Among the features of the recently enacted JOBS Act that
has attracted the most attention are the legislation's provisions for
"crowdfunding." Under these provisions, a company is permitted to raise up to
$1 million during any 12-month period through an SEC-registered crowdfunding
portal. While these provisions have attracted a great deal of discussion
and even controversy, a more basic question is - who will actually be taking
advantage of this new fundraising procedure?
A common assumption about the new crowdfunding procedure
is that it will be most beneficial to start-up companies. But at least
according to a May 9, 2012 CFO.com article (here),
due to the procedural burdens and costs associated with the JOBS Act's
crowdfunding provisions, crowdfunding is unlikely to be an attractive alternative
for start-up companies.
According to the article, the crowdfunding provisions in
the JOBS Act may be "too complex and onerous" and "not very cost-effective"
for an early-stage company. Among other things, entrepreneurs launching a
new venture "may lack the financial acumen and robust business plans they'll
need to comply with the JOBS Act" and they also "may not have the cash to hire
the accountants and lawyers they will need to navigate the law."
Instead, the companies likeliest to be using crowdfunding
will be "more mature firms" that "have the experience of searching for sources
of capital" and that are "able to show, based on financial information,
performance metrics and forecasts, that they are heading in the right
direction." Among other things, the crowdfunding process will require a
certain amount of rigor, if for no other reason than the company using the
process will have to provide financial statements.
The financial statement requirements will impose a
cost-benefit analysis on companies considering a crowdfunding financing, due to
the Act's sliding scale requirements. Companies raising up to $100,000 need
provide only a financial statement signed by the company's directors. But
companies raising between $100,000 and $500,000 must provide financials
reviewed by a CPA. And for companies raising between $500,000 and $1 million,
audited financials must be provided. Companies will have to decide whether
their financing requirements justify the expense of having their financials
reviewed or audited. In addition, the Internet platforms through the
crowdfunding offerings will be conducted will also be charging fees, which will
add to the cost.
As I have previously noted (refer here),
the JOBS Act's crowdfunding features also expressly include liability
provisions. The potential liability exposures mean that issuers trying to raise
money through a crowdfunding offering "will probably need to get a lawyer
involved," which, as a commentator quote in the article notes, is "not ever
cheap."
There is also the possibility that the SEC will add even
greater burdens and expense when it releases its crowdfunding rules in January
2013. Among other things, the SEC could add additional burdens in the way that
it regulates the funding portals. The SEC has also no secret of its concerns
about the possibility of scam artists using crowdfunding to try to con
investors, as a result of which, as a commentator quote in the article notes,
the SEC might "layer on more regulation." For example, the SEC might require
disclosure after the crowdfunding offering, which "could make crowdfunding potentially
cost prohibitive."
The Venue That Suits You Best:
Where is the best place in the world to file a lawsuit? Well that depends on
the kind of lawsuit you want to file. Want to sue for libel? Then you want to
file in the U.K. Thinking of suing for patent infringement? Then you should
file in Germany. All of this is according to the "best and worst places to sue"
atlas published on May 10, 2012 in BusinessWeek, and which can be found here.
More Thoughts on Asia: As
I discussed in a blog
post summing up my observations of my recent Asia trip, there is an
incredible amount going on now in Asia. The present and future business
opportunities in Asia are enormous - so much so that I really regretted during
my trip that my children were not there to see what I was seeing.
It is in this context that I note an article that
appeared on May 11, 2012 Wall Street Journal. The article, entitled
"P&G Unit Bids Goodbye to Cincinnati, Hello to Asia" (here),
describes how Proctor & Gamble is moving its cosmetics and personal-care
unit from Cincinnati to Singapore. The company is making the move based on its
"decision to base the business in the fast-growing Asia beauty market," as part
of a larger plan to move employees and manufacturing facilities closer to its
key customer bases. The article goes on to note that the Asia-Pacific region
already accounts for half of the world's market for skin care, and is also by
far the fastest growing region.
The article includes a sidebar identifying a number of
similar moves developed-world companies have made recently. For example, GE has
moved its X-ray unit from Wisconsin to Beijing; Halliburton has set up a
separate headquarters in Dubai; DSM Engineering Plastics has moved its
headquarters from the Netherlands to Singapore: and Rolls-Royce has moved its
global marine headquarters to Singapore from London. (As I understand it, AON's
recent decision to move its headquarters from Chicago to London is in part
explainable as part of this same phenomenon, because so much of its business and
growth is outside the U.S.)
Maybe I am giving too much significance to these
developments I am overly focused on Asia so soon after my return home from
Asia. Even allowing for that possibility, these companies' moves still
seem significant. These companies are re-orienting themselves because the world
is re-orienting. It seems pretty clear to me that the path to
future business success is going to run through Asia. Those of us doing
business in the U.S. and in Europe now need to prepare for the fact that our
clients, or at least those who are likeliest to succeed, are going to be
positioning themselves to participate in Asian opportunities. Provides of
services will need to be prepared to adjust as the companies reposition.
China in Ten Words: Another
observation from my Asia trip is how vast, complex and enigmatic China is.
Since returning home, I have read several books about China and its history,
trying to get a better sense of the country and the changes it has been through
in recent years. The country is so large and the changes it has been through
have been so momentous that it seems nearly impossible to briefly summarize it
all. For that reason, the slim, readable book China in
Ten Words by Yu Hua, a Chinese author who lives in Beijing, is so
interesting and impressive.
Yu's book is divided into ten short chapters, each of
which has a single word as a theme. The ten chapters are: people; leaders;
reading; writing; Lu Xun (a pre-revolutionary Chinese author); revolution;
disparity; grassroots; copycat; and bamboozle. Yu took this thematic approach
because, as he says, if he tried to capture everything about China, the result
would be a book so long that no one could ever read it. By limiting himself to
just ten words, he gives us "ten pairs of eyes" to scan the contemporary
Chinese scene.
Yu's method has a very specific purpose, which he
explains in his introduction:
"The arrow hits the target, leaving the string," Dante
wrote, and by inverting cause and effect he impresses on us how quickly change
can happen. In China's breathtaking changes during the past thirty years we
likewise find a pattern of development where the relationship between cause and
effect is turned in its head. Practically every day we find ourselves
surrounded by consequences, but seldom do we trace those outcomes back to their
roots. The result is that conflicts and problems -which have sprouted
everywhere like weeds during these past decades - are concealed amid the
complacency generated by our rapid economic advances. My task here is to
reverse normal procedure; to start from the effects that seem so glorious and
search for their causes, whatever discomfort that may entail.
In tracing the current outcomes back to their roots, Yu
tells the story of contemporary China from the perspective of his own personal
experiences. What quickly becomes apparent is not only how much Yu has seen and
experienced in his life, but how much everyone in China older than, say, forty
or so, has seen and experienced. The dramatic and appalling details of the
scenes he witnessed during the Great Leap Forward and the Cultural Revolution,
which took place during his childhood and adolescence, provide an almost
incredible backdrop to China's current prosperity and economic growth. As
Yu says, "in this quest to follow things back to their source, we cannot help
but stumble on one misfortune after another."
The unexpected and interesting message that emerges from
Yu's account is the directness of the connection between the events during the
Great Leap Forward and the Cultural Revolution and contemporary circumstances.
Yu finds parallels between the excesses of those earlier eras and many of the
excesses of modern China. In his chapter titled "Revolution," he shows how the
propaganda deceptions of the Great Leap Forward era and the revolutionary
violence of the Cultural Revolution era continue to shape behavior and events.
The consequences for China emerge Yu's book progresses;
his final four chapters - disparity, grassroots, copycat and bamboozle -
portray a country beset with "moral bankruptcy and confusion of right and
wrong." For example, in discussing the "copycat" phenomenon - whereby, as
a result of an engrained revolutionary era ethos, counterfeiting and
infringement are accepted as part of the "anarchist spirit" - Yu characterizes
the trend as "a sign of something awry in China's social tissue."
In the same vein, in the book's final chapter, Yu
explains how the word "bamboozle" has come to gain such broad acceptance in
modern China, as its particular usage "throws a cloak of respectability over
deception and manufactured rumor." Yu describes a society where the people
routinely bamboozle the government and the government routinely bamboozles the
people Yu recounts several different tales illustrating this process in
action, and then comments that "there is really no end to these stories of
fraud and chicanery, for 'bamboozle' has already insinuated itself into every aspect
of our lives."
Yu concludes that "the rapid rise in popularity of the
word 'bamboozle,' like that of 'copycat,' demonstrates to me a breakdown of
social morality and a confusion in the value system in China today," which he
says is "an aftereffect of our uneven development these past thirty years." Yu
ends his book with a personal anecdote showing how the attempt to bamboozle can
backfire. (Yu recounts how as a child he faked a stomachache to get out of
doing chores and wound up getting his appendix removed.) Yu doesn't expressly
connect the link between his personal experiences and China, but the implicit
message seems to be that China could wind up as the victim of its own
bamboozlement.
Yu writes simply and clearly, and his many anecdotes
humorously illustrate his themes. Using ten words, Yu manages to provide an
interesting and though-provoking picture of contemporary China. In the portrait
he paints, China is a troubled giant still struggling to recover from the
painful events of the country's early history.
Read
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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