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Colleen Baker

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PhD (Wharton) Professor Baker is an expert in banking and financial institutions law and regulation, with extensive knowledge of over-the-counter derivatives, clearing, the Dodd-Frank Act, and bankruptcy, in addition to being a mediator and arbitrator.

Previously, she spent time at the U. of Illinois Urbana-Champaign College of Business, the U. of Notre Dame Law School, and Villanova University Law School. She has consulted for the Federal Reserve Bank of Chicago, and for The Volcker Alliance.  Prior to academia, Professor Baker worked as a legal professional and as an information technology associate. She is a member of the State Bars of NY and TX. Read More

For those of you who haven’t seen it, the SEC has issued its rules proposal for so-called Regulation A+. It’s available here.

Section 401 of the JOBS Act required the SEC to exempt from registration public offerings of securities with an aggregate offering amount of up to $50 million per 12-month period. The Act does not go into much detail, but it does impose some conditions on the exemption the SEC is supposed to adopt:

  • the securities may be offered and sold publicly
  • the securities are not “restricted securities,” meaning they may be resold freely
  • the issuer must file an offering statement with the SEC and distribute that offering statement to prospective investors
  • the issuer may solicit interest in the offering prior to filing an offering statement with the SEC
  • the issuer must file audited financial statements annually
  • certain issuers are disqualified
  • the SEC may require the issuer to file periodic disclosures.

Section 401 does not mention Regulation A, but the statutory requirements are similar to the requirements in Regulation A, so everyone has been referring to it as Regulation A+. The SEC could have chosen to issue a new exemption completely separate from Regulation A, but it has…

I have been pondering one of the provisions in the SEC’s proposed crowdfunding rules, and I have decided that it’s extremely dangerous to crowdfunding intermediaries.

Reducing the Risk of Fraud: The Statutory Requirement

Section 4A(a)(5) of the Securities Act, added by the JOBS Act, requires crowdfunding intermediaries (brokers and funding portals) to take steps to reduce the risk of fraud with respect to crowdfunding transactions. The SEC is given rulemaking authority to specify the required steps, although the statute specifically requires “a background and securities enforcement regulatory history check” on crowdfunding issuer’s officers and directors and shareholders holding more than 20% of the issuer’s outstanding equity.

Proposed Rule 301

Proposed Rule 301 of the crowdfunding regulation implements this requirement.

A couple of the requirements of Rule 301 don’t really relate to fraud, even though the section is captioned “Measures to reduce risk of fraud.” Rule 301(a) requires the intermediary to have a reasonable basis for believing that the issuer is in compliance with the statutory requirements and the related rules. Rule 301(b) requires the intermediary to have a reasonable basis for believing that the issuer has means to keep accurate records of the holders of the securities it’s selling.

When the SEC adopted the Rule 506(c) amendment allowing general solicitation in certain Regulation D offerings, it also proposed a number of changes to Regulation D. The Federal Regulation of Securities Committee of the American Bar Association’ s Business Law Section, recently submitted a very thoughtful comment letter on those proposed changes. It’s available here.

I have been a member of the Federal Regulation of Securities Committee and several of its subcommittees for over two decades. Almost all of the country’s top securities lawyers are members. (I’m not sure why they let me join.) I don’t always agree with the committee’s views, but its positions are always thoughtful and well-reasoned. This letter is no exception (and, in this case, I happen to agree with most of it). It’s worth reading.

If you have an interest in entrepreneurship and innovation, or if you just want to know more about the company whose boxes are currently appearing on porches across the nation, read Brad Stone’s new book, The Everything Store: Jeff Bezos and the Age of Amazon.

Stone is not a corporate shill; his portrait of Bezos is not always flattering. But the book is well written and entertaining, and a good study of what made Amazon successful. Budding entrepreneurs could derive a number of important lessons from Jeff Bezos.

The Goal of a Business is to Serve Customers

Entrepreneurs often chase the wrong rabbit. The goal of a business is not to create the fanciest technology. The goal of a business is not to get ready to make a public offering. The goal of a business, and the way it makes money, is to serve customers—to fulfill some customer need more effectively than any other company.

It’s clear that customers have been Bezos’ top priority from the beginning, and that’s what has made Amazon successful. The most obvious example of that philosophy? Putting both positive and negative customer reviews on the Amazon web site. We take that for granted now—many…

There’s an interesting slide show available on Forbes, 10 Terms You Must Know Before Raising Venture Capital.

It’s interesting, but it overlooks the most important thing entrepreneurs should know before raising venture capital: the need to hire an experienced lawyer. Learning the terminology won’t substitute for representation by someone who knows what he or she is doing.

For a long time, law, business, and economics professors have used “widgets” in their hypotheticals and examples. A widget is a purely hypothetical manufactured product; there’s no such thing.

The advantage of using widgets instead of real products is that the product and the market may have whatever characteristics the professor attributes to them. The professor doesn’t have to fit the example to any real-world attributes or worry that some student will say, “That’s not how the market for widgets actually works.”

I’m not sure where the term came from, but it’s been used for a long time. The Oxford English Dictionary includes a reference from 1931. “Widget” is commonly used; in a recent Westlaw search, I found 3,569 law review articles using the term.

Now, of course, a widget is a real thing. A widget is software used on cellphones, tablets, and computers. When a professor today says “widget,” students don’t automatically think of a manufactured article; they think of software—a real product with real attributes.

Given that real-world association, I think it’s time to stop using the term “widget” to describe a hypothetical manufactured object. (The alternative, for law professors to actually know enough about real businesses and…

The news media and blogs have been filled with discussions of the “nuclear option” adopted by U.S. Senate Democrats last week. No, Senate Democrats are not threatening the Republicans with weapons of mass destruction (well, not all the Senate Democrats). It’s just a new way to end a filibuster. A simple majority vote is now sufficient to stop filibusters of executive and some judicial nominations.

I’m sure your first thought about the nuclear option had nothing to do with politics or judicial appointments. Your first thought was undoubtedly the same as mine: what would happen if the Senate were a closely-held corporation? (What? That wasn’t your first thought? I guess I’m too much of a business law geek.)

Duties of Controlling Shareholders; Oppression

As I’m sure you know, many jurisdictions impose a stronger fiduciary duty on those in control of a closely held corporation. See, e.g., Donahue v. Rodd Electrotype Co. of New England, Inc., 328 N.E.2d 505 (Mass. 1975). Actions that disadvantage the minority are subject to careful review. In addition, many corporate statutes allow courts to dissolve the corporation if those in control of the corporation have acted oppressively. See, e.g., Revised Model Business Corporation…

A student who completed one of my computer-assisted legal exercises pointed out that one of his answers was partially correct, and asked me why he didn’t receive partial credit. The short answer is a technical one–the software doesn’t allow for partial credit on questions. But the student’s inquiry made me think about the deeper issue of giving credit for partially correct answers.

All of the law professors I know give partial credit for exam essay answers that contain errors or reach erroneous conclusions. In the context of a single end-of-semester exam, where there’s significant time pressure and no opportunity for students to redo their answers, that philosophy probably makes sense. But does it teach our students the wrong lesson?

One doesn’t get credit for partially correct answers in law practice. Answers are either right or wrong. If the lawyer tells the client yes and the correct answer is no, it doesn’t matter that most of the lawyer’s analysis was correct. Overlooking a crucial fact or missing an important step in the analysis is not excusable in practice. The client is unlikely to congratulate the lawyer for being 80% correct.

Of course, lawyers get lucky. The lawyer’s answer may be right…

The SEC’s crowdfunding proposal offers small, startup
businesses a new way to raise capital without triggering the expensive
registration requirements of the Securities Act of 1933. But the capital needs
of small businesses are often uncertain. They may need to raise money again
shortly after an exempted offering. Or they may want to sell securities pursuant
to another exemption at the same time they’re using the crowdfunding exemption.
How do other offerings affect the crowdfunding exemption? The proposed crowdfunding
rules are unexpectedly generous with respect to other offerings, but they still
contain pitfalls.

Other Securities Do Not Count
Against the $1 Million Crowdfunding Limit

The proposed rules make it clear that the crowdfunding
exemption’s $1 million limit is unaffected by securities sold outside the crowdfunding
exemption. As I explained in an earlier post, only securities sold pursuant to
the section 4(a)(6) crowdfunding exemption count against the limit.

Crowdfunding and the Integration Doctrine

But the integration doctrine, the curse of every securities
lawyer, poses problems beyond determining the offering amount.

Briefly, the integration doctrine defines what constitutes a
single offering for purposes of the exemptions from registration. The Securities
Act exemptions are transactional; to avoid registration, the issuer must fit …

I support crowdfunded securities offerings, but I have criticized the crowdfunding exemption in the JOBS Act. I won’t repeat those criticisms here, but, after wading through the 585-page SEC rules proposal, I am happy to report that some (but not all) of the proposed rules would significantly improve the exemption.

1. The proposed rules clear up the statutory ambiguities relating to investment limits and the amount of the offering

Title III of the JOBS Act includes a number of ambiguities relating to the investment limits and the amount of the offering. The proposed rules clear up those ambiguities. I have already discussed this aspect of the proposed rules and won’t repeat that discussion here.

2. Both issuers and intermediaries can rely on information provided by investors to determine if the investment limits are met.

The amount that an investor may invest in a crowdfunded offering depends on that investor’s net worth and annual income and also on how much that investor has already invested in section 4(a)(6) offerings in the last 12 months. I have argued that crowdfunding issuers and intermediaries should not be required to verify these numbers–that investors should be able to self-certify.
I am happy to…