According to the National Highway Traffic Safety Administration (“NHTSA”), human error causes 94% of serious vehicle accidents.1 In response, the latest vehicles have implemented driver assistance technologies that use sensors, cameras, and computers to identify safety risks and reduce error-caused accidents.2 While still in development, automated vehicles that “can see more and act faster than…
Tag: Michigan
No-Fault’s Future in Michigan
In the state of Michigan, it is not clear that no-fault insurance has much longer to live. The state has the highest rates for automobile insurance in the country.1 For many, this high cost makes it difficult to afford a car; this cost imposition has led to a high number of uninsured vehicles in the…
A Quick Look at Michigan’s Corporate Income Tax
In May of 2011, Michigan Governor Rick Snyder signed into law a bill that made numerous adjustments to Michigan’s tax laws. These changes included replacing the Michigan Business Tax with a corporate income tax. The Michigan corporate income tax consists of a flat tax at a rate of 6%.1 At the time he signed this…
Two Ways to Corner the Market: The Battle of Beer
There is a battle being played out in Ann Arbor and throughout the rest of Michigan. No, it has nothing to do with the Michigan Wolverines lackluster start to the football season. This battle is about beer! To be more specific, this battle is about the rapid growth of the craft beer industry in North…
Venture Capitalists Target Untapped Markets in the “MidBest”
Venture capitalists and entrepreneurs have recently started to make an unexpected move east from Silicon Valley to put down roots in an unlikely location: the Midwest.1 Historically, the majority of serious entrepreneurs from around the country have flocked to Silicon Valley and New York in search of easily accessible and trendy tech industry jobs.2 The…
Detroit’s Burgeoning Entrepreneurial Ecosystem
When most Americans think of Detroit today, they think of the largest municipal bankruptcy in U.S. history, pictures of derelict buildings and houses, and ultimately, a city on the decline. However, ask a true entrepreneur what they think of Detroit today, and you will most likely be given an answer that can be summed up…
Law Students and MOOCs
In the face of contracted legal hiring, many have criticized law schools for failing to properly train students for modern legal careers. These perceived deficiencies in legal education were the subject of a notable 2011 New York Times article, which highlighted the difficulties many students—even those from the top institutions in the country—have had adapting to practice at corporate law firms.[1]
Some law schools have responded by reforming upper-class curriculum. NYU, for instance, recently revamped its third-year curriculum with a focus on offering students opportunities to pursue specialized concentrations, including programs dedicated to developing students’ business and financial literacy.[2]
But another quickly-emerging trend in legal education indicates that students interested in transactional careers don’t have to wait for curriculum reform if they want to cut their teeth before starting at a firm.
At http://www.lawmeets.com Drexe,l University Professor Karl Okamoto offers a solution considerably more proximate and infinitely less pricey. On October 23, Professer Okamoto debuted a two-week massive open online course (MOOC) entitled “The Basics of Acquisition Agreements.”[3] The course was open to the public, and offered free of charge.[4]
Okamato’s course included a mix of lectures, interactive learning exercises, and panel discussions, and was headed by professors from premier law schools throughout the country.[5] Students were given hypothetical client inquiries about drafting business acquisition agreements and instructed to upload video responses.[6] The responses were then evaluated by a group of experts from law firms and corporate legal departments around the world, who provided written feedback via online discussion boards and streaming video.[7]
LawMeets, which pitches itself as an online legal education program dedicated to training young lawyers via the apprenticeship system, is just one of many such open courses offered by institutions throughout the world to any student with a working internet connection.[8] At http://www.coursera.org inter,ested students can take classes covering a broad array of mathematical subjects.[9] http://www.edX.com a non,profit startup from Harvard and the Massachusetts Institute of Technology, opened its first official classes this fall to an audience of 370,000 students.[10] As the costs of higher education soar, MOOCs are going viral.
Upcoming LawMeets programs bode particularly well for students interested in private equity and venture capital law. The website plans to offer a MOOC called “Advising the Startup.”[11] In addition, LawMeets sponsors a program called “Transactional LawMeet,” an annual “moot court” experience for students interested in honing transactional skills.[12] The next National Transactional LawMeet will occur in February 2013, and will be hosted regionally by schools throughout the country.[13] The program will include interactive educational competitions designed to give students a hands-on experience in developing and honing transactional lawyering skills.[14]
Critics of the MOOCs system point to various issues raised by the courses’ unusually large enrollment—often teachers cannot offer direct feedback to students, and there exists a propensity for students in such large classes to cheat.[15] In addition, while droves of students tend to register for MOOCs, a large percentage of enrolled students often do not complete the courses for which they register.[16]
Still, these trends should come as welcome news to law students, who, often impatient with the Socratic tradition of hiding the ball, now find the ball in their court when it comes to attaining the applicable skills necessary to hit the ground running in a transactional practice. For such students willing to make the commitment, MOOCs are an efficient, low-cost alternative to university courses.
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[1] See David Segal, What They Don’t Teach Law Students: Lawyering N.Y. TIMES, November 19, 2011, at A1. Available at http://www.nytimes.com/2011/11/20/business/after-law-school-associates-learn-to-be-lawyers.html?pagewanted=all.
[2] THE NEW YORK UNIVERSITY LAW SCHOOL, NYU ANNOUCES AmBITIOUS NEW STUDY-ABROAD PROGRAM AS PART OF CURRICULAR ENHANCEMENTS (2012). Available at http://www.law.nyu.edu/news/NYU_LAW_ANNOUNCES_STUDY-ABROAD_PROGRAM_CURRICULAR_ENHANCEMENTS_THIRD_YEAR
[3] See LAWMEETS, http://www.lawmeets.com (last visited Nov. 10, 2012).
[4] Id.
[5] THE DREXEL UNIVERSITY LAW SCHOOL, LAW PROFESSOR CREATES FIRST MASSIVE OPEN ONLINE COURSE TO TEACH BUSINESS ACQUISITON SKILLS. Available at http://www.drexel.edu/now/news-media/releases/archive/2012/September/Law-MOOC/.
[6] Id.
[7] Id.
[8] LAWMEETS, http://www.lawmeets.com/about (last visited Nov. 10, 2012).
[9] See Laura Pappano, The Year of the MOOC, N.Y. TIMES, November 4, 2012, at ED26. Available at http://www.nytimes.com/2012/11/04/education/edlife/massive-open-online-courses-are-multiplying-at-a-rapid-pace.html?pagewanted=2&_r=0.
[10] Id.
[11] See LAWMEETS, http://www.lawmeets.com (last visited Nov. 10, 2012). (Toward the bottom of the page they note an upcoming program with date TBA called “Advising the Startup”).
[12]LAWMEETS, http://transactionalmeet.lawmeets.com/ (last visited Nov. 10, 2012).
[13] Id.
[14] Id.
[15] See Laura Pappano, The Year of the MOOC, N.Y. TIMES, November 4, 2012, at ED26. Available at http://www.nytimes.com/2012/11/04/education/edlife/massive-open-online-courses-are-multiplying-at-a-rapid-pace.html?pagewanted=2&_r=0 (“What’s Frustrating in a MOOC is the instructor is not as available because there are tens of thousands of others in the class,” Dr. Schroeder says…”We found groups of 20 people in a course submitting identical homework,” says David Patterson, a professor at the University of California Berkeley.)
[16]Id. (“The ones I have study groups with people, those are the ones I finish,” Ms. Spillman says.)
Impact Investing
Impact investing has become the new hot topic in the social impact world. Similar to social entrepreneurship and social enterprise, impact investing attempts to amalgamate social good and more traditional models of finance arrangements. Rather than dividing the world into the classic for-profit/non-profit dichotomy, impact investing is another example of the trend that attempts to build a new path.
Impact funds span a range of investment philosophies. Lok Capital, for example, puts a high value on base of the pyramid companies that “have clear alignment with [investors] in terms of profitability and growth.” [1] Acumen Fund, one of the earliest impact investing funds, puts a higher value on portfolio companies’ social impact, viewing their financing as supporting growth in a market that takes longer to show impact and return.[2]
Closer to home, the University of Michigan Ross School of Business Social Venture Fund approaches investments based on a nuanced balance of social and financial returns, with the exact details largely dependent on the focus of the investment. [3] These three funds represent only a small fraction of the variety in this sector. Additionally, the space consists of numerous organizations that help seed organizations, but view themselves more as incubators than as any type of investment vehicle.
Traditional private equity and venture capital funds have a relatively clear principle mission – provide support for and help create more value in companies in which the fund invests. This takes the form of financial investment and control through different ownership tools. Impact investment, however, is based on the thesis that the social impact of a company is as important to foster as the financial returns. While this is a wonderful vision, the reality of balancing financial and social returns can get very messy.
Just as traditional investment vehicles put a high value on thorough due diligence, impact funds attempt to apply tried metrics to understand the impact and potential return of a social company – one that is likely to move more slowly in terms of financial returns, but with potentially life-changing impact for customers and clients.
Many of these funds focus on base of the pyramid customers due to the sheer number of these customers and the clear lack of service that has been provided to this market segment in the past. Rather than viewing individuals making less than two dollars a day as customers, many governments and companies see this group as a massive charity case – give them more and their lives will be better.
Impact investors, and a multitude of international conglomerates and new start-ups, see these billion-plus individuals as potential consumers who can contribute to the local and the international economy and through this process, can be pulled out of the most extreme poverty. This thesis, that poverty can be eliminated and social problems can be solved through the market, is not new but it remains somewhat radical. The challenge many impact funds encounter is how to balance the breadth and depth of impact with the opportunity cost of not applying a good business model to new customers, who may not be quite as needy as those who were originally the target market.
Impact investing is continuing to evolve and have a range of success. As companies, governments, and non-profits see alternative forms of activities, this space will grow and the potential value of the base of the pyramid market, and viewing opportunities in a combination of social and financial returns will become increasingly important.
[1] Lok Capital Investment Thesis, http://www.lokcapital.com/investment_approach.html (last visited Oct. 13, 2012).
[2] See David Bank, Acumen Fund’s Transparent Experiment, Impact (Oct. 13, 2012), http://impactiq.org/acumen-funds-transparent-experiment/.
[3] See Social Venture Fund, http://www.umsocialventure.com/philosophy (last visited Oct. 13, 2012); University of Michigan Social Venture Fund, YouTube (Oct. 13, 2012), http://www.youtube.com/watch?feature=player_embedded&v=1oNdU9mJ8L0 (describing the Social Venture Fund’s investment philosophy).
Re-defining the Line between Public and Private
In his new article, Revisiting “Truth in Securities Revisited”: Abolishing IPOs and Harnessing Private Markets in the Public Good, Adam Pritchard argues that the current transition between private and public company status is awkward and inefficient.[1] Pritchard suggests that these inefficiencies can be reduced through the implementation of a two-tier market system for transitioning from private to public status.[2] In this blog, I analyze the implications of Pritchard’s suggested system on the Private Equity Community.
Background
Pritchard argues that the separate enactment of the Securities Act and the Exchange Act created a mismatched dividing line between public and private status.[3] The Securities Act draws the line in a manner that focuses explicitly on investor protection, while the dividing line under the Exchange Act reflects the attempt to balance investor protection, interests in capital formation, and practical ease of application.[4] Congress has shifted the point at which companies must go public through the JOBS Act, which gave the SEC new authority to exempt offerings from the requirements for registered offerings and authorized the SEC to adopt less demanding periodic disclosure from companies who benefit from this new offering exemption.[5] Pritchard contends that the JOBS Act reforms have the potential to create a lower tier of public companies and to blur the line between private and public companies.[6]
The Two-Tier System
Pritchard offers a different solution; one he believes unifies the public/private dividing line under the Securities Act and Exchange Act. Pritchard’s solution involves a two-tier market for both primary and secondary transactions, where the primary market would be limited to accredited investors, while the public market would be accessible to all.[7] Under this regime, all public offerings would be seasoned offerings with a price informed both by full disclosure and a pre-existing trading market. Issuers would be able to choose whether to sell in the primary or secondary market and companies would become eligible for the primary market after reaching a certain quantitative benchmark (he suggests $75 million in market capitalization, the threshold currently used by the SEC for shelf registration).[8]
Under this system, issuers below the quantitative benchmark would be limited to selling their securities to accredited investors. However, contrary to the current system, those securities could not be freely resold after a minimum holding period, but would instead be sold to other accredited investors on an established secondary market (similar to SecondMarket or SharesPost except expanding eligible purchasers from Qualified Institutional Buyers to all accredited investors).[9]
Elevation to the public market would be completely voluntary.[10] Issuers unable or unwilling to meet the obligations associated with access to the public market would be allowed to remain private. Once a company chose to go public, a seasoning period would follow with the filing of requisite 10-Q’s during which the shares would continue to be traded in the private market.[11] This seasoning period would allow the trading price in the public market to be informed by the prior trading in the private market as well as the new information required to initiate the “going public” process.[12] Only after the company graduated to having its shares traded in the public market would the company be free to sell equity to public investors.[13] This two-tier system relies on the pricing efficiency of the markets.
Impact on Private Equity
Pritchard’s suggested model would impact the private equity market in multiple dimensions. First, companies looking for late stage investment to expand their brand could continue to seek private capital, without having to cross the public divide. Consequently, the amount of firms seeking private equity would likely expand, creating more opportunities for private investment.
Additionally, Pritchard’s plan would essentially create a liquid market for private equity investors. While similar markets already exist, see SecondMarket and SharesPost, these markets are limited to “qualified institutional buyers” (investors with more than $100 million under management). Pritchard’s secondary markets would include accredited investors, individuals with at least $200,000 in annual income or $1 million in assets. This increased participation in the secondary market would allow the market to establish a trading price.
Lastly, Pritchard’s plan would eliminate the need for marketers to create demand when a firm decides to go public. Instead, the secondary market, supplemented by the required filings to go public, would establish a trading price. The underpricing dilemma of IPOs would essentially disappear. Thus, private equity holders participating in the company’s transition from private to public would receive greater returns.
In summary, Pritchard’s two-tier market plan would create new opportunities for private equity investment, create a liquid trading platform, and help ensure that investors exiting the market when a firm elects to go public receive proper returns. Such a market system would be advantageous to private equity investors; it should be given serious consideration.
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[1] Adam C. Pritchard, Revisiting “Truth in Securities Revisited”: Abolishing IPOs and Harnessing Private Markets in the Public Good (University of Michigan Law & Econ Research, Paper No. 12-010, 2012), available at http://ssrn.com/abstract=2103246 .
[2] See id. at 5.
[3] Id. at 3.
[4] Id.
[5] See Revisiting “Truth in Securities Revisited” at 4.
[6] Id.
[7] See id. at 30.
[8] See id.
[9] See id. at 31.
[10] Id. at 33.
[11] Id.
[12] Id. at 34.
[13] See id.
Ann Arbor has the Right Stuff
Jason Mendelson (@jasonmendelson) and his partner, Brad Feld (@bfeld), visited Ann Arbor and UofM back in the fall. They made the rounds of TechArb, the University Office of Tech Transfer, and even stopped by a Ross School of Business Class taught by Dr. David Brophy that pairs students with budding companies trying to land Angel or VC funding. I was enrolled in the class and I got to pitch Jason on my company… WHAT a great experience! I was REALLY impressed with both of them and I love their dedication to cultivating a culture of entrepreneurship in Boulder, Ann Arbor, and throughout the US more generally. It is definitely something that helped stoke my entrepreneurial fire. However, the best thing I heard was at a lunch talk at the Law School. Both gentlemen raved about Ann Arbor and, while I am way overdue in sharing, this recent post encouraged me to mention their trip.
I thought I would share this blog entry, written by Brad, since it has a number of good thoughts and links to some of the other posts from their visit. Enjoy!
http://startup-communities.com/2012/02/28/action-in-ann-arbor-mi/