Growth Capital Investor Vol. I Issue 5 The Journal of Emerging Growth Company Finance September 17, 2012 IN THIS ISSUE Emerging Growth Issuers Largely Muddy Solicitation Proposal Takes Wind Out of Crowdfunders Immune to Broad Market Sentiment The SEC’s proposed rules on general solicitation of investments draws jeers from the crowd cap- by Joe Gose italists ..............................................................2 or all the focus being placed on boosting small business to create jobs and NIR Group Investors Faced fuel an economic recovery, emerging growth companies struggling to find with 97% Loss Ftraction in the public markets. Investors in beleaguered PIPE fund manager received As a group, small issuers that have conducted private placements over the last harsh news last week ............................................3 several months have generally lagged the stock market’s rise over the last year – the PIPE Player Rodman Dow Jones Industrial Average Index has risen 20% – suggesting that the firms are Closes Banking Business less influenced by broad market sentiment. The long-time most active banker in the PIPE market But exactly how far out of whack is the performance of small private place- closes its doors .......................................................4 ment issuers with the rest of the market? Growth Capital Investor reviewed equity ALSO INSIDE private placement (EPP) activity from June 1, 2011 through May 30, 2012, using Direct Markets Investor Pared Holdings Ahead of Sagient Research’s PlacementTracker database. News; Internal Fixation Accused of Manipulation, The analysis focused on growth equity private placements (GEPPs): unregis- Misleading Reporting; China Hydroelectric Sues tered and registered common stock sales, rights offerings, fixed-price convertible Dissidents in Value Fracas; Fairfax Financial Shorting issuances, and non-convertible debt and preferred stock sales, issued at fixed-price Case Tossed; SEC Suspends Shell Accountant Hatfield; issuance and conversion terms. No placements involving variable-priced securities, SEC Sues China Sky One for Fake Revenue; and other equity lines or at-the-market offerings were included. The issuer parameters fo- stories ....................................................................5 cused on emerging growth companies that had a minimum share price of $1 and EPP, PIPE & APO MARKET DATA market capitalizations ranging from $10 million to $1 billion. Aggregate Year-to-Date Market Activity ...............12 The goal was to get a snapshot of how companies and a handful of active Deal Performance – Growth Capital EPPs ...........13 sectors performed following the transactions against comparable indices. While Growth Capital EPP Candidates ..........................15 See Immune on page 16 Growth Capital EPPs 2012 SEC Forgoes Rule Making $4 billion 49 48 and Addresses Research Analyst 44 $3 40 39 Reforms under JOBS Act in FAQ by Brett Goetschius $2 hile much of the emerging growth capital market was fixated over the past two weeks on the Securities and Exchange Commission’s 20 Wvague proposals lifting the ban on public solicitation for investments $1 in private placements, the agency issued a FAQ outlining its stance on the JOBS Act’s repeal of restrictions on sell-side research analysts’ participation in investment banking activities. While similarly paradigm-shifting in its impact on capital rais- 0 ing, the release of the interpretative document has received little attention outside Apr. May June July Aug. Sept. of securities law circles. Investment ($B) Deals The SEC’s Division of Trading and Markets issued the FAQ in late August as an alternative to new rulemaking vis-à-vis the JOBS Act, which explicitly forbids Source: PlacementTracker, a service of Sagient Research. September data thru 9/14/12. See FAQ on page 17 Growth Capital Investor Editor & Publisher Muddy Solicitation Proposal Takes Brett Goetschius Contributing Editors Wind Out of Crowdfunders Joe Gose by Joe Gose Paul Springer udging by the glowing proclamations that the JOBS Act would revolution- Teri Buhl ize small business capital formation, equity crowdfunding proponents were Production Editor Jone of the most eager constituencies waiting for the Securities and Exchange Gary Newman Commission to write rules lifting the ban on general solicitation when conducting Rule 506 offerings under Regulation D. The commission’s blessing to advertise the sale of unregistered securities to accredited investors was considered to be the first step in a two-step process. The Growth Capital Investor next step, which could occur as early as January, is supposed to open unregistered securities sales to non-accredited investors. is published monthly by For the most part, however, the commission delivered a gut kick to crowd- funding aspirations when in late August it issued a proposal rather than final rules – further delaying rulemaking that was supposed to be completed in July – and P.O. Box 7172 then decided to put the onus on issuers to determine whether an investor is in fact Petaluma, CA 94955 accredited. The vague explanation on how issuers should conduct their investiga- Phone: 707-861-1005 tions added some sting, too. Fax: 360-364-2752 “If you want to get capital flowing to job creators, if you’re trying to solve the problem of the funding void that exists for entrepreneurs and small business- es, then undefined bureaucracy doesn’t help,” said Sherwood Neiss, a principal of Miami-based Crowdfund Capital Advisors, a strategy and technology consulting Growth Capital Investor is published on the first group that works with crowdfunding platforms and investors. “We want to work and third Mondays of each month, except the with the SEC, but we want to know in black and white what it is they want from us.” first Mondays of August and January. Subscription The burden of proof in Rule 506 offerings currently is on investors, who typ- rate: $1,995 per year for 22 print issues, delivered ically sign a document affirming that they’re accredited and that they understand electronically, and full online access to all articles. the risks, said Neiss, who along with two business partners worked with lawmakers Available in hardcopy at additional charge. to craft the crowdfunding legislation in the JOBS Act. But issuers of those deals ar- All rights reserved. Copyright © 2012 MarketNexus en’t allowed to solicit the general public. To accommodate the JOBS Act’s elimina- Media, Inc. Photocopy permission is available solely tion of the advertising ban, the SEC has proposed that issuers employ various due through MarketNexus Media. Copying, distributing diligence approaches to determine whether an investor is accredited, depending on electronically by email, or duplicating this publica- the facts and circumstances of the offering. tion in any manner other than one permitted by Comment letters from other crowdfunders responding to the proposal echo agreement with MarketNexus Media is prohibited. Such actions may constitute copyright infringe- Neiss’ sentiments and have urged the commission to create a clearly defined safe ment and leave perpetrators subject to liability of harbor test for issuers to follow when determining whether an investor is accredited. up to $150,000 per infringement (Title 17, U.S. Gil Michel-Garcia, a partner with Blue HF Legal Services, a Montreal law firm code). Growth Capital Investor is a trademark of focused on startups, in a comment letter noted that the commission had created “un- MarketNexus Media. certainty that will no doubt make it more expensive and difficult for small and medi- Growth Capital Investor is a general-circulation um-sized companies to be able to raise funds using crowdfunding on the Internet . .” publication. No data herein should be construed The SEC is taking comments for 30 days following the proposal’s publication to be recommendations to purchase, retain, or sell in the Federal Register on Sept. 5, and some commenters praised the proposal or securities, or to provide investment advice of the urged even stricter rules. Neiss suggested that if the commission fails to meaning- companies mentioned or advertised. No fees are fully alter the proposal, the final rule could be contested in court. accepted for publishing any editorial information. Beyond that, crowdfunders are now keeping an eye on what emerges from the MarketNexus Media, its subsidiaries, and its em- SEC and the Financial Industry Regulatory Authority in terms of crowdfunding ployees may, from time to time, purchase, own, or rules for the broader masses. Those will include investment caps, offering terms, sell securities or other investment products of the portal registration guidance and other items not spelled out in the JOBS Act, Neiss companies discussed or advertised in this publi- cation. said. The deadline for the rules is Jan. 5, but he expects the agencies to ask for more time. September 17, 2012 Copyright © 2012 MarketNexus Media, Inc. 2 Growth Capital Investor Meanwhile, at least one crowdfunder suggests that general solic- The deal is open to accredited and non-accredited inves- itation could still add value – at least in cases where issuers are solely tors who live in Washington, D.C., and Virginia, but the process focused on reaching accredited investors. Fundrise, a website sell- to draw up the Reg A deal and clear it with the SEC took 10 ing shares in a Washington, D.C., real estate project for $100 each months, he said. Filing a Reg D offering using general solicita- through a Regulation A offering, so far has raised $200,000 and may tion would take a matter of minutes. raise up to $325,000, said Ben Miller, a co-founder of the company. “It would be a dramatic change,” Miller added. NIR Group Investors Faced with 97% Loss by Teri Buhl nvestors in beleaguered PIPE fund manager N.I.R. Group re- At the beginning of this year PwC wrote a cash flow report ceived harsh news last week when the court-appointed liquida- that showed there was only around $1 million of cash left in the Itors for the firm’s hedge funds told them in a group conference funds and NIR Group had taken out $24.5 million in fees from call the once $800 million funds had lost of 97% of their value.