Janice Wilken is a partner at Ice Miller LLP.  Her primary area of concentration is corporate law. She also handles securities law compliance matters for public companies.

Financial times are tough, but let's take a step back. Rather than making things worse for ourselves by stashing all our savings under the mattress, let's take a deep breath and look at the situation.

Fed by a culture of consumerism, our real estate and other consumer credit-based markets have been lending at very high levels for years. Loan-to-value ratios have been way out of whack. (There are very few scenarios in which it would be financially responsible for a new college grad making $70,000 a year to take out a $400,000 mortgage and a $50,000 car loan.) In order to spread the risk relating to these loans, banks have entered into swap transactions and myriad of collateralized debt transactions and otherwise sought to offload the risks onto other players in the market. This is a massively over-simplified explanation, but clearly this cultural phenomenon had to come home to roost at some point.

So let's look at some of the consequences. The real estate markets have crashed. Large investment banks and insurance companies have failed. Some were "bailed-out." Others were not. Some major mortgage market players such as Fannie Mae and Freddie Mac joined the spiral. Deposit banks looked like they might fail, and that's when we really saw things become interesting in terms of government involvement. Rumors of a "bail-out package" began to circulate long before we saw the first four-page draft (which was 451 pages in its final form - the KISS principle went out the window on that one). People began to worry about the security of their money in the banks. FDIC limits were raised. Some of us felt better.

Early on in the "financial crisis," the fear showed itself in relatively small changes in the Dow, often in response to the most recent headline failure of a financial institution. But it has now gotten to the point where Dow-watching is a sport. How many times in the last three weeks have you walked into someone's office to find them staring fixedly at Yahoo Finance? How many people do you know who have taken a large portion of their savings out of the equity markets and put it into government bonds (or their pillow cases)? How many people do you know who have suddenly become part-time day-traders? In my view, all of these developments are disturbing and, even worse, are contributing to the problem.

The Dow has fluctuated wildly every day for the last few weeks. If you have any concern for your blood pressure, it's best not to follow it too closely. Talk to your financial advisor. Don't panic. The recent removal of large amounts of capital from the equity markets have significantly depressed the returns on government bonds. While short-selling has been restricted, the increasing speculative trading only exaggerates the market's swings.

Now, I am by no means a financial advisor, and I make no claims to any ability to see the future (through the stock market or otherwise), but I can see the past. Our economy has seen every form of up and down, from the Great Depression to the dot com bubble. None of the extremes have been a result of people acting rationally and in their own long-term best interests.

The fundamental fact is that our markets will recover. The questions are, how long will it take and what will we have to do to get there. In the meantime, let's try not to exacerbate the problem.

As Associated Press business writer Michael Liedtke observed in his October 20, 2008 article Feeling Financial Squeeze, VCs Curtail Investments, “Although a drought hasn't set in yet, it's looking inevitable as the ripple effects of a worldwide financial crisis rattle venture capitalists.”

According to data released by Thomson Reuters, PricewaterhouseCoopers and the National Venture Capital Association, venture capital investments have recently experienced the largest decline since spring of 2003 following the dot com bust.

Many venture capital firms are advising the management teams of their portfolio investments to revise their short-term business plans to reduce costs by laying off staff and trimming budgetary spending in expectation of a worsening recession.

Although venture capital investments have experienced the largest drop off in the last decade, there is a silver lining in the form of a rising interest in biotechnology and alternative energy.  As stated by Terry Kosdrosky in Private Equity Has Toolkit to Ease Troubled Market, “Political leaders and the public are hungry for renewable sources of energy that will lessen the country's dependence on foreign oil and cut down on pollution.”

Venture capital and private equity funds have followed the emerging trend of new companies seeking to stake a founding interest in these industries.  For example, Liedtke cites statistics supporting a 21 percent increase in venture capital investments in biotech startups from last year, while alternative energy, was close behind with a 17 percent increase.

In addition to venture capital opportunities in the U.S. biotechnology and alternative energy industries, Kosdrosky also points to growing opportunities overseas, stating “With growth stunted in the U.S., many private equity firms are looking to put their money to work in growing markets such as China and India.”

The current financial climate has forced venture capitalists to focus their resources on existing investments rather than taking on new challenges.  What does all this mean?  Despite the downturn in the global economy, opportunities for lucrative venture capital investment still exist, albeit in new forms and perhaps in sectors not previously considered.  As blogger Seth Levine wrote in his October 22, 2008 post of VC Adventure, “Be flexible. Seek outside input. Be introspective. Stop and consider what you're learning and if it effects key assumptions behind your business idea. Tweak what you're doing.  Repeat.”

The following blog was posted by Joseph DeGroff, partner at Ice Miller LLP.

For those like me who tend to be somewhat challenged when dealing with rapidly changing technologies, ponder for a moment about how large companies, institutional investors and government are also trying to keep pace.  To be sure, the pace of change is increasing as companies, investors and government regulators embrace – or at least accept the reality of – access to information at company Web sites and the growing use of SMS or text messaging, RSS feeds, message boards and blogs.

 

Just recently, the SEC released interpretive guidance regarding how public companies provide information to the public and the investor community over the Internet.  The SEC also has announced that its EDGAR on-line filing system will be replaced with a successor system called IDEA (for Interactive Data Electronic Applications), which will allow investors, analysts and others to more easily extract and analyze financial information from company reports and more quickly compare those financial results with other companies.

 

These developments follow the 2007 "notice and access" SEC rules that allow companies to provide proxy materials to investors by posting the materials on their Web sites and providing notice that such materials may be obtained on-line.

 

For securities lawyers, investor relations officials and regulators, these technological advances raise as many potential concerns as benefits.  The recent SEC release provides important guidance to companies that want the public coming to their Web sites for information (and not simply send folks to EDGAR or to other third party sites) but without increasing potential exposure under securities laws.  Important SEC messages include:

• Information posted to a company Web site will likely be deemed to be “publicly available” provided that the company satisfies the Web site awareness, standard practice, basic format and waiting period considerations included in the SEC release.
• While the anti-fraud provisions of the securities laws will continue to apply to information posted to the Web site, steps may be taken to manage risk including the separation of dated information into an archive or similar section.
• Hyperlinks may be included, but the SEC suggests certain steps to head off assertions that the company has directly or indirectly "adopted" any or all information accessed via the hyperlink.
• Summary information about the company and its financial results may also be included with appropriate safeguards such as "alert" language, explanatory language and references to publicly available information that has been filed with the SEC (including risk factors and forward-looking information disclaimers).
• For interactive Web site features such as message boards or stockholder forums, the guidance confirms that the company will not be held responsible for third party postings and is not required to respond to or correct any incorrect information or misstatements made by others.

Time will tell whether companies, the investor community and regulators will take full advantage of these technological advancements.  Or, will challenges, regulatory actions and lawsuits chase companies back into yesterday's disclosure regime?  At the very least, this recent SEC guidance should help companies look to the future and utilize these new information delivery tools while taking appropriate steps to minimize risk.  Stay tuned for further development.

The following blog was posted by Jennifer Rhodes, a partner at Ice Miller LLP.

In our third in a series of life science distinguished speakers luncheons we were honored to have Dr. Ora Hirsch Pescovitz the Executive Associate Dean for Research and Edwin Letzter Professor of Pediatrics at Indiana University School of Medicine. She served as director of Pediatric Endocrinology and Diabetology at Indiana University School of Medicine from 1990-2004. In September 2004, she was named to the position of CEO and President of Riley Children's Hospital. In her role in the Dean's office, she oversees all research at the School of Medicine

Dr. Pescovitz asked the question why do life science research in Indiana? And the answer lies within the state’s national ranking for five major health indicators in Indiana: cancer deaths, smoking prevalence, obesity, cardiovascular deaths, and diabetes.  The state ranks in the bottom half of each of these health indicators, and in the bottom 10 of all states in most cases. 

Not only the health impact, but the economic impact is another reason for the state to focus on the life science industry.  Dr. Pescovitz mentioned that high-tech research driven industries have contributed to over a third of the nation's economic growth over the past decade and the U.S. biotech industry had revenues of over $65 billion in 2007, which is up 11% nationally over 2006, so why shouldn't Indiana be getting a piece of that important pie? 

Dr. Pescovitz also discussed how Indiana University School of Medicine is driving the life sciences initiative in Indiana and provided examples of new Indiana businesses, such as Fast Diagnostics, CS Keys, EndGenitor and Immuneworks, not only expanding the technology and research but also bringing in new forms of revenue to the State.  She pointed out that success in the life sciences industry requires a significant amount of collaboration. 

The Indiana Clinical and Translation Scientists Institute is a statewide partnership to transform life science research and health care delivery.  The goals of this project are largely to use basic discoveries and translational approaches to new scientific discoveries from the bench to the bed-side and then to translate these discoveries from the bed-side and move them into the community and from the community into actual medical practice and then taking that feedback from the community back to the researchers so it really is a full cycle. 

Dr. Pescovitz closed by commenting that the cost of life science research is high, but the  return on investment is priceless.

Like the little black dress, socially responsible investing (SRI) is not new but is ever present and constantly updated. The history of SRI includes boycotting of investments in companies that profited from the Vietnam War, avoidance of investments in South Africa during apartheid and, more recently, investment in companies developing sustainable energy strategies, promoting clean water, preventing climate change, producing organic foods, promoting consumer protection and other categories.

 

SRI can be defined in a number of ways, but it generally refers to an investment strategy that considers not only profit but also the social, environmental or other impact of the investment. This "double bottom line" approach is intended to maximize both financial return and social good. Sounds great. Lots of people seem to think so.  According to a recent study by the Social Investment Forum, approximately 11% of assets under management in the United States are involved in SRI. SRI assets increased from $639 billion in 1995 to $2.71 trillion in 2007.

 

As particular types of social activism (think environmental preservation) became accepted mainstream societal values, venture funds with a socially conscious agenda are becoming more common.  There's also the growth of so-called "greenwashing" that has likely contributed to the increase in SRI. Companies wanting to cash in on this societal trend may use environmental protection essentially as a marketing strategy. But, the actual operations of the business may not be carried out in an environmentally friendly manner. Your typical investor would not be in a position to know and may therefore not effectively accomplish their identified goals with their investment dollars.

Will the growth in SRI continue?

 

Hard to say. Funds in SRI, so far at least, have had to be "patient capital." That is, there are no quick returns and the investor should not expect liquidity on the short timeframe that is typical for private equity transactions. SRI funds and SRI companies seeking investment will have to control expectations of their investors as they strive to meet their double bottom line goals. Another concern is that the trend will catch on in a manner reminiscent of the dot com bubble.  Many investors funded dot com companies without adequate diligence and, as a result, many of those companies failed to meet their projected returns. The failure cast a dim light on all Internet-based companies, regardless of their merits as investments.

We can only hope the same does not happen to SRI. The idea of SRI is a noble one. I'd hate to see it fail because we all jump on the bandwagon before the underlying premise has been proven to make for a valuable investment

The Securities and Exchange Commission (SEC) has adopted amendments to its rules, known as Regulation D, governing private securities offerings. The amendments purport to modernize and streamline the reporting process with respect to private offerings and to enhance information availability to the investing public and regulators alike. I'm not so sure you can simultaneously streamline the process while increasing the information available.

 

The amended rules require the mandatory notice filing on Form D to be filed electronically rather than on paper, after a phase-in period in which issuers can file in either format. The data resulting from those filings will be publicly available through the SEC's Web site and is expected to be interactive and searchable. The overall goal of these changes is to ease the burden of filing and to provide easier access to information to investors and regulators.

Another purported goal of the electronic filing requirement is to coordinate efforts among regulators. The ultimate goal would be to have filing with the SEC become a one-stop-shop, eliminating the need to file in individual states. Have you ever tried to convince state securities regulators in New York or Florida, or any other state with a peculiar securities regulation regime, that the SEC has any jurisdiction or even influence over them whatsoever? Only a securities lawyer can relate to that quandary.

A noticeable source of conflict arises from the content changes to Form D.  Among many other things, the new Form D will: require revenue range information for most issuers (subject to an option to decline to disclose); reduce disclosures regarding use of the proceeds to include only commissions and similar fees and payments to related parties; and permit a limited amount of "free writing" in response to certain questions.

Some additional amendments include: decreasing requirements to identify related parties; removing the requirement of a description of the business and replacing it with a code identifying the issuer's industry; and limiting reporting of minimum investment amounts so as to avoid affecting employee incentive plans adversely.

Essentially, the SEC has its heart in the right place with these amendments. The goals of streamlining the process for private offerings and increasing investor and regulator access to information are good ones, but they conflict with one another to some extent. Each amendment, insofar as it relates to the content of the required disclosures, either favors streamlined disclosure or favors increased access to information. You can't have it both ways.

The Indiana Supreme Court, in November 2007, decided a case which could impose significant new responsibilities on corporate directors.  In Lean v. Reed, the court found a director of a Canadian corporation personally liable as a matter of law (i.e., without trial) for violations of the Indiana securities laws by the corporation. While this in itself is not groundbreaking, the facts underlying the case are rather startling.

 

This ruling has emphasized that directors and officers can be personally liable for a corporation's violations of the Indiana securities laws (and the similar securities laws of other states) under some circumstances. A director could have a defense against personal liability if the director did not know, and in the exercise of "reasonable care" could not have known, of the facts giving rise to the violation. In Lean v. Reed, the court found that the elected director had per se failed to use reasonable care because he assumed, without inquiry, that management had taken the steps required to comply with the Indiana securities laws in connection with a share exchange transaction approved at his first board meeting.

 

The Lean v. Reed decision could be read as imposing a burden under certain circumstances on directors to inquire into the company's securities law compliance, an area of law often understood by only securities attorneys, whenever the corporation issues securities.  Although it is not clear what will be sufficient to establish the use of reasonable care, we do know that you might be held not to have used reasonable care if you do not at least ask. Directors (and officers and partners and managers and others in similar situations) shouldn't assume that they will have no liability under state securities laws for securities transactions completed by their companies simply because they may act in good faith.