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2012 Symposium – Repair or Replace: Lifting SEC Regulation from Patchwork to Permanence

Every year, OSBLJ hosts a symposium where academic, political and business leaders from around the country gather to discuss emerging trends and current affairs.  This year, OSBLJ’s symposium addressed the current methods being used to circumvent the Securities Acts.  The question presented to the panelists: Given the prevalence of these methods, is it time to finally start anew and regulate the distribution of securities from scratch?  Or should regulation continue in a patchwork manner under the ‘33 and ‘34 acts?

2012 Symposium Keynote Speaker:

James Park is an Associate Professor of Law at Brooklyn Law School where he teaches Corporations, Securities Regulation, Civil Procedure and an Accounting, Finance and Law Seminar. Prior to joining the faculty at Brooklyn Law School, Professor Park was an Assistant Attorney General in the Investment Protection Bureau of the New York State Attorney General’s Office and a litigation associate at Wachtell, Lipton, Rosen & Katz in New York.  After law school, he clerked for Judge Robert A. Katzmann of the U.S. Court of Appeals for the Second Circuit and for Judge John G. Koeltl of the U.S. District Court for the Southern District of New York.  Professor Park has published extensively, including articles in the California Law Review, Duke Law Review, Michigan Law Review, Journal of Corporation Law, Harvard Civil Rights-Civil Liberties Law Review, and the Quinnipiac Law Review.

Presenter Biographies

Eric Alden is an Assistant Professor of Law who came to Chase from Palo Alto, California, where he had previously been an equity partner in corporate and securities law with a large high tech and IPO law firm in the Silicon Valley area and later equity partner in the Silicon Valley office of a global law firm. He has broad securities regulatory and transactional experience, including public company disclosure counseling, corporate governance, public and private offerings of equity, debt and hybrid securities, mergers and acquisitions, the formation of private investment funds and the representation of banks and hedge funds in their interactions with the public markets, with an overall emphasis on technical securities law and SEC compliance matters.

During 2005-2006, Alden served as an Attorney Fellow at the Securities and Exchange Commission in Washington, D.C., in the Division of Corporation Finance, Office of Chief Counsel. In that capacity, he oversaw and administered for the 2006 proxy season the agency’s shareholder proposal program, which has functioned as a central battleground of recent corporate governance disputes between institutional shareholders and public company boards of directors.

Prior to joining Chase, Alden taught Corporate Governance as a Lecturer at the University of California Berkeley School of Law and Securities Regulation as an Adjunct Professor at the University of California Hastings College of Law. During 2010-2011, he was a Research Fellow in Securities Regulation and Corporate Governance at the Berkeley Center for Law, Business and the Economy. He has published articles in the Harvard Journal of Law and Public Policy and the Berkeley Business Law Journal (forthcoming), in addition to various industry publications. His area of teaching focus is in Contracts, Corporations (Business Organizations), and Securities Regulation.

J. Robert Brown Jr. is a Professor of Law and Director of the Corporate Commercial Law Program at the University of Denver Sturm College of Law where he has taught corporate and securities law for more than two decades. He has authored numerous publications in the area, including recent pieces on the DC Circuit’s decision on shareholder access and a textbook on Corporate Governance.  The US Supreme Court has citied a number of Professor Brown’s articles, including one in Basic v. Levinson, the leading securities case on the issue of materiality. Professor Brown has also written amicus briefs on behalf of law professors that were filed in Matrixx v. Siracusano and Merck v. Reynolds, two recent securities cases heard by the United States Supreme Court.

Professor Brown has advised foreign governments on corporate and securities law reform, most recently in the West Bank.  He is an arbitrator for FINRA and sponsors the corporate governance blog, The Race to the Bottom (www.theracetothebottom.org).  Among his outside activities, Professor Brown is the chairman of the board of directors of the Colorado Coalition for the Homeless.

Rutherford Campbell, Jr. is a Professor of Law at the University of Kentucky College of Law where he teaches courses in Securities, Economics and Corporate Law.  From 1988 to 1993, Professor Campbell served as the Dean of the University of Kentucky College of Law.  After receiving an LL.M. from Harvard Law School, Professor Campbell began teaching at the University of South Carolina.  Professor Campbell has published extensively, including articles in the Duke Law Journal, the North Carolina Law Journal, and the Washington University Law Quarterly.

Joan MacLeod Heminway is the College of Law Distinguished Professor of Law at The University of Tennessee (UT) College of Law in Knoxville and a fellow of the Center for Business and Economic Research, the Center for the Study of Social Justice, and the Center for Corporate Governance at UT-Knoxville. Prior to joining the UT College of Law faculty in 2000, Professor Heminway practiced transactional business law (public offerings, private placements, mergers, acquisitions, dispositions, and restructurings) for nearly 15 years in the Boston office of Skadden, Arps, Slate, Meagher & Flom LLP.  Professor Heminway’s scholarship focuses on disclosure law and policy (especially under Rule 10b-5), as well as securities regulation, corporate finance, and corporate governance issues under federal and state law.  Her work has been published in a wide range of law reviews and journals.  She coauthored (with Douglas M. Branson, Mark J. Loewenstein, Marc I. Steinberg & Manning G. Warren, III) a business law text, released in 2008 (with a second edition forthcoming in 2012), entitled Business Enterprises: Legal Structures, Governance, and Policy (LexisNexis). In addition, her edited/coauthored book, Martha Stewart’s Legal Troubles, was released in 2007 (Carolina Academic Press).  She is a member of the American Law Institute and is licensed to practice in Tennessee and Massachusetts (inactive).

Dale Oesterle is a professor of law at The Ohio State University Moritz College of Law where he teaches the law of business associations, mergers and acquisitions, securities regulation, and law and finance for entrepreneurs.  After graduating from the University of Michigan Law School, Professor Dale Oesterle clerked for the Honorable Robert R. Merhige, Jr., United States District Court for the Eastern District of Virginia.

Before joining the Moritz faculty, Professor Oesterle Prof. Oesterle was a law professor at the Cornell Law School and the School of Law at the University of Colorado at Boulder, where he also served as director of the school’s Center for Entrepreneurial Law.

In 2003, Prof. Oesterle joined Moritz, where he was named the Gilbert J. Reese Chair.

Prof. Oesterle’s teaching and research focus primarily on business law, particularly mergers and acquisitions, corporate governance, hedge funds, securities law, and securities trading markets.

Alan Palmiter is a Professor of Law at the Wake Forest University School of Law.  Professor Palmiter teaches Securities Regulation, Corporate Law, Legal Valuation, and Energy Law in addition to Comparative Law between the United States and Latin American law.  Professor Palmiter is a graduate of The Ohio State University with degree in Mathematics.  Before entering the University of Michigan Law School, where he graduated Magna Cum Laude, Professor Palmiter taught high school math in Medellín, Columbia.

Professor Palmiter’s research interests lie in “corporate democracy,” including investor participation in corporate voting, regulation of institutional investors and judicial protection of shareholder rights.  Professor Palmiter has published numerous textbooks and articles alike, including the 2011 edition of Securities Regulation: Examples and Explanations and Corporations: A Contemporary Approach.

Andrew Schwartz teaches and publishes on Contracts, Corporations, and other aspects of business law.

A native New Yorker, Professor Schwartz studied Civil Engineering at Brown University and then attended Columbia Law School, where he served on the Columbia Law Review and assisted the late Professor E. Allan Farnsworth on his leading Contracts treatise. At Columbia, he was awarded the Class of 1912 Prize for Contract, earned a Certificate of Achievement from the Parker School of Foreign and Comparative Law, and was thrice named a James Kent Scholar.

Prior to joining the Colorado law faculty, Professor Schwartz clerked for Judge William A. Fletcher of the United States Court of Appeals for the Ninth Circuit and Judge Naomi Reice Buchwald of the United States District Court for the Southern District of New York, practiced for several years with Wachtell, Lipton, Rosen & Katz, a leading global business law firm based in midtown Manhattan, and lectured at UC Berkeley School of Law. He is admitted to practice in New York and before the United States Patent and Trademark Office.

William K. Sjostrom is a Professor of Law at the University of Arizona James E. Rogers College of Law where he teaches Securities Regulation, Business Organizations, and Acquisitions.  Professor Sjostrom is a graduate of the University of Notre Dame Law School and was previously a Professor of Law at the Salmon P. Chase College of Law at Northern Kentucky University.

Professor Sjorstrom has twice published with the Ohio State Entrepreneurial Business Law Journal: The Truth about Reverse Mergers, 2 Entrepreneurial Bus. L.J. 743 (2008) and PIPEs, 2 Entrepreneurial Bus. L.J. 381 (2007).  In addition, Professor Sjorstrom has been published in the Washington and Lee Law Review, the UCLA Law Review, and the Boston College Law Review, to name a few.

Jeremiah Thomas is an Associate with Kegler Brown Hill & Ritter in Columbus, Ohio.  Jeremiah focuses his practice primarily in the areas of Corporate Law and Intellectual Property.  Jeremiah is a graduate of the The Ohio State University Moritz College of Law in 2010.  He graduated with the following honors: Summa Cum Laude and Order of the Coif.  While at the Moritz College of Law, Jeremiah was Articles Editor for The Ohio State Law Journal.


Professor Dale Oesterle 

The Initial Public Offerings (IPOs) of both Facebook and Google both had a very unusual feature, neither company needed to raise capital by selling shares to the public.  Indeed, the filings of both companies indicated that they would park the considerable sales proceeds from the offerings in United States Treasuries until they could figure out what to do with the money.  The irony was not lost on bloggers and commentators.  The sales proceeds from the public offerings could actually dilute earnings per share as the interest on the Treasuries would not match the return on operating capital in the businesses. Why raise money you do not need?

The answer is well known to players in the securities markets.  The companies both wanted to “go public” and create a public trading market in their shares. The trading market would serve to provide a valuation of the business in which market participants would have more confidence and the trading market would provide an easier exit for owners and equity investors in the company.  Venture capital funds could cash out and the founders could, by partially cashing out, diversify their portfolios.

At issue is why our regulatory system requires firms to raise money they do not need so as to create public trading market in their stock.  Admittedly the quandary arises rarely; it is unique to companies that are blockbuster success stories, typically in high tech industry.  There are not that many.  But any answer to the quandary offers yet another searching questioning of a tottering distinction central to the Securities Act of 1933 and the Securities Exchange Act of 1934, the “public/private” distinction. Any elimination of the need of Facebook and Google to do an IPO as a condition of creating a public trading market in their shares would shatter the traditional public private distinctions as defined in both acts.  Perhaps it is time.

Professor Andrew Schwartz

The most basic distinction in the Securities Act of 1933 is between public offerings and private placements.  Public offerings must be “registered” with the SEC (a costly and cumbersome process), while private placements need not.  This serves the salutary purpose of exempting transactions among friends and family from the costly oversight of a federal bureaucracy.  This symposium asks, however, whether this public/private distinction continues to accurately delineate between those offerings that should, as a matter of public policy, be subject to registration, and those that should not.  Most notably, many have expressed concern that the cost of registering securities is so high as to make it uneconomical for early stage entrepreneurs seeking to raise modest amounts of capital.

“Crowdfunding,” of one form or another, has lately become a popular response to this problem.  The idea behind crowdfunding is that an entrepreneur can raise a substantial amount of money by soliciting small investments from a large number of people on the Internet.  It has its origins in “crowdsourcing,” which is “the act of outsourcing tasks, traditionally performed by an employee or contractor, to a large group of people or community (a crowd), through an open call.”  The most famous crowdsourced project is probably Wikipedia, a free online encyclopedia drafted and edited by millions of volunteers. [1]  Professor Schwartz’s topic sympathizes with the plight of early stage entrepreneurs in need of financing, but contends that crowdsourcing, as currently envisioned, is not the answer.

Professor Robert Brown, Jr.

Most issuers relying on exemptions from registration use those contained in Regulation D, a set of rules that provide a safe harbor under the private placement and small offering exemption.  These exemptions, however, must balance the need to lower the cost of acquiring capital against the risk that the rules will be used to promote fraudulent transactions.  As a result, the rules contain a number of limitations, including a ban on general solicitations. The ban all but results in a bar to the use of the Internet to advertise offerings.  One proposed solution has been the crowdfunding legislation that recently passed the House of Representatives. Another solution, however, would be to remove (or reduce) restrictions on exempt offerings but to bar the use of the rules by recidivist securities law violators.  Rule proposals currently outstanding would move the rules in this direction.

Professor Joan Heminway

Financial interests in business enterprises are becoming more complex.  No longer necessarily content to offer, sell, buy, or hold traditional debt and equity interests, business enterprises and their funders continue to explore ways of meeting their respective and collective needs with innovative, new financial interests and offerings.  With the advent of the crowdfunding era, for example, financial interests in business enterprises may look less like debentures or common stock, and more like loans, gambling bets, consumption interests, or charitable.donations.

Innovations in financial instruments raise questions of regulatory interpretation and authority.  How do we classify the instruments that represent complex or hybrid financial interests in business enterprises?  What area of regulation should apply to them?  Why?  What do the answers to those questions tell us, if anything, about the current (and possible future) structure and function of domestic and international financial regulation?  This presentation will explore the features of certain hybrid financial interests and begin to answer associated questions.

Professor Rutherford Campbell

Small businesses are vital to our national economy.  For example, past data from the Small Business Administration suggest that today firms with less than 20 employees may account for nearly 20% of the employment in this country.  Firms with less than 100 employees may account for as much as 40% of the employment in this country.  In our market economy, access to external capital is in nearly all cases important or essential to firms’ competitiveness or, indeed, to their very survival.  Firms’ access to capital is highly regulated by state and federal governments.  Rational regulation of access to capital must balance two policies, which at times appear to be in conflict.  Rulemakers and administrators must balance the need for capital formation with the protection of investors.  Both are essential in a market economy.

Over the years, Congress and the Securities and Exchange Commission have enacted exemptions from the registration requirements of the Securities Act of 1933, which exemptions have attempted to strike an appropriate and sensible balance between capital formation and investor protection.  While these exemptions have not been balanced precisely correctly in all instances, they generally have been on the mark and, certainly, have provided a sensible framework that could be fine tuned through administrative action. These exemptions, which were designed especially for the unique circumstances of small business capital formation, have been to a large extent wrecked, principally as a result of state securities laws and regulations.

Regulation A provides an exemption from registration under the 1933 Act.  The exemption is predicated on closely tailored, mandatory disclosures.  The exemption allows a public offering, imposes no offeree or purchaser qualification requirements and results in unrestricted securities in the hands of purchasers.  This exemption has fallen into nearly total disuse, due in large part to state securities laws.  Approximately 85% of Regulation D offerings that could be made under either Rule 504 or Rule 505 are now made under the significantly more onerous provisions of Rule 506 and limited to accredited investors.  Once again, this distortion in the use of two sensible and balanced exemptions is due in large part to the impact of state securities laws.

Congress now has before it three bills that could have a dramatic effect on the availability of exemptions from the registration requirements.  The bills, if enacted, will add substantial confusion to the area and offer problematic solutions to the present imbalance between capital formation and investor protection.

Professor William Sjostrom

Securities laws as understood today provide for differing potential liability for public offerings and private placements. Professor Sjostrom’s topic will consider whether private placement liability should be increased to be on par with public offering liability in light of the role placements played in the financial crisis and the growth of the private placement market.

Professor Alan Palmiter

Disclosure of pricing in securities offerings:  what do investors need? A look at the disclosure requirements concerning the pricing in initial equity offerings, both registered and unregistered.  Under current practice, prospectus disclosure in registered offerings is standard boilerplate that gives no clue of how the price for an offering has actually been set.  Instead, pricing happens behind the scenes in negotiations between the managing underwriter and the issuer — using various valuation models, multiples and comparables, along with indications of market demand.  The same level of disclosure seems also to be the prevailing practice in unregistered public offerings under Reg A, given the typical presence of a securities firm providing “pricing” services.  In private placements, private disclosure documents hone close to their public counterparts, though in practice the parties (usually with sophisticated advisers) are keenly aware of the pricing models and multiples that underlie their price negotiations.  All of this is relevant to recent proposals to give small companies greater access to public capital.  The talk considers ways in which the SEC can assist investors in equity (and also debt) offerings in which underwriters or other professional advisers may be absent — with the purpose of replicating the underwriters’ pricing function.

Professor Eric Alden

As a former partner at a nationally leading law firm in the arena of venture capital financing, Mr. Alden will speak with respect to the practical realities of private capital raising.  Specifically, although a number of regulations purporting to offer exemptions from the SEC’s registration requirements exist on the books, in almost all cases they contain limiting provisions or requirements which render them unattractive avenues for small, cash-strapped startup ventures to rely upon.  The one exemptive provision for capital raising which is relied upon in nearly all instances is the one which offers the simplest, most streamlined procedures, namely the Rule 506 safe harbor under the Section 4(2) private placement exemption.

However, in relying on Rule 506, startups nearly universally will offer securities only to “accredited investors,” due to conditions, which have been placed on making offers to anyone else.  As a result, those persons who do not meet the definition of accredited investor have, as a matter of experienced day-to-day observation, been protected out of any realistic opportunity to participate in ground-floor investments in promising new, young business ventures. This is an economic domain, which has thus been, as a direct result of regulation, as a practical matter reserved to members of the upper-middle class and the wealthy.

As a policy matter, in the interest of not excluding large sectors of the American public from the opportunity to participate in potentially high growth investments, and in the interest of easing the regulatory burden on capital raising by new enterprises struggling to get off the ground, it might therefore make sense to explore the possibility of creating an additional streamlined placement exemption open as a practical matter to individuals below the accredited investor threshold.  Recent legislative initiatives regarding a potential new “crowd-funding” exemption will be discussed.

[1] See http://en.wikipedia.org/wiki/Wikipedia.