On August 13, 2010, President Obama signed a law that contains a new fee for worker visas (H-1B and L nonimmigrant work visas). The new fee is $2,000, which is in addition to the following already existing fees: $320 base I-129 filing fee, $500 fraud prevention fee, $1,500 American Competitiveness and Workforce Improvement Act of 1998 fee ($750 if the employer has less than 25 employees), and a $1,000 optional expedited 2-week processing service fee. The new fee only applies to companies with 50 or more employees in the United States with more than 50 percent of its employees in the United States in H-1B or L visas. The new fee increase will help pay for the cost of an increase in border security.
It remains to be seen whether this fee increase can help reduce the unemployment rate. Would the $2,000 fee serve as a sufficient deterrent for US employers to start hiring US citizens or residents instead of the foreign workers? Unlikely, given that the US employers can subtract the fee from the salary or have the visa workers pay for it. However, the fee may have an adverse effect of causing Americans lose more jobs. Because of the overall costs and time required to bring in a qualified foreign worker, the US employers may choose to outsource more jobs to India and other destinations rather than hire in their US locations.
Monday, August 23, 2010
Wednesday, August 18, 2010
Disclosure Relief for Smaller Public Companies
One of important considerations for companies that are deciding whether or not to “go public” is the cost involved with being a public company. Current securities regulations require many detailed disclosures from public companies, some of which require considerable resources to collect. However, starting in December 2007, the Securities and Exchange Commission has lessened disclosure obligations of smaller public companies, thus reducing their costs associated with being “public”. These rules allowed approximately 42% of all public companies to provide reduced disclosure, as opposed to 29% prior to the adoption of the rules, as of 2006.
The rules apply to companies with a public equity float held by non-affiliates of less than $75 million or, if the company does not have common equity or there is no market for its common equity, with revenues below $50 million for the last fiscal year. Under these rules, smaller reporting companies can omit risk factors, compensation discussion and analysis, disclosure about the market risk, performance graphs, selected financial data, supplementary financial data and certain other disclosures. Companies are also allowed to shorten description of their businesses, describe business activities for only three instead of five years and provide audited financials for two instead of three years.
Additionally, the Wall Street Reform and Consumer Protection Act, signed into law in July 2010, has exempted smaller reporting companies from compliance with Section 404(b) of the Sarbanes-Oxley Act internal control auditor attestation requirements.
Smaller companies can voluntarily include the no longer required disclosures on an item-by-item or “a la carte” basis, if they deem certain disclosures to be particularly relevant for their investors. I encourage smaller reporting companies to do so, especially with respect to the risk factors that help protect companies from potential liability.
Overall, these rules have been a welcome relief for smaller public companies, as they reduce compliance costs and minimize diversion of attention of the management and the board from running the company.
The rules apply to companies with a public equity float held by non-affiliates of less than $75 million or, if the company does not have common equity or there is no market for its common equity, with revenues below $50 million for the last fiscal year. Under these rules, smaller reporting companies can omit risk factors, compensation discussion and analysis, disclosure about the market risk, performance graphs, selected financial data, supplementary financial data and certain other disclosures. Companies are also allowed to shorten description of their businesses, describe business activities for only three instead of five years and provide audited financials for two instead of three years.
Additionally, the Wall Street Reform and Consumer Protection Act, signed into law in July 2010, has exempted smaller reporting companies from compliance with Section 404(b) of the Sarbanes-Oxley Act internal control auditor attestation requirements.
Smaller companies can voluntarily include the no longer required disclosures on an item-by-item or “a la carte” basis, if they deem certain disclosures to be particularly relevant for their investors. I encourage smaller reporting companies to do so, especially with respect to the risk factors that help protect companies from potential liability.
Overall, these rules have been a welcome relief for smaller public companies, as they reduce compliance costs and minimize diversion of attention of the management and the board from running the company.
Thursday, July 22, 2010
Change in the Accredited Investor Definition
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Reforms introduced by the Act are broad and will affect many aspects of the operation of the U.S. capital markets. Today, I would like to mention one reform in particular, the new “accredited investor” standard. Only one word has changed, but this change may have an immediate and profound impact on the way small businesses access capital markets.
The Act has amended Rule 501(a)(5) of Regulation D and Section 215(e), both under the Securities Act, to provide that an accredited investor is one whose net worth, individual or joint with the spouse, at the time of purchase, is $1,000,000, excluding the value of a primary residence. Previously, the net worth had to be $1,000,000, including the value of a primary residence. This change is effective immediately upon enactment of the law. When raising a limited amount of capital, Regulation D does not require companies to provide disclosures to accredited investors. However, if offers are made to non-accredited investors, then companies have to provide extended disclosures about their business, industry, risks and also their financial statements.
On one hand, this change has been long overdue. The definition of an “accredited investor” had not been changed since 1982, when it was first adopted. The standard that is supposed to describe high net worth individuals who earn high salaries and can afford the services of a financial representative has lost its purpose as the inflation and rising real estate values made more and more people “accredited”. For example, all those who were fortunate enough to purchase their apartments in Manhattan in the early 1980s have all become “accredited” by the mid-2000s just by virtue of owning apartments, when the real estate boom had quadrupled the prices. However, not all of these individuals have enough other income to afford the services of a financial representative to guide them through the risks of private investments. Therefore, the Congress has decided to protect these individuals by making them “non-accredited”.
On the other hand, this change makes it more difficult for small businesses to raise money. Providing extensive disclosures for non-accredited investors will add up legal fees, as attorneys will have to draft lengthy private placement memorandums. Since the pool of accredited investors has shrunk, raising capital in the initial rounds (in “Family and Friends” or “Angels” rounds) has become more expensive. This comes at a critical time for many businesses that cannot obtain bank financing and whose only option is to resort to raising capital from investors.
Of course, the change is needed, since the definition of “accredited investor” has not been updated in almost 30 years. However, it comes at a cost to small businesses, a high cost, given the current economic environment.
The Act has amended Rule 501(a)(5) of Regulation D and Section 215(e), both under the Securities Act, to provide that an accredited investor is one whose net worth, individual or joint with the spouse, at the time of purchase, is $1,000,000, excluding the value of a primary residence. Previously, the net worth had to be $1,000,000, including the value of a primary residence. This change is effective immediately upon enactment of the law. When raising a limited amount of capital, Regulation D does not require companies to provide disclosures to accredited investors. However, if offers are made to non-accredited investors, then companies have to provide extended disclosures about their business, industry, risks and also their financial statements.
On one hand, this change has been long overdue. The definition of an “accredited investor” had not been changed since 1982, when it was first adopted. The standard that is supposed to describe high net worth individuals who earn high salaries and can afford the services of a financial representative has lost its purpose as the inflation and rising real estate values made more and more people “accredited”. For example, all those who were fortunate enough to purchase their apartments in Manhattan in the early 1980s have all become “accredited” by the mid-2000s just by virtue of owning apartments, when the real estate boom had quadrupled the prices. However, not all of these individuals have enough other income to afford the services of a financial representative to guide them through the risks of private investments. Therefore, the Congress has decided to protect these individuals by making them “non-accredited”.
On the other hand, this change makes it more difficult for small businesses to raise money. Providing extensive disclosures for non-accredited investors will add up legal fees, as attorneys will have to draft lengthy private placement memorandums. Since the pool of accredited investors has shrunk, raising capital in the initial rounds (in “Family and Friends” or “Angels” rounds) has become more expensive. This comes at a critical time for many businesses that cannot obtain bank financing and whose only option is to resort to raising capital from investors.
Of course, the change is needed, since the definition of “accredited investor” has not been updated in almost 30 years. However, it comes at a cost to small businesses, a high cost, given the current economic environment.
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