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NB Investment Bank Eyes New SEC Regs

Newport Beach-based investment bank Digital Offering LLC is betting on recent changes that allow companies to publicly advertise and solicit investors as they seek to raise private placement capital.

The technology-oriented firm operates an online platform and provides broker-dealer services to link issuers and potential investors.

Previously, companies seeking to sell securities could either register with the U.S. Securities and Exchange Commission or get an exemption by agreeing to a prohibition on general solicitation and advertising in connection with their private offerings.

The recent change, part of the federal 2012 Jumpstart Our Business Startups Act, or JOBS Act, means companies now can market more broadly, although actual sales of securities are still restricted to “accredited investors” who meet certain income or net-worth thresholds.

The SEC approved the regulatory changes in July, and the rules took effect on Sept. 23, the same day Digital Offering officially rolled out its online services.

A company that wants to sell securities can join Digital Offering’s platform and provide necessary information—such as an executive summary, a pitch video and transaction documents—that investors can access.

Digital Offering hasn’t yet uploaded deals to its site but is currently considering “at least three” and is likely to announce some next month, according to cofounder and President Louis Bevilacqua, who also serves as general counsel.

“There is a very thorough due diligence process we go through,” he said.

The bank is starting in the mining and energy industries with offerings of between $3 million and $50 million.

Such a brokerage business model is not new, and competitors include San Francisco-based CircleUp and I-Bankers Direct in Connecticut, said Digital Offering Chief Executive Gordon McBean.

A key advantage for Digital Offering, he said, is its access to the large retail investor base of strategic partner Euro Pacific Capital Inc., an investment advisory firm in Westport, Conn.

Euro Pacific, which has more than 20,000 client accounts and about $2 billion in assets under management, is headed by Chief Executive Peter Schiff, who also is Digital Offering’s largest shareholder. McBean serves as president of Euro Pacific, has several offices in the U.S., including one in Newport Beach.

“Euro Pacific has thousands of accredited investors in its client base,” said McBean. “The challenge to anyone else who’s trying to do what we’re doing, it’s the cost of acquisition to go find the accredited investor. That’s not easy to do.”

SEC laws define an accredited investor as someone with $200,000 or more in annual income for each of the most recent two years. A couple must earn $300,000 or more per year.

There also has to be a “reasonable expectation to make the same amount in the upcoming year,” Bevilacqua said. “Or they have to have net worth of $1 million, excluding the value of primary residence.”

Bevilacqua was a partner in the corporate and securities practice at law firm Pillsbury Winthrop Shaw Pittman LLP before he joined McBean, who spearheaded the formation of Digital Offering for a second time.

McBean founded the company in 1999 under the name Digital Offering Inc. to manage online stock offerings. It was short-lived; he sold it in 2001 after seeing the “timing wasn’t right after the dot-com market popped.”

Years later, McBean decided the JOBS Act “really looked like it had a shot” and called together Bevilacqua and technology developer Chris Cruttenden to join him in the venture.

“I really think the legislation will have the impact of what it was intended to do, which is making jobs and allowing small businesses to raise capital in an effective manner,” McBean said. “And sure as heck, the old name was available. The folks that bought it after a few years didn’t need a broker-dealer anymore. They basically closed it down.”

Cruttenden serves as Digital Offering’s chief technology officer. He also cofounded Newport Beach-based NetChemistry Inc., which provides Web-based distribution and tracking software used by global investment banks to raise private capital. He also is president there.

Digital Offering this month tapped Richard Ingrassia to head its new media, technology and entertainment practice. Ingrassia previously spent 11 years at Newport Beach-based Roth Capital Partners.

Digital Offering then formed a seven-member advisory board, including Schiff; Steve Holder, chief executive of Irvine-based real estate investment trust ECC Capital Corp.; and Patrick Williams, chief executive of Innospec Inc., a specialty chemicals company in Colorado.

Uncharted Territory

The new rules are largely untested, and uncertainties remain.

Cary Hyden, who chairs Latham & Watkins LLP’s corporate practice at the law firm’s OC office, said the requirement that an investor’s accreditation be verified, for instance, is vague.

“Ultimately, everyone that buys must be an accredited investor, and the issuer is obligated to take what’s called ‘reasonable steps’ to verify,” he said. “Then you ask, ‘What are the reasonable steps?’ The SEC has left it somewhat flexible.”

The lack of clarity on that front is keeping companies and investors cautious, said James Loss, a partner and co-leader of the corporate practice group at law firm Bingham McCutchen LLP in Costa Mesa.

“There’s no specific guideline, but the SEC has set these safe harbors, [saying] issuers can review tax filings, bank statements and broker statements,” he said. “But I don’t think people will want to send their statements to some company they don’t know. There isn’t a lot of experience here yet, but it will be very interesting to see how it will develop.”

The law’s “crowdfunding plan” also bears watching, Loss said, referring to the proposal regulators made late last month to relax rules that guide online fundraising by startups and small businesses.

Companies currently are limited to solicit accredited investors but would be able to tap unaccredited investors if the proposal is implemented. Investor protection measures, such as a cap on the amount raised, also are expected.

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