The New Rules of Raising Capital
- by Maurice M. Lefkort
Imagine you’re a banker and you lend a company $92 million. You spend weeks negotiating loan terms, the lawyers prepare a credit agreement and a host of ancillary documents. You prepare a schedule for the lawyers of all of the numbers to fill in. The lawyers copy down the numbers accurately, time passes, the borrower goes belly up, but instead of $92 million of security, you only have $92,000 of security. Why? Because the schedule you gave the lawyer was “dollars in thousands” and the lawyer didn’t understand the implications.
This is a real story—read the full details here—albeit an extreme example of the problems that can occur because lawyers and businesspeople sometime speak different languages.
Perhaps even more costly than the losses that come from errors are the missed opportunities. For example, do you have a plan to take advantage of the major changes that just came into effect on the rules governing capital raising?
New Securities and Exchange Commission rules, effective Sept 23, 2013, have dramatically liberalized the means by which companies can raise capital. The effect of this could be more efficient capital markets and cheaper cost of capital. Imagine a world in which you could post on your website a business plan, terms of the debt or equity securities you’re offering, conduct a Dutch auction and allow investors to bid on investing in you. Well, that world is here today.
Even if those dramatic changes are not commonplace yet, the new rules have the potential to transform how businesses raise money and how sectors of the securities industry operate. If you are looking to raise capital, relying on the same old methods that were used in the past could cause you to miss untapped markets of cheaper capital. Even if your business isn’t looking to raise capital, your competitors no doubt are.
What’s changed? Under the new rules required by the JOBS Act of 2012, a company can open up its offering to anyone in the world and publicly advertise the offering without having to file a registration statement with the SEC if:
• It only sells securities to buyers who qualify as “accredited investors” AND
• The company is not a “bad actor” as defined by SEC rules.
Why hasn’t the capital markets revolution happened yet? There are a number of reasons. It takes time for the capital markets to adapt to new legal regimes, and the securities sold through these new types of private placements are still considered restricted securities, subject to “restrictions on resale.”
What’s next? If I could answer that, I would be retired and living at the beach, but here are things to look for.
• Sophisticated companies will use these new rules to increase the efficiency of their capital raises and reduce their cost of capital.
• Increased advertising of securities offerings targeted to high-net-worth individuals means an advertising boon to those media companies that can deliver those “eyeballs.”
• Regulation will likely increase as unscrupulous individuals take advantage of the new rules to dupe the public.
As a business lawyer, Wharton graduate and new blogger on this site, I have three goals:
1. Educate. Help you, the readers, separate the wheat from the chaff and alert you to legal developments like these new SEC rules that can transform a business.
2. Empower. Help you get more out of your business lawyers, because businesspeople and lawyers often speak different languages.
3. Entertain. But you may have to read to the end of future posts for the Law & Order-type final twist.
I would like to address what is of interest to you, so if there are business-law topics that you would like me to blog about, please leave a comment below.
Editor’s note: This blog post is intended as general information on the law and legal developments, and is not legal advice as to any particular situation. Under New York ethical rules, please note that this post may constitute “ATTORNEY ADVERTISING.”