Company Name: Michigan Growth Capital Symposium
Public Availability Date: 05-04-1995
INQUIRY LETTER 1WARNER NORCROSS & JUDD LLP 900 OLD KENT BUILDING 111 LYON STREET, N.W. GRAND RAPIDS, MICHIGAN 49503-2489 TELEPHONE(616) 752-2000 February 06, 1995 Mr. Richard R. Wulff
Chief, Office of Small Business Policy
Securities & Exchange Commission
Division of Corporation Finance
Office of Small Business Policy
450 5th Street, N.W.
Washington, D.C. 20549 Re: Michigan Growth Capital Symposium Dear Richard: Reference is made to your telephone conversation of Monday, April 25, 1994,
regarding the subject file and our letter of February 24, 1994, to Bill Morley. You asked two questions: 1. Does the Michigan Growth Capital Symposium have a policy against distribution
of private placement memoranda at its meetings? Response: The Symposium will forthwith communicate to all participants a
statement of policy that no private placement memoranda may be distributed at
its meetings. This policy will be included in its instructions to new presenters
each year. 2. What Consulting activities does Professor Brophy perform for which he
receives a fee? Response: Professor Brophy generally provides three types of services. He
renders advice on the weaknesses of corporate structure, works with firms to
improve their business plans, and advises regarding venture capital sources. In
the past ten years, he believes that less than 1% of the presenters have
utilized this service. Certainly that percentage would not exceed 5%. Last year,
2 of the 15 presenters used his services as a consultant. If you need any additional information, please advise. Sincerely, Hugh H. Makens aj cc: Cyril Moscow
Michael B. Staebler INQUIRY LETTER 2WARNER, NORCROSS & JUDD 900 OLD KENT BUILDING 111 LYON STREET, N.W. GRAND RAPIDS, MICHIGAN 49503-2489 TELEPHONE(616) 459-6121 February 24, 1994 Mr. William Morley
Senior Associate Director
Division of Corporation Finance
U.S. Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549 Re: Michigan Growth Capital Symposium Dear Bill: We represent the Michigan Growth Capital Symposium, (the "Symposium"), an annual
symposium co-sponsored jointly by the University of Michigan (the "University"),
and The Office for the Study of Private Equity Finance of the School of Business
of the University of Michigan (jointly the "Sponsors"). The moving force behind the Symposium is David J. Brophy, a professor from the
Graduate School of Business at the University and Director of The Office for the
Study of Private Equity Finance at the University. Professor Brophy is generally
recognized as one of the foremost academic experts in venture capital financing.
He was a consultant to the National Venture Capital Association from 1977
through 1980, during which time he gathered and published the basic data which
measured the size, distribution and growth of venture capital in the U.S.
Professor Brophy's database and collection system were the basis upon which the
periodical Venture Economics became the major disseminator of information on the
venture capital industry. Introduction and Background. The Symposium was first presented in 1979, under the sponsorship of the
University of Michigan's Institute of Science and Technology ("IST"). It was one
of the outgrowths of a research monograph done by Professor David Brophy under
an IST grant, titled Finance, Entrepreneurship and Economic Development. As a
result of that and subsequent research, Professor Brophy has contributed
directly and indirectly to several other fundamentally important initiatives in
the development of the infrastructure for emerging growth companies and
technology in Michigan, among them the following: Establishment of the Governor's Council on High Technology (1979) which
addressed fundamental impediments to the development of technology-based
industry in Michigan and which caused the formation in Michigan of the
Industrial Technology Institute, located in Ann Arbor, Michigan; the
Microbiology Institute, located in Midland, Michigan; and the Advanced Materials
Institute in E. Lansing, Michigan. Passage of Public Act 55 (1982) which permitted Public Employee Pension Funds in
Michigan to earmark a percentage of their funds for investment in venture
capital and special investments. Creation of the Michigan Strategic Fund, through which were initiated programs
directly funding technological development along with the formation and partial
state funding of Seed Funds and Business and Industrial Development Corporations
(BIDCO's) in the State of Michigan, both assisting in the financing of emerging
growth companies in Michigan. Establishment of and teaching a course on the MBA curriculum at the University
of Michigan Business School titled Finance 625 "Venture Capital Finance and
Investment," through which MBA students learn about the processes involved in
building and financing emerging growth companies. This course has been offered
continuously since 1983 and, for example, had an enrollment of 190 students in
three sections in the Fall 1992 term. Appointment of Professor Brophy as advisor to the University of Michigan Office
of the Vice President for Research on matters of technology transfer within the
University, and to the Vice President of Finance regarding investment of the
University's endowment in venture capital funds. Formation, through Professor Brophy's effort and under his directorship, of the
office for the Study of Private Equity Finance located at the University of
Michigan School of Business. The Symposium hereafter will be managed through
this office. Nature and Characteristics of the Symposium. Despite the regulatory, legislative and public policy activity described above,
it was clear to Professor Brophy and to others that Michigan was systematically
underrepresented in the supply side of the venture capital market. To address
and reduce the impact of this problem, Professor Brophy, with the support of
IST, organized the Symposium. The structure of the Symposium was modeled after
the program presented by the American Electronic Institute. The Symposium, as presently structured, consists of an annual two-day
presentation to which approximately twenty selected companies are invited to
make twelve minute presentations about their plans, products, and financial
needs to a group composed primarily of sophisticated corporate entities whose
primary objective is investment in and development of emerging growth
businesses. Other attendees include representatives of banks, insurance
companies, state and local agencies (principally engaged in economic
development), law and accounting firms and operating companies. Also in
attendance are students from the School of Business of the University who assist
with or observe the program. The purpose of the Symposium is and has been to provide efficient access to the
national private equity finance markets for firms in Michigan which are
systematically disadvantaged in this respect. The objective of this activity is
to help young and growing businesses, many of which are technology-based, to
gain access to appropriate capital markets and to help them expand the job base
in a state which is in transition from a heavy reliance on a declining large
automotive manufacturing industry and which does not have a well developed
venture capital and investment banking infrastructure. The operating characteristics of the Symposiums have remained relatively
constant since 1979. They are as follows: Emerging growth companies, principally but not exclusively located in Michigan,
which believe they will need capital in the near future (typically 6-9 months)
approach and are referred to Professor Brophy by accounting firms, law firms,
commercial banks, venture capital firms or other individuals and corporate
entities. Only private firms are considered for the Symposium. "In registration"
firms are not considered for the Symposium, but public companies seeking
additional financing may be considered in the future. Prospective presenters submit a business plan to Professor Brophy for review in
the Symposium screening process. On the basis of his experience, Professor
Brophy selects 15 to 20 of the nominated firms for Symposium presentation. Firms
not selected are given explanations and recommendations for change or
improvement and are usually invited to re-apply for the next year's program. Firms selected for presentation are invited to visit with Professor Brophy to
discuss the process of approaching the venture capital market. The result of
this meeting is the development of a 12 minute presentation by the company, with
assistance, editing and final approval by Professor Brophy. As appropriate,
students from Professor Brophy's MBA course, Finance 625 "Venture Capital
Finance and Investment" participate in this work as a practicum in the
preparation of firms. The selected firms pay a fee of $850 which covers the costs of their
participation in the Symposium. These funds are paid to the University of
Michigan and are deposited in the Symposium account, from which expenses of the
Symposium are paid. No conditional fees or brokerage-type commissions are
charged to presenting firms or to potential or actual investors. Professor
Brophy may have consulting contracts with a small number of presenters from time
to time and be paid for these services. Prospective investors have no prior contact, arranged or suggested by the
Symposium, with presenters. No specific financing program is presented. The twelve minute presentation includes background information on the company,
its product, its management team, and its plans for development. On the basis of
attending the presentation, investors or prospective corporate strategic
partners may visit with the presenters, view their products at a presenter's
exhibit booth, and schedule meetings with the presenter subsequent to the
Symposium at a place of mutual choosing. Presenters are generally seeking
between $1.5 to $3 million, with a $500,000 up-front funding and the remainder
in a second tranche. However, no financing details are presented as part of the
presentation. Symposium attendees presently pay a fee of $325 for the first person from their
firm and $195 for additional firm members. Meals are covered by this fee. Other than the presenters, a variety of people attend the Symposium. Potential
investors are principally representatives of organized venture capital funds
from around the United States, most of whom are familiar with Professor Brophy
through his work with NVCA, his research, and the 14 year history of the Growth
Capital Symposium. These are usually institutionally backed funds, and in every
case are accredited investors. Potential corporate strategic partner candidates
or potential buyers also attend the Symposium. Typically, firms will have sales
in excess of $50 million per year and are accredited investors. Both of these
groups are sent a letter and a brochure announcing the date and place of the
Symposium, the schedule of events and the identity of speakers who will appear,
and provided a specific invitation to attend. Mailings are sent to about 2000
entities. Attendees may also be attracted in an advertisement in the Venture
Journal or by word of mouth from prior attendees. Private Placement Memoranda are rarely presented to any attendees at the
meeting. If distributed they are provided to specific potential investors as the
result of individual discussions rather than on a general or public basis.
Professor Brophy cannot recall any distributions of private placement memoranda
or similar documents at the Symposium. Rather business plans, advertising
materials, technical writings, and similar business documents are frequently
provided to interested persons. Even these documents are not generally
distributed, but are often available in the private rooms or table areas
designated for presenters. Presenters are instructed not to distribute this
material until a prospective investor has been qualified as an accredited
investor. Professor Brophy annually submits a questionnaire approximately 12 months after
the presentation inquiring about receipt of funding. The results of his informal
survey indicates that about 1/2 of the presenters obtain some form of financing
within that period. If funding is achieved as the result of a presentation, it
typically takes the form of a joint funding by three or four venture capital
firms. Any funding arrangement is arrived at through extensive negotiations. Neither the Symposium nor its sponsors provide a computer matching or similar
service. Legal Issues: Presenters seeking funding through investors will generally have to rely on the
exemptions from securities registration under the Securities Act of 1933
provided by either Section 4(2) or Regulation D. The principal issue for
consideration is whether the presentations at the Symposium constitute "general
solicitation" for each of the presenters, thereby potentially disqualifying
their receipt of funding in a private offering for a period of six months
subsequent to the presentation. Rule 502(c) of Regulation D prohibits an issuer or person acting on its behalf
from offering or selling securities by any form of general solicitation or
general advertising, including but not limited to .... (2) Any seminar or
meeting whose attendee have been invited by any general solicitation or general
advertising. We have been unable to locate interpretive rulings or no-actions letters based
on comparable facts. Accordingly, we believe that this letter presents a matter
of first impression to the Commission. The number of invitees would not appear on its face to cause a problem, given
the characteristics of the attendees, their varied purposes, and sophistication
and qualification of potential investors, and the unique nature of the
presentations. Footnote 30 of Release No. 33-6339 proposing Regulation D noted
that ...(P)ursuant to the accredited investor concept in Regulation D, offering
could theoretically be made to an unlimited number of accredited investors. In
Woodtrails-Seattle, Ltd. (August 9, 1982), the Commission granted no-action
relief in a mailing to 330 persons with prior investment experience based upon
(1) the preexisting business relationship with the general partner, (2) the
determination by the general partner that investors met certain suitability
standards and (3) the belief that each proposed offeree has such knowledge and
experience in financial and business matters that enable them to evaluate the
merits and risks of the prospective investment. In this instance, the preponderance of prospective investors will have
previously attended the conference. We propose that each attendee be asked to
certify on the Symposium registration form that either the attendee as an
individual or in a representative capacity is an accredited investor in
accordance with Rule 501(a) or that the purpose for attending is not actual or
prospective investment, but rather a specific stated purpose, including: (1) Student at the Business School of the University or other department or
institution. (2) State or Local Government Agency employee representing the agency. (3) Potential corporate strategic partners. (4) Representative of a presenter. (5) Observers such as an attorney, certified public accountant, academic or
other educator. (6) Banker. (7) Others who must specify the reason for attendance and be acceptable to the
sponsors based on their status as persons who are not potential investors. Registrants will be informed of the criteria for accredited investor status in
accordance with Rule 501(a) in registration materials. In his follow-up questionnaire, Professor Brophy will make inquiry of the
issuers regarding the identity of persons providing funding and verify that such
persons were accredited investors if they attended the symposium. Presenters will be instructed in writing at the time of acceptance for
presentation that any sale of securities should be made in compliance with
applicable state and federal securities laws, that no funds or subscriptions may
be accepted nor may private placement memoranda or similar offering documents be
distributed at the Symposium other than on an individual basis and that any
funds accepted as the result of introductions at the Symposium should be
accepted only from accredited investors. Establishment of the exemption under Section 4(2) raises greater uncertainty
given the absence of direction provided by the courts to date. While the courts
have rejected a numerical investor test in Securities & Exchange Commission v.
Ralston Purina Co.,
346 U.S. 119 (1953) and its progeny, the standards to which
investors are held may be more restrictive than those found in Regulation D.
However, the prospective investors present at the Symposium should meet these
higher standards as best expressed in Hill York Corp. v. American International
Franchises, Inc. 488 F.2d 680 (5th Cir. 1971). These investors are almost all
professional venture capitalists or large institutions. It is not unreasonable
to assume that they have the negotiating power and experience to seek whatever
information they deem relevant in determining to make an investment, that they
have the knowledge and sophistication to evaluate that information, and that
they have substantial net worth and can afford the loss of all of their
investment if the company does not perform to its expectations. All investors
should be clearly aware of the high degree of risk of investing in emerging
growth companies and have the capability of assessing the risks associated with
the individual presenters. If these procedures are followed, it is highly probably that the only
investments arising from the Symposium will come from a very select group of
highly sophisticated accredited investors. Further, it is highly probably that
an investment arising from the Symposium will be made by between one to five
accredited investors, with multiple investors acting jointly. The Symposium also publishes an advertisement in the Venture Capital Journal.
This journal is Venture Capital Journal, published monthly, and subscribed to by
venture capital entities and institutional investors. A copy of the
advertisement is attached. Given the limited circulation, the sophistication of the subscribers and the
nature of the Symposium, we believe that it is appropriate for the Commission to
determine that no general advertising is involved for the individual presenters.
Their names are not identified in the advertisement and, in fact, are often not
known at the time of placing the advertisement; the invitation is to the
Symposium and not for an individual issuer, the sponsors get no benefit from any
successful investment nor are they representing the issuers in soliciting funds;
the intent of the program is to improve the economy of the State of Michigan and
business in general and not to find funds for a specific company. Based on the foregoing, we ask that the Commission determine to take "no-action"
if the Symposium proceeds in the manner described above. Very truly yours, Hugh H. Makens, Partner
Warner, Norcross & Judd
900 Old Kent Building
Grand Rapids, Michigan 49503 Cyril Moscow, Partner
Honigman, Miller, Schwartz & Cohn
2290 First National Building
Detroit, Michigan 48226 Michael B. Staebler, Partner
Pepper, Hamilton & Scheetz
100 Renaissance Center
Suite 3600
Detroit, Michigan 48243 Enclosure cc: Professor David J. Brophy
Mr. Richard Wulff STAFF REPLY LETTERMay 4, 1995 RESPONSE OF THE OFFICE OF SMALL BUSINESS POLICY
DIVISION OF CORPORATION FINANCE Re: Michigan Growth Capital Symposium (the "Symposium")
Incoming letters dated February 24, 1994 and February 6, 1995 Based on the facts presented, particularly noting that: 1 - the Symposium, co-sponsored by the University of Michigan and the Office for
the Study of Private Equity Finance of its School of Business, is a vehicle to
provide Michigan firms with efficient access to the national private equity
finance markets; 2 - presenter companies are selected by the Director of the Office for the Study
of Private Equity Finance and are limited to private firms; companies currently
"in registration" are barred from participation, although public companies
seeking additional funds in the future might be eligible to participate; 3 - While the Director may provide consulting services to some of the presenter
companies, such services are limited to advising about the weaknesses of
corporate structure, improving business plans and informing about available
venture capital sources; such consultations have involved less than 5 percent of
the presenters over the years; 4 - the Symposium is publicized through targeted mailings to known accredited
investors, limited generic advertising in the Venture Journal and by word of
mouth from prior attendees; 5 - the Symposium arranges no prior contacts between presenter firms and
attendees; no specific financing details are a part of the presentations made at
the Symposium and no private placement materials are distributed there; 6 - besides providing assistance in preparing the presentation, the Symposium
and its Director offer no other service, and receive no compensation from
presenters or attendees except for fees associated with the conduct of the
Symposium; no conditional fees or brokerage-type commissions are charged to any
participant; the Division concurs in your view that for purposes of Rule 502(c) of Regulation
D, the Symposium, including the participation of the presenter companies,
involves no general solicitation or general advertising. We express no view as to the availability of any particular exemption for a
securities offering by a Symposium participant. In this regard, it is
particularly noted that in our view the subsequent purchase of a security by an
attendee at the Symposium would not relieve a presenter company from, nor be a
substitute for, the required independent evaluation of an investor's
accreditation; also, such investor's attendance at the Symposium alone would not
be a sufficient basis to form a reasonable belief that such investor is
accredited. Furthermore, Symposium presenter companies should be made aware of
the possible applicability of section 5(a) and (c) of the Securities Act to a
public offering of their securities which does not come within the terms or
guidelines set forth in Rule 502(a) of Regulation D. Because this position is based on the representations made to the Division in
your letters, it should be noted that any different facts or conditions might
require a different conclusion. Sincerely, Richard K. Wulff, Chief
Office of Small Business Policy
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