Wednesday, August 28, 2013

The Death of Good Standing Certificates in Texas

Virtually every M&A or corporate finance transaction of any significant size includes a requirement that the parties be in "good standing."

A Texas corporation is in "good standing" if it is in existence and it is not delinquent in filing its franchise tax returns to the extent the State of Texas may revoke the corporation's corporate status.  Until recently, companies could demonstrate that they were in good standing in Texas by going to the Texas Comptroller's website, searching for the company in question, and printing off a "Certificate of Account Status,” sometimes called a “Certificate of Good Standing.”

But the Certificate of Account Status died effective May 5, 2013.  You may not have seen the funeral, but that's when the Texas Comptroller's office ceased issuing Certificates of Account Status.

Nowadays, a company seeking to demonstrate that it is in good standing with the Texas Comptroller's office must search the Comptroller's website for an electronic report labeled "Franchise Tax Account Status."  If the company's Right to Transact Business in Texas is shown as "Active" on that page, that means the company is in good standing.

Wednesday, August 21, 2013

Rule 506 Amendments - The SEC Giveth and Taketh Away

On July 10, 2013, the SEC adopted long-awaited final rules eliminating the prohibition against general solicitation and general advertising in Rule 506 offerings if the issuer of the securities takes reasonable steps to verify that all purchasers of securities in the offering are accredited investors.

Congress instructed the SEC amend to Rule 506 to permit general solicitation in Rule 506 offerings as part of the Jumpstart Our Business Startups (JOBS) Act.  The JOBS Act was enacted on April 5, 2012, and required the changes to be made within 90 days (or by July 4, 2012).  On July 10, 2013, the SEC announced its final rules implementing the change permitting general solicitation in Rule 506 offerings.  The amendment becomes effective September 23, 2013.  So by my calculations, the amendment becomes effective only 446 days after the deadline set by Congress in the JOBS Act!

In any event, the amendment to Rule 506 should come as good news for small and mid-sized businesses seeking to raise capital in private placements.  Beginning September 23, 2013, there are no longer restrictions on advertising and other means of general solicitation to conduct a valid private placement under Rule 506 if the issuer is careful to verify the accredited investor status of its investors.

On the other hand, the same day that the SEC released its final rule permitting general solicitation, the SEC also adopted or proposed related rules which may restrict the ability of issuers to take advantage of the new general solicitation rules, including:

  1. adopting so-called "bad-boy" disqualifications from Rule 506, which will restrict issuers who are affiliated with felons and other bad actors from participating in Rule 506 offerings;
  2. proposing new rules which will require additional filings with the SEC in connection with any Rule 506 offering in which the issuer engages in general solicitation, including filing a Form D 15 days before any such general solicitation; and
  3. adopting strict standards for adequate verification of the accredited investor status of potential purchasers in Rule 506 offerings using general solicitation.
SEC Releases adopting the final rules are available here (regarding general solicitation) and here (regarding "bad boy" disqualifications).  The SEC Release proposing the new rules regarding additional Form D filing requirements is available here.