Shadowland: Exempt Offerings and Individual Investors
In our forthcoming upgrade of the Knowledge Mosaic website in May, we will allow our subscribers to search on sales commissions and finder’s fees associated with securities offerings exempt from registration under Regulation D of the Securities Act of 1933. For example, on the Knowledge Mosaic Form D search page, you will be able to identify the names of commissioned sales representatives and search and sort by commission and/or finder’s fee. You will also be able to identify offerings with sales to unaccredited investors.
This is great stuff. The information in Form D filings is limited. You learn virtually nothing about the offering or the company sponsoring the offering. These offerings can target large institutional investors or very wealthy individuals known as accredited investors. These are the “sophisticated investors” who have entrusted their money to the JP Morgan Digital Growth Funds that I wrote about last week.
Does “sophisticated” imply that you must believe Twitter is worth $4.5 billion? Maybe so.
At any rate, what is less commonly known, but of greater concern to the SEC, is that the exempt offerings constitute a vast, largely unregulated investor shadowland. While the premise of the U.S. securities laws is that “sunlight is the best disinfectant”, and that philosophy is at the heart of the SEC’s corporate disclosure requirements, the Form D exemptions liberate a vast amount of capital that flows from individuals – many of whom are not “sophisticated” or wealthy – into investment vehicles of dubious quality.
The sales compensation data and unaccredited investor data can therefore give us important clues about investing practices that can expose instances where fraud or misrepresentation in violation of the securities laws may have occurred.
For example, in the last 12 months, the SEC has approved 14,179 Form D offerings that included a specific offering amount (another 3,500 were raising an “indefinite” amount of money). Almost 70 percent of these defined offerings involved sums of less than $5 million. Nearly 90 percent involved offerings of less than $25 million. The total amount of funds to be raised in these “defined” offerings was $629 billion.
About 10 percent – 1,481 – of the exempt offerings for defined amounts authorized sales to unaccredited (or unsophisticated and unwealthy) investors. Of this total, 822 filings – or 55 percent – were for offerings of less than $1 million. Only 37 percent of the total number of exempt offerings for defined amounts were for less than $ 1 million.
What does this information tell us? Well perhaps many things and nothing all at once. While the small offerings of less than $1 million account for 37 percent of the total number of offerings, their total value of $2.4 billion accounts for only 4 percent of the sums raised via Regulation D in the last 12 months. The sums of money unaccredited investors are risking seem to be relatively small, for the most part.
For example, SmallBiz Video Network, which seeks to be the “MTV of the enterprise sector”, submitted a Form D on February 10, 2011 indicating that the company had raised $45,000 of a target sum of $250,000 via a total of 25 unaccredited investors. So the average sum invested was less than $2,000. Moreover, offerings depending on commissioned promoters or salespeople do not appear to be disproportionately targeting unaccredited investors.
But maybe we are looking in the wrong place. When larger sums are involved, unaccredited investors may be more exposed to risk. For instance, CCI Parent Corp issued a Form D filing on February 11, 2011 that indicated the company had raised its total offering amount – $53,197,942 – from 17 investors, 11 of whom were unaccredited. In this case, the average sum raised per investor exceeded $3 million. A Google search for “CCI Parent Corp” reveals no information beyond references to the Form D filing itself. If we investigate the Related Persons data, it becomes more clear that the corporation has a connection to private equity firm Golden Gate Capital in San Francisco. But nothing in the filing itself would indicate that connection.
Anyway, this all bears more scrutiny, but the data is rich and it is exciting to consider the wisdom we may divine from it.