Being sued by Ironridge Global Partners LLC may be a good

thing for some companies.

The fling of lawsuits is part of an innovative fnancing structure,
offered by the investment manager, that turns liabilities such as
debts for unsold inventory into equity.
San Francisco-based Ironridge, which is led by Richard Kreger,
Brendan ONeil and John Kirkland, launched the so-called Li-
ability for Equity program, or LIFE program, in 2011 and has,
since, completed more than 50 such transactions and put to work
tens of millions of dollars.
The LIFE program allows public companies to satisfy trade pay-
ables, debts and other liabilities in exchange for unregistered
common stock using a Section 3(a)(10) fairness hearing.
Section 3(a)(10) of the Securities Act is an exemption from re-
quirements to register securities for sale in some exchange trans-
actions. Unregistered securities can be issued under Section 3(a)
(10) in exchange for other securities, claims or property inter-
ests. The fairness of the terms and conditions of a Section 3(a)
(10) exchange must be approved by a court or other government
entity.
In a LIFE program transaction, Ironridge acquires an outstand-
ing debt owed to a microcap company vendor, fles a lawsuit
against the company and asks a judge to convert the debt into
stock under Section 3(a)(10).
Sometimes Ironridge is approached by the creditor to initiate
such transactions, and sometimes it is approached by the securi-
ties-issuing company, Kirkland told The Deal.
In either case, we call the other side to see if its workable, he
said. We only do consensual deals. Were the Warren Buffett of
microcap fnancing.
Next, Ironridge sues the microcap company, usually in Los An-
geles County Superior Court, and uses the Section 3(a)(10) fair-
ness hearing process to get a judge to approve the transaction.
THE STRATEGY is controversial. Steve Winters, managing part-
ner of Gemini Strategies LLC in Encinitas, Calif., has said that
Ironridge is abusing the Section 3(a)(10) exemption and fairness
hearing process at the expense of investors in more common
forms of private investments in public equity, or PIPEs.
They may be technically correct but we believe theyre misap-
plying Section 3(a)(10), he said.
Most PIPE investments, in which accredited investors buy un-
registered shares in public companies, rely on the Securities and
Exchange Commissions Rule 144. Securities issued under Rule
144 cannot be sold into the public market until certain condi-
tions are met. The restrictions are meant to limit the risk to pub-
lic market investors of issuing securities without the disclosures
required in a registration statement.
Those restrictions include a six-month holding period for securi-
ties issued by companies that meet the SECs reporting require-
ments.
Meanwhile, securities issued under Section 3(a)(10) are immedi-
ately freely tradable.
When you invest in a convertible debt PIPE, the premise is
youre taking risk by waiting for the six-month period for Rule
144 shares to be tradable, Winters said. If youre going to mis-
apply the rule, what youre doing is problematic.
Kirkland responded that such concerns are often raised by rivals
who have unsuccessfully tried to copy Ironridges strategy.
I always say we are super compliance oriented, said Kirkland, a
former attorney who led the securities law practice at Luce For-
ward Hamilton & Scripps LLP and the securities group in the
Los Angeles offce of Greenberg Traurig LLP.
We get a legal opinion on every transaction, plus a legal opin-
ion from the transfer agent, the clearing service and the broker-
dealer, he said. Every deal clears six lawyers at minimum and
as many as 12 at maximum.
IronrIdge breathes LIFe Into debt exchanges
by dan LonkevIch
REPRINT FROM April 25, 2014
Kirkland also said that Ironridge is not the only investment man-
ager structuring fnancings using Section 3(a)(10), although he
declined to identify rivals.
Section 3(a) (10) is a deceptively simple statute, he said. Its a
very broad exception that, if used properly, can be a godsend to
an issuer.
As far as I can see, were the only ones doing it right, he said.
Scores of attorneys tell me Im doing it right. We think were as
compliant as compliance gets.
To be sure, Kirkland said Ironridge has never requested what is
known as a no-action letter from the SEC. In transactions that
raise regulatory questions, frms sometimes request such letters
from the commission as confrmation that the SEC was aware of
the deal and chose not to take regulatory action.
The deals happen too quickly, Kirkland said. The advantage
of the LIFE Program is speed and cost. Instead of two months
to fle a registration, it takes two weeks, and instead of costing
$200,000 in legal fees, it costs $20,000.
Most LIFE program transactions are done with the smallest of
microcap companies and involve fnancing amounts of less than
$3 million. They have ranged from as small as $250,000 to as
large as $15 million.
Ironridge invested $1.27 million last May in Jammin Java Corp.,
which sells coffee under the Marley Coffee brand. In February
2013, Ironridge invested $800,000 in Axiologix Inc., a Sarasota,
Fla.-based developer of cloud computing services.
In 2012, Ironridge invested $2.2 million in Rapid Fire Marketing
Inc., a Carson City, Nev.-based maker of vapor inhalers. The frm
also invested $2.5 million in Atlanta-based technology company
East Coast Diversifed Corp. In 2011, Ironridge invested $1.12
million in Gillette, Wyo.-based High Plains Gas Inc.
Weve done them literally overnight, though not typically,
Kirkland said. Usually it takes two or three weeks and up to a
month. It depends on how much the issuer has its act together.
He said that Ironridge does considerable due diligence with both
the issuer and the creditor.
We need to see the note, evidence of the wire transfer, notation
of the debt in fnancial statements, proof of delivery of a prod-
uct, Kirkland said. If its a widget company, we need to see evi-
dence the widgets were delivered.
WHILE IRONRIDGE gets contacted by issuers and creditor
alike, typically its the creditors who approach most frequently.
Were often contacted by lawyers and auditors, Kirkland said.
Theyre our two most common creditors. Landlords also.
Typically, Ironridge pays creditors for their liabilities up front,
Kirkland said.
Normally, we wire the money after signing the agreement, he
said.
To do other otherwise, as some rivals do, could raise questions
about the legitimacy and legality of the claim on the liability and
make such a transaction look more like underwriting, he said.
And acting as an unlicensed underwriter is a sure way of getting
into regulatory trouble.
Just because youre exempt from registration doesnt mean
youre exempt from everything else, Kirkland said. If youve
just been assigned a debt and are selling the shares you receive to
pay the debt, it sounds a lot like what an underwriter does.
We routinely pay ahead of time. Were out the money. Were na-
ked. We frequently do it conditionally, however, which means if I
cant get a court approval I can get out. Our obligation starts the
moment the approval comes.
After Ironridge acquires stock, it treats it as a long investment,
with an eye toward buying low and selling high, Kirkland said.
Were like any long shareholders. Well hold or sell depending
on whether we think we should own it or sell it and buy Apple
instead.
The goal is to invest for the long term. We always sell some, but
we rarely sell all. We try to break even on every transaction and
hit a grand slam every now and then.
Weve had a few. Sometimes the stock explodes out the gate,
sometimes we have to wait. Nothing we can do except write the
checks and wait.
Kirkland said that Ironridge also has had a couple of whacka-
doodle clients who breached their duties and later threatened
to complain to the SEC, although he declined to identify them.
We think we do everything right, he said. People say, Well
call the SEC. We tell them, Go ahead. Call now. Well wait on
the line.
Kirkland noted that Ironridge has heard rumors that the SEC
is investigating frms that take advantage of the Section 3(a)(10)
exemption. He said that although such an investigation would be
disruptive, it ultimately might be necessary to weed out bad ac-
tors. Many of those bad actors who are trying to copy Ironridge,
he said, even going so far as to copy its transaction documents.
In every case Ive seen, they take our documents word for
word, Kirkland said. Even the typos are the same. They change
two or three things and they always end up violating the law by
making the changes. When you get a few bad apples it spoils it
for everybody else.
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