Improving Access to Capital Markets
Let’s be honest, despite the fact that the biodiesel industry is experiencing arguably its most successful year, it is still difficult for biodiesel producers to raise capital in the current investing climate. This difficulty in accessing the capital markets, especially equity capital, is hindering the biodiesel industry’s ability to expand and implement process and technical improvements, which could improve efficiency and profitability in the industry. This pain is shared almost universally by companies in various industries following the worldwide financial problems that we have endured in recent years.
In response to difficulties that companies face in raising capital, Congress passed the 2012 Jumpstart our Business Startups Act (JOBS Act) with the goal of improving access to the U.S. capital markets. One provision of the JOBS Act required the U.S. Securities and Exchange Commission to allow advertising and general solicitation in certain unregistered capital raises when all of the participating investors are accredited under SEC regulations. The ability to use advertising and general solicitation was previously reserved for capital raises that were registered with the SEC.
Accredited investors under SEC regulations are primarily higher income and net worth investors. Categories of accredited investors include: (i) individuals with annual income in excess of $200,000 (or $300,000 in joint annual income with a spouse) for the two most recent years and who expect the same level of income in the current year; (ii) individuals who have net worth in excess of $1 million without including equity in the investor’s primary residence; (iii) directors and executive officers of the companies raising capital; and (iv) certain business and other entities with assets in excess of $5 million. While this is not an exclusive list of investors who qualify as “accredited” under SEC regulations, these are the most common types of accredited investors.
On July 10, the SEC adopted final regulations implementing this key provision of the JOBS Act. The longstanding prohibition against advertising and general solicitation in unregistered capital offerings has created difficulties in modern times when so much communication takes place through the internet and social media. In order to allow greater access to the capital markets, Congress sought to use these new communication tools to enhance the ability of companies to attract investors. Congress determined that the competing interests of investor protection versus increasing businesses’ access to capital through modern forms of communication could be appropriately balanced by the SEC.
Under these new rules, companies engaging in advertising and general solicitation must take reasonable steps to determine whether the investors participating in their capital raises are actually accredited. This reasonable verification is a greater duty than companies currently have when they pursue unregistered capital raises, which is the trade-off that must be considered by companies who wish to pursue these types of unregistered offerings. Under these new rules, the SEC has developed a list of methods that companies can use to determine whether the investors participating in the unregistered offering meet the accredited standard. However, the SEC went out of its way to state that it wants to provide flexibility to companies in order to meet this requirement in a way that makes sense for their business.
Further, the SEC proposed additional rules not yet effective, which would require companies raising capital through advertising and general solicitation to file additional information with the SEC. While this could add additional burdens to companies pursuing unregistered offerings using advertising and general solicitation, it is certainly less burdensome than registering with the SEC. No firm timetable has been established for when these additional filing rules may become effective.
The bottom line is, while pursuing an unregistered capital raise using advertising and general solicitation may require additional steps in order to comply with these SEC regulations, it may provide your company access to investors who were previously unavailable, and expand the potential pool of capital available.
These new regulations become effective on Sept. 23. It is important to note that the changes made by the SEC only enhance the ways in which companies can raise capital through unregistered offerings and provide a new tool that can be used. The traditional methods of conducting unregistered capital offerings are intact and available to be used.
Author: Joe Leo
Attorney, BrownWinick Law Firm