Investment Banking: Compliance and Regulatory …

1 Investment banking : Compliance and Regulatory Issues Thursday, May 28. 11:15 12:15 Topics: Advise, establish Compliance procedures and surveil for: o Investment banking Conflicts of Interest o Interactions between Research Department personnel and Investment banking clients o Private Placement procedures o Filings with FINRA related to public offerings and private placements o Understand New and Pending Regulatory Developments in the area Speakers: Robert Mendelson (moderator). FINRA Fellow FINRA Member Regulation, Office of Risk Oversight and Operational Regulation Kevin Genirs Managing Director Barclays Paul Mathews Vice President FINRA Corporate Financing Gil Mogavero Managing Director JMP Securities, LLC.

2 2015 Financial Industry Regulatory Authority, Inc. All rights reserved. Investment banking : Compliance and Regulatory Issues FINRA annual conference May 28, 2015 Washington, DC. Panelists Moderator Robert Mendelson, FINRA Fellow, FINRA Member Regulation, Office of Risk Oversight and Operational Regulation Panelists Kevin Genirs, Managing Director, Barclays Paul Mathews, Vice President, FINRA Corporate Financing Gil Mogavero, Managing Director, JMP Securities, LLC. 2015 FINRA annual conference 2015 FINRA. All rights reserved. 1. Introduction C is the founder and CEO of a small technology company that he believes has a disruptive technology that will be a game changer.

3 NuTech has clever ideas and patents on short-range, 3-D pulse radar imaging. NuTech has limited revenues (50 million or so) but there are many commercial applications from self- driving cars to accident avoidance. C wants NuTech to raise significantly more capital so he can take the next step in development. C's background is as an electrical engineer. He is highly intelligent but doesn't know the financial markets in the detail needed and hasn't yet got a CFO. familiar with the capital raising process. 2015 FINRA annual conference 2015 FINRA. All rights reserved. 2. Pre-IPO (Initial Public Offering). C is approached by Bill, an Investment banker with Techbanker & Co.

4 , who follows all the companies in the sector which NuTech belongs to, both public and private. Bill tells C that NuTech's first step should be to raise more equity capital through an institutional private placement in the United States. C agrees, the put together a teaser and send it to qualified institutional buyers (QIBs). C asks whether they can reach out to his old college buddies who live in the United States. He assures Techbanker's diligence team that they have all had an income of at least $200,000 for the past two years. 2015 FINRA annual conference 2015 FINRA. All rights reserved. 3. Pre-IPO (cont.). Before the deal launches, Techbanker asks C to set up an electronic data-room for the investors; C agrees, but does not want to include a couple of his key contracts, which are very commercially sensitive and include some fairly punitive terms.

5 Techbanker is concerned whether that is acceptable in a private placement. What answer do you provide? 2015 FINRA annual conference 2015 FINRA. All rights reserved. 4. On-Going Reporting The private placement is a huge success, and Techbanker & Co. is able to find hundreds of interested investors. C remembers reading that Google was forced to conduct its initial public offering (IPO) because it had so many investors. He wonders whether he is in the same position since in addition to the QIBs there are a largish number of investors through Techbanker's private wealth management group. 2015 FINRA annual conference 2015 FINRA. All rights reserved.

6 5. On-Going Reporting (cont.). Techbanker explains to C that NuTech will need to file if it has more than 500 equity holders of record, excluding AI's. He gives you the closing set from the private placement, which includes AI certificates from each investor. 2015 FINRA annual conference 2015 FINRA. All rights reserved. 6. IPO on the Horizon After a year, NuTech's CFO starts to think about whether an IPO might be the correct next step. C and his CFO ask Bill to come in for a meeting and tell him they have made no decision, but that NuTech's Board has decided that they like being private for now. C is hoping that Bill could provide an explanation of the IPO process and a market update, as C is interested in an IPO and trying to convince the Board to reconsider.

7 Techbanker has recently hired a new research analyst, Sally, who is trying to learn about the imaging space and build her reputation. Sally calls C and asks to get together to introduce herself and learn about the company. 2015 FINRA annual conference 2015 FINRA. All rights reserved. 7. IPO on the Horizon (cont.). Following her firm's procedures, Sally seek clearance for the meeting with C. Should Sally be allowed to take the meeting? What diligence would you do before clearing it. Would it affect your decision if you read in a trade journal that C has been quoted as saying he hopes to complete an IPO within 18 months. 2015 FINRA annual conference 2015 FINRA.

8 All rights reserved. 8. IPO on the Horizon (cont.). During your diligence, you seek out Bill, who is the IB. ( Investment banker) for this space. Bill tells you that C. told him that his company has hired Alice, a well- known banker at Through the Looking Glass, LLC, a boutique bank that often functions as an IPO adviser. C did not elaborate on her role. 2015 FINRA annual conference 2015 FINRA. All rights reserved. 9. IPO on the Horizon (cont.). What if Bill had heard from C that he is going to kick off the IPO process? Must he report that to Techbanker's control room? In the meantime, Sally is planning to convene her firm's first annual imaging tech conference .

9 She asks whether she can include a panel on private companies. She calls C and invites him to the conference , and has a pleasant conversation about her views on the industry and why she is excited about the conference . 2015 FINRA annual conference 2015 FINRA. All rights reserved. 10. IPO on the Horizon (cont.). Sally is disappointed that you do not permit her to invite C to the conference , but then receives a call from C telling her about the IPO process and asking her to come to a meeting with him and his CFO. 2015 FINRA annual conference 2015 FINRA. All rights reserved. 11. IPO on the Horizon (cont.). Alice, who it turns out is acting as IPO advisor to NuTech, then calls Bill and tells him that they are close to a decision on banks.

10 In making the decision, they would like to get a valuation view from Techbanker. Bill sends the IB department's model and valuation. Alice reviews it and calls asking for confirmation that this is a firm valuation that reflects research's view. What response? 2015 FINRA annual conference 2015 FINRA. All rights reserved. 12. IPO on the Horizon (cont.). Bill and his team are so impressive in his meeting with C, the CFO and key board members that Techbanker is hired. Bill tells them that Techbanker is going to be one of five banks to participate in the IPO, and that actual roles and economics will be decided later. The IPO process proceeds and marketing is planned to commence next week.