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Article from SFGate.

In recent years, LinkedIn, Groupon and Demand Media all suggested they were profitable while privately held. But when the businesses were forced to file audited financial statements as they prepared to go public, those years or quarters in the black mysteriously vanished.

That’s just one of many reasons why it’s disturbing to see legislators hard at work on laws that would actually make it easier for companies to seek investments without also providing thorough and transparent financial data. And it’s why the proposals demand serious scrutiny.

This week, Sens. Pat Toomey, R-Pa., and Tom Carper, D-Del., introduced a bill that would raise the number of shareholders that companies are allowed to have before being forced to routinely disclose finances. Under the proposal, the threshold would rise from 500 to 2,000, minus employees.

Companies often feel compelled to go public when they near the 500 mark, because the disclosure requirements are nearly the same as those for a public company. Observers were quick to note that the law could ease IPO pressure on businesses like Facebook, which is bumping up against that threshold, further inflating private trading markets without adding any financial clarity.

“Lots of companies with fairly substantial market capitalizations would avoid the transparency of being reporting companies,” said John Coffee, a law professor at Columbia University.

Crowd funding

Separately this week, the House approved legislation proposed by Rep. Patrick McHenry, R-N.C., that would allow small businesses to raise capital through what is called crowd funding. That would mean startups could solicit investments from a pool of small investors, not just high-net-worth investors.

Individuals could invest the lesser of $10,000 or 10 percent of their annual income. As long as the firms raise less than $1 million a year, they could provide scant if any financial disclosures (though they would have to highlight the risky nature of the offerings).

Meanwhile, the private-equity and investment-banking industries are pushing for even bigger changes. Last month, a group calling itself the IPO Task Force – including representatives from Hummer Winblad Venture Partners and the law firm Wilson Sonsini Goodrich & Rosati – submitted an audacious wish list for policymakers.

Complaining about the paucity of IPOs in recent years, it recommended a looser set of rules for “emerging growth companies” with less than $1 billion in annual gross revenue.

These companies would be able to take advantage of a five-year “on-ramp” period that would reduce requirements for disclosures of historical financial data. The bill would also exempt companies from regulations concerning shareholder voting rights on executive compensation and loosen rules regarding analyst conflicts of interests.

Some corporate governance experts think the very premise of an on-ramp is flawed.

The first five years “is exactly when you would need to have the best disclosures,” said Charles Elson, director of the center for corporate governance at the University of Delaware.

The argument in favor of these proposals is that freeing companies from onerous regulations put in place in recent years would allow them to more easily build capital, accelerate innovation and create jobs.

Advocates for the task force recommendations contend that the rules are directly responsible for the decline in IPOs in recent years. Without that potential payday, venture capitalists and other investors have less incentive to take chances on young companies.

“Given the urgency to get America back on the path to economic growth, we need to get capital back in the hands of companies that create jobs,” said Kate Mitchell, chair of the task force and managing director of Scale Venture Partners, in a statement.

These are all tantalizing promises in the current economic climate. But we’ve seen again and again why transparent information is critical for the investing public..

Shareholders of Enron lost $11 billion and employees saw their life savings evaporate when it turned out the company was hiding billions in shell firms and fudging its balance sheet.

More recently, Lehman Bros., Bear Stearns and AIG crashed and nearly took the global financial system with them after losing highly leveraged, complicated and opaque bets on toxic mortgages.

These economic crises prompted laws like the Sarbanes-Oxley Act of 2002, which required more thorough disclosures of things like off-balance-sheet transitions. Similarly, the Dodd-Frank Act, passed in the aftermath of the 2008 economic collapse, granted greater oversight of complex instruments like credit default swaps.

Watering down

But political memories are short, and the instinct to enact reforms to prevent future catastrophes fades as constituents shift their frustrations to stubborn unemployment rates. And so now, we see proposals to water down the protections that were just passed.

From the moments these rules went into effect, industry has lamented how the burdensome and expensive regulations harm business and discourage IPOs. But maybe these things should be burdensome and expensive.

There’s a great responsibility that goes along with accepting millions of dollars from college endowments, pension funds, mom-and-pop stock pickers and, yes, even accredited investors.

I’d submit that the decline in IPOs had at least as much to do with the market crashes brought about by dot-com pump-and-dump schemes and the subprime mortgage and derivatives fiasco.

In other words, the private-equity and investment-banking industries haven’t exactly proven themselves worthy of lighter regulations. On the contrary, they’ve repeatedly demonstrated an unconscionable eagerness to get away with exactly as much as they can, even at immense cost to the broader economy.

Obviously, this isn’t universally true, and not all startups, venture capitalists or investment banks should be tarnished by the acts of a few. But the best way for the rest of us to know the difference is through crystal-clear transparency.”

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Here is an article from Dealbook at NY Times.

The Treasury Department expects to recover all but $42 billion of the $370 billion it has lent to ailing companies since the financial crisis began last year, with the portion lent to banks actually showing a slight profit, according to a new Treasury report, Jackie Calmes writes in The New York Times.

The new assessment of the $700 billion bailout program, provided by two Treasury officials on Sunday ahead of a report to Congress on Monday, is vastly improved from the Obama administration’s estimates last summer of $341 billion in potential losses from the Troubled Asset Relief Program. That figure anticipated more financial troubles requiring intervention.

The officials said the government could ultimately lose $100 billion more from the bailout program in new loans to banks, aid to troubled homeowners and credit to small businesses.

Still, the new estimates would lower the administration’s deficit forecast for this fiscal year, which began in October, to about $1.3 trillion, from $1.5 trillion.

The report could tamp down some of the public anger directed against both parties over the bailouts. Congressional leaders are already planning to use some of the program’s money for economic stimulus and job creation.

Of course, the government’s potential losses extend beyond the Treasury program. The Federal Reserve, for example, still holds a trillion-dollar portfolio of mortgage-backed securities whose market value is unknown.

The improved picture of the Treasury program is the result of higher-than-expected returns on the loans and the fact that, as the financial sector has recovered from its free fall last year, the government has not had to use much more of its $700 billion in lending authority this year, according to the Treasury officials, who declined to be identified as discussing the report before it was presented to Congress.

Last week, Bank of America became the latest big bank to say that it was raising private capital and would soon repay its $45 billion bailout loan. Once that payment is made, Citigroup will be the last big bank tethered to the state.

The estimated $42 billion in losses is a net figure that accounts for some profits to offset the losses. The Treasury officials said the government had lost about $60 billion, roughly half to Chrysler and General Motors and the other half to the insurance giant American International Group.”

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Here is an excellent blog entry from Mind The Bridge.

“The American Recovery and Reinvestment Act, passed last February 2009, pours over $65 billion into renewable energy, energy efficiency and greentech financing of which 6.5 billion for R&D. It is a real “Green New Deal”: The most significant effort in public spending in science and technology after the launch of the Apollo Program. And «it only costs the equivalent of a couple of months in Irak» as a blogger commented on the New York Times website. A big part of these dollars is already profiting Silicon Valley start-ups and research centers, which are leading the way through future technological development.”

It continues…

“The most important incentives deployed by the Stimulus Package are the following:

  • A large sum for energy efficiency, including $5 billion for low-income weatherization programs; over $6 billion in grants for state and local governments; and several billion to modernize federal buildings, with a particular emphasis on energy efficiency.
  • $11 billion for “smart grid” investments.
  • $3.4 billion for carbon capture and sequestration demonstration projects (also known as “clean coal”).
  • $2 billion for research into batteries for electric cars.
  • $500 million to help workers train for “green jobs.”
  • A three-year extension of the “production tax credit” for wind energy (as well as a tax credit extension for biomass, geothermal, landfill gas and some hydropower projects).
  • The option, available to many developers, of turning their tax credits into direct cash, with the government underwriting 30 percent of a project’s cost.

For more details, I found the DSIRE database very useful to navigate the complex space of federal and state incentives for renewables and efficiency.”

In Silicon Valley, the following companies are eyeing these funds.

“Renewable Power Generation : Thin Film Solar photovoltaic
Solyndra is the first company to receive an offer for a U.S. Department of Energy (DOE) loan guarantee within the Stimulus Package. Solyndra, a Fremont, California-based manufacturer of innovative cylindrical photovoltaic systems using thin film technology, will use the proceeds of a $535 million loan from the U.S. Treasury’s Federal Financing Bank to expand its solar panel manufacturing capacity in California. Also in the thin-film sector, Heliovolt is looking into the Stimulus Package for the development of its technology and production capacity. It is a CIGS thin-film PV panel manufacturer that uses a fraction of semiconductor material used in traditional silicon cells, significantly slicing costs while at the same time achieving performances comparable to traditional silicon cells.

Transportation: Electric Cars and Biofuels
Tesla Motors, Inc. is awaiting word on a $350 million loan application to the Department of Energy that would allow the electric carmaker to build the Model S sedan, which is expected to cost $57,400. Tesla is a Silicon Valley automobile startup company focusing on the production of high performance, consumer-oriented battery electric vehicles. In the biodiesel space, Aurora Biofuels uses proprietary technology developed at the University of California at Berkeley, to produce biodiesel feedstock from microalgae. Based in Alameda, California, Aurora’s technology achieves yields that are 100 times higher and at significant lower costs than traditional bioethanol production methods.

Energy Efficiency:
Serious Materials, a leading sustainable building materials company based in Sunnyvale, CA, announced that it fully supports the American Recovery and Reinvestment Act energy efficiency provisions. “We are already opening plants to meet the Recovery Act demand and hiring what may be hundreds of workers this year.” The company’s products such as SeriousWindows and SeriousGlass can reduce heating and cooling energy costs by up to 50%. Under the Recovery Act, homeowners can receive federal tax credits for “qualified energy-efficient improvements,” which include windows, doors and skylights. The new tax credits are for 30% of the cost of eligible products up to a limit of $1,500.

Efficiency of Infrastructures: Smart Grid Management Systems
Lumenergi, Inc., a Newark, CA based start-up is emerging rapidly in a space populated by large corporations. Lumenergi manufactures advanced and price-competitive dimming electronic ballast for fluorescent lighting that, combined with a proprietary lighting control system, is able to achieve energy savings in the order of 70%. In addition, Lumenergi’s system is Demend Response ready, allowing utilities to save energy at peak loads. This provides a huge opportunity as lighting accounts for 23 percent of all electricity consumption in the U.S. and 50 percent of electricity used in high-rise buildings. Coupled with rebates and grants that are increasingly being offered by utilities or state energy offices, Lumenergi estimates that a customer could get a return on their investment in only two years.

With billions of dollars from the Recovery Act flowing into smart grid investments, pushing utilities towards efficiency, and funding energy efficiency retrofits of commercial and governmental building, Lumenergi and other technology start-ups in Silicon Valley are getting organized to make the most out of federal and state funding.”

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