Ptpeline §DEALFLOW REPORT NEWS , INFORMATION , AND ANALYSIS OF SMALL CAP EQYITY FINANCE VOLUME ll. NO. 28

MARKET UPDATE

• An SEC proposal that issuers file general

solicitation materials could hamper startup

fundraising.

• Is troubled OCZ Technology undergoing a

quiet sale or restructuring?

• Hot biotech IPOs could lead to higher M&A

valuations ....... .. .. ............ ...... .. ... ....... .. ...... ... ...... 2

• NanoTech is buying MagicScreen3D ........ .. .. .. 3

DATES & DEADLINES

• A listing of important events coming up in

the small-cap financing market.. .. .. .. .............. 4

REGULATORY UPDATE

• The SEC charged China Intelligent Lighting,

NIVS and its sibling CEOs with diverting

offering cash ...... .. .... .... ...... .. .... .. .. .. ...... .. 5

• Massachusetts formed a new crowdfunding,

unregistered offering watchdog unit ........... S

• Attorney Virginia Sourlis was banned by the

SEC for a false opinion letter .. ................... 6

• Penny-stock promoter National Financial will

pay $1.6M over fraud charges .. .. ............... 6

• Miami attorney Stewart Merkin was

permanently banned by the SEC .. .............. 7

LEGAL UPDATE

• A former Leerink Swann analyst and his

college friend got 16 months for insider

trading .................................... .. .. ........ ... 8

DEALFLOW

• SPAC Silver Eagle bumped up its IPO to

$300M from $250M ............ .. ................ ... 9

• Aeterna Zentaris is raising $7.8M to develop

cancer, hormone deficiency drugs ............... 9

• Rexahn is raising $5.7M for cancer

treatments .... ... .... ... .......... ...... ... ..... ... ..... 9

• SPAC Selway is borrowing $5M from the

Partners for Growth fund ...... .. .. .. .. .. .... .. .. 1 0

• Gold Standard Ventures is seeking $4.8M in

a best-efforts offering by Macquarie ......... 10

SMALL-CAP EQUITY FINANCE ACTIVITY ... 15

ISSUER INDEX ...... .............................. 31

JULY 29, 2013

SEC'S PROPOSED REQUIREMENT FOR FILING ADVERTISING DOCUMENTS TOO BURDENSOME FOR STARTUPS

by Dan Lon){evich

The Securities and Exchange Commis­sion's proposed rule that would require private placement issuers to file general solicitation and advertising materials with the commission could lead small companies to raise less capital, rather than more, under the common securities law provision that many currently use.

That is the opinion of numerous entre­preneurs and advocates for startup compa­nies, expressed in interviews and in letters filed with the SEC as comments on the proposal.

Sara Hanks, co-founder and CEO of Crowd Check Inc., said in a lengthy, July 6 letter to the SEC that the conunis­sion is unlikely to receive all the solicita­tion materials it is expecting because many small securities issuers don't understand the nuances of the secmities laws. Crowd­Check, based in Alexandria, Va., provides due diligence and disclosure services in small, online securities offerings.

"This imposes a significant burden on the founders of small issuers, whose focus should be on running their companies and making sme that their communications are complete and accurate, not on uploading large, continually changing files to the com­mission," Hanks wrote.

Proposed Rule SlOT was published for public comment on July 10. It would require private placement issuers relying on Rule 506(c) of the Securities Act to file written general solicitation materials with the SEC.

The filings would be made through an intake page on the SEC website no later than the date of the first use of the materi­als. The filing requirement does not apply to oral communications. Filings would not be available to the general public and would expire after two years, tmder the proposal.

The SEC made the proposal on the same day that it approved a rule to elimi­nate the ban against general solicitation and

Advertising continued on page 13

OCZ TECHNOLOGY: GOING NOWHERE FAST

by Paula Schaap

If it were only about making computers rev faster, then OCZ Technology Group Inc. wouldn't be facing its cunent problems.

But as the publicly listed solid state drive manufacturer continues to promise, and fail, to produce financial returns, industry watchers wonder if a quiet sale or restructuring process might not be going on, especially in a sector that has seen recent consolidation.

The San Jose, Calif.-based company is considered a leader in consumer SSD products beloved especially by the gaming world - the company's name is a mash­up of overclocking, which means resetting a computer's clock to run faster so that all those beautiful game images that take up so much memory render more quickly.

OCZ Technology continued on vaee 11

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Advertising continuedji-omji-ont page advertising of private placement offerings.

Congress had required the SEC to end the general solicitation ban under the Jumpstatt Our Business Startups Act, which was signed into law in April 2012. Ending the ban was one of numerous pro­visions of the JOBS Act that was meant to make it easier for small companies to raise capital.

The SEC wants the 510T filings in order to gather information about how general solicitation and advertising devel­ops in the private placement market. The commission plans to use the infmmation to make any necessary changes to protect investors from market abuses.

To be sure, many in the indusu·y fear such information may lead to enforcement actions.

Unsophisticated Issuers

traditional, text-heavy disclosures such as private placement memoranda.

Materials such as slide-decks, videos, legal documents, platforms that allow for due diligence or information calls between issuers and investors will present challenges to issuers in terms of their fil­ing requirements.

Significant Burden

For the SEC, building a system that can handle the potential volume and dif­ferent types of data will be "difficult and expensive," Hanks wrote.

In addition, the SEC's possible use of information gathered from such filings in enforcement actions may create incentives for issuers to feign compliance and with­hold materials that might raise concerns with regulators.

Hanks said the SEC would be better Hanks said that many small securities served in its efforts to be informed about

issuers do not hire experienced attorneys the small-cap financing market by relying and, as a result, may not understand that on the existing array of advisory bodies proposed Rule SlOT would require them and working groups on small business and to submit written communications fol- investor protections. lowing the guidelines of Rule 405 under Many of Hanks' concerns were echoed the Securities Act. Rule 405 defines by Scott Purcell, the founder and CEO of graphic and broadcast material as written Arctic Island LLC, in a July 22 letter communications. to the SEC. San Francisco-based Arctic

"It will not occur to people not steeped Island plans to offer software and servic­in the technicalities of securities law that es to help small businesses raise private a video is 'written,"' Hanks stated in her placement financing. letter. As a result, she said many common "These businesses and their related forms of general solicitation and advettis- parties, including owners and employ­ing will "remain innocently unsubmitted." ees, may be very good at operating their

Hanks also asserted that because companies but are cettainly not steeped in there is no way for the SEC to detetmine securities laws," Pmcell wrote. whetlter all materials have been submit- Requiring them to pre-file "every ted, there may be a built-in incentive to Facebook like, evety Tweet, every Pinter­undersubmit. est, every mention in a post or comment

"There is evety incentive for issuers to on a Linkedin forum, or every handwrit­submit whatever materials they find easi- ten sign they may place in the reception est to submit and deliberately withhold area of their businesses is simply not prac­materials they least want the SEC to see tical," he stated. "Even with the best of or which present challenges to upload- intentions, it is not reasonable to expect ing," she wrote. that t11e rule will be complied with by

The withheld materials are most likely these small issuers. And even if it were, to include innovative approaches to fun- the millions of postings would likely over­draising, Hanks said, while the submit- whelm any database that the SEC creates ted materials are most likely to include for such a purpose." THE DEALFLOW REPORT © 2013 THE DEAL, LLC 13

MARKET UPDATE

Purcell said that the SEC should pro­vide an exemption from the rule for offer­ings by business issuers raising less than $5 million, or it should create a separate standard for funds, differentiated from businesses raising capital directly to grow and create jobs.

"There' s no way a strutup can digest all this," said Jason Crawford, the 33-year­old co-founder of tech startup Kima Labs. It raised $770,000 from angel and seed investors including his parents in 2010 before selling itself to Groupon Inc. in 2012 for an tmdisclosed atnount.

Kima Labs made iPhone apps, includ­ing one called Barcode Hero, which allowed users to scan the barcodes of products, comment on them and view other users' comments.

"The securities laws are so complex," Crawford said. "No one understands them except the expetts.

"I'm lucky because I work with good lawyers," he said. "It's probably going to lead to extra legal expenses, but I'll be able to avoid penalties and major prob­lems. I wony about the guys who can't afford a good lawyer. Good luck trying to do it yourself."

Crawford said he suppmts an exemp­tion for the smallest tech startups to allow them to avoid the filing requirements. "There are a lot of ru·eas where the filing requirements could be lessened," he said.

Premature

Mitchell Littmatl, a partner with the law finn of Littman Krooks LLP in New York, said he was smprised people ru·e so concerned about tlte new filing require­ments because it is premature to say for sure how the new rules will affect capital raising.

"If they're feeling queasy about their offering documents, maybe that should tell them something," he said. "Either be confident in your work or don't file."

Littman said the concern is probably confined to the smallest and least sophis­ticated issuers who are not as knowledge­able about securities laws.

JULY 29, 2013

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The good news for the w1sophisticated issuers is that if they're overwhelmed by the filing requirements for general solici­tation and advertising, they can opt to raise capital the old fashioned way, with­out solicitation and advettising, he said.

"Just like one-size-fits-all doesn't work with capital raising, no one size fits all for exemptions," Littman said. "If you don't like the rules, you can still issue shares without general solicitation. The variations have actually expanded and not shrunk."

The SEC staff is unlikely to be recep­tive to the concerns that startup advocates are expressing, said David Pankey, a part­ner in the Washington office of law firm McGuire Woods LLP.

"They're basically saying people will try to figw·e out ways not to comply with the filing requirement," Pankey said. "I

don't think the staff will be persuaded by that argument."

Pankey said that small companies already face filing requirements with the SEC for acquisitions and other kinds of transactions . Trade groups and deal advisers have developed standard forms to help small companies deal with those requirements.

"There is already in place a very similar requirement when you're doing a proxy solicitation or an M&A deal," Pankey said. "It's been in place for over a decade."

Industry groups "very quickly figured out how to put out pro-forma filings with the SEC," he said. "If there is industry guidance out there, and there will be fast, I wouldn't see it as a potential problem. Peo­ple who are intermediaries and members of trade associations would put them together

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B®rga!llti!liO!'I.fliln {Apr 15.2013]

MARKET UPDATE

and their members could use them." Pankey noted, however, that it also

remains to be seen whether state securities regulators will put out their own similar requirements.

Asked whether securities issuers should be worried about such filing requirements being used against them in enforcement actions, Pankey was circumspect.

"It depends entirely on each individual situation," he said. "Some presence exams of fund managers are leading to enforce­ment cases, but the vast majority are lead­ing to situations where the SEC says, 'You need to fix this or that. ' It depends on the personalities of the examiners, the profile of the people involved and mostly on the extent of the alleged wrongdoing."

Senior editor Dan Lonkevich may be reached at dlonkevich@thedeal.com.

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THE DEALFLOW REPORT © 2013 THE DEAL, LLC 14 JULY 29, 2013