10,000 or 10% of their annual income.  The bill (H.R. 2930) has been passed by the House of Representatives, and is currently working its way through the Senate.

Here's a link to the 

Here's a good overview article on Forbes.com that discusses crowdfunding:  http://www.forbes.com/sites/techonomy/2012/02/29/crowdfunding-set-to-explode-with-passage-of-entrepreneur-access-to-capital-act/ 

Here's a link to the bill (H.R. 2930):   http://www.govtrack.us/congress/bill.xpd?bill=h112-2930 



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IPO Legislation Working Way Through Senate: WSJ

2/17/2012

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Legislation designed to make it easier for emerging growth companies to go public has advanced in the US House of Representatives, according to the Wall Street Journal.  The legislation applies to companies that have less than $1 billion in annual revenue at the time they register for their IPO and that have under $700 million in publicly traded shares.  These companies would for a period of time be exempt from certain provisions of Sarbanes-Oxley , which requires significant requirements regarding a company's internal controls.

In my view, this is a very good step towards addressing the IPO crisis in America.  However, this legislation alone won't solve the problem and more work needs to be done.  Additional areas that need to be addressed include: the broken business model for investment banks to support smaller public companies (inadequate compensation for investment banks's research departments that cover these companies and inadequate trading profits for investment banks that support these companies); the dearth of boutique investment banks servicing smaller companies (the bubble-era disappearance of the "four horsemen" - Hambrecht & Quist, Montgomery Securities, Alex. Brown and Robertson Stephens); and other regulations that have combined to effect the deterioration of the IPO market for smaller companies.

Link to the Wall Street Journal article (full article requires subscription):  http://online.wsj.com/article/SB10001424052970204880404577227853616803384.html?KEYWORDS=ipo+bill 

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Private Equity Industry Attracts S.E.C Scrutiny: NYTimes.com DealBook

2/13/2012

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The Securities and Exchange Commission has commenced an informal examination into the Private Equity industry, according to a report by the NYTimes.com DealBook entitled "Private Equity Industry Attracts S.E.C. Scrutiny".  Areas of interest include valuation of private holdings and returns.  The SEC has a new asset management unit that is leading the examination of the industry.  Here's a link to the story:   http://dealbook.nytimes.com/2012/02/12/private-equity-industry-attracts-s-e-c-scrutiny/

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Volker Rule Impacting Venture Capital? Reuters Article

1/16/2012

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Is the Volker Rule having an unintended negative impact on Venture Capital?  Silicon Valley Bank thinks so.  The Reuters article "Silicon Valley Calls the Help Desk on Volker Rule" is an interesting read.  Here's the link:   http://www.reuters.com/article/2012/01/12/us-financial-regulation-volcker-idUSTRE80B1QB20120112

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Sarbanes-Oxley and the Legacy of Enron

11/25/2011

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For those who sit on boards of directors of public (and private) companies, there is a very good article on the achievements and failings of Sarbanes-Oxley by Michael W. Perergrine (partner at MeDermott Will & Emery) and posted on NY Times Dealbook.  The title is "Another View: Sarbanes-Oxley and the Legacy of Enron."

Here's the link:  http://dealbook.nytimes.com/2011/11/25/another-view-sarbanes-oxley-and-the-legacy-of-enron/


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Eliot Spitzer Interview on Financial Regulation: SF Chronicle

11/19/2011

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Eliot Spitzer, when he was Attorney General of New York, negotiated a universal settlement with Wall Street banks that, among other things, prohibited equity research analysts from participating in underwriting activities.  The San Francisco Chronicle has an interview with Mr. Spitzer on the impacts of financial regulation.  The story can be found here:  http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/11/19/BUUA1M0II9.DTL

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SEC Adopts New Rules for "Reverse Merger" Listings

11/10/2011

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The Wall Street Journal reports today that the SEC has approved new rules for "reverse merger" listings.  Reverse merger listings are a way for foreign companies to obtain a listing on a US exchange without going through the registration process with the SEC.  Foreign companies merge with publicly-traded shell companies to effect the reverse merger listing.  The problem is that the merger process has allowed foreign companies without strong accounting controls to become publicly traded in the US.  Here's the link to the WSJ story:  http://professional.wsj.com/article/SB10001424052970204358004577028381460208046.html


The new rules make it tougher for foreign companies to list via reverse mergers.  I applaud this move.
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500 Shareholder Rule

11/9/2011

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There's a bill working its way through Congress which will loosen the rules requiring private companies to publicly disclose their finances.  Currently, once a private company reaches 500 shareholders, the company must begin to publicly disclose its financial and operating information, similar to a public company.  This rule has been around for many years, but is now under scrutiny as companies like Google, Facebook and Zynga reach this threshold.  These companies grant employees stock options, and under the existing rule the employees receiving these stock options are considered to be shareholders.  Thus as a private company grows and grants options to its employees, it may run afoul of the 500 shareholder rule and be forced to become a public company.

The legislation currently being proposed raises the 500 shareholder limit to 2000 shareholders.  Accredited (wealthy) investors and employees receiving options will count against this limit.

Here are some links to this story:
The Atlantic Wire:  http://www.theatlanticwire.com/technology/2011/11/lawmakers-sponsoring-very-facebook-friendly-bill/44748/
Fortune Term Sheet:  
http://finance.fortune.cnn.com/2011/11/08/ending-the-500-shareholder-rule/


The original purpose of the 500 shareholder rule was to force a company with 500 or more shareholders to publicly disclose its financials in order to provide the shareholders with information that they otherwise wouldn't have.  The basic tenets of the securities laws are disclosure and protection.  Accredited investors are deemed to be sophisticated and in need of less protection.  But employees and investors who are not accredited investors deserve disclosure and protection, which in my view should be purpose of the 500 shareholder rule.   Therefore I would argue that the 500 shareholder limit should remain, but accredited investors should be exempt from the rule.

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