Strictly Business http://www.strictlybusinesslawblog.com A Business Law Blog for Entrepreneurs, Startups, Venture Capital, and the Investment Management Industry. Mon, 14 Apr 2014 20:01:38 +0000 en-US hourly 1 http://wordpress.org/?v=3.9 Venture Capital Term Sheet Negotiation — Part 8: Carve-Outs to Anti-Dilution Provisions and “Pay to Play” Provisions http://www.strictlybusinesslawblog.com/2014/04/13/venture-capital-term-sheet-negotiation-part-8-carve-outs-anti-dilution-provisions/?utm_source=rss&utm_medium=rss&utm_campaign=venture-capital-term-sheet-negotiation-part-8-carve-outs-anti-dilution-provisions http://www.strictlybusinesslawblog.com/2014/04/13/venture-capital-term-sheet-negotiation-part-8-carve-outs-anti-dilution-provisions/#respond Mon, 14 Apr 2014 00:00:00 +0000 http://www.strictlybusinesslawblog.com/?p=1721 This post is the eighth in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet. In the prior seven posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, discussed […]

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This post is the eighth in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet.

In the prior seven posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, discussed dividends on preferred stock, explained how liquidation preferences work, discussed the conversion rights and features of preferred stock, examined voting rights and investor protection provisions, and analyzed anti-dilution provisions. This post will discuss carve-outs to anti-dilution provisions that typically do not trigger dilution adjustments and also examine “pay to play” provisions.

Anti-Dilution Provisions

As we discussed in a previous post, dilution refers to the phenomenon of a shareholder’s ownership percentage in a company decreasing because of an increase in the number of outstanding shares, which can happen for various reasons. Dilution is not always a negative but can be a concern for venture capital investors because of the possibility a company may engage in a “down round,” or a later issuance of stock at a price that is lower than the price the venture capital investors paid. Anti-dilution provisions protect against the consequences of a down round by adjusting the conversion price of their preferred stock upon new issuances at lower per-share prices, so as to partially or completely protect the venture capital investor’s investment from a decrease in value resulting from the down round.

For examples of different types of anti-dilution provisions, see the National Venture Capital Association’s (NVCA) term sheet here.

Customary Carveouts

An anti-dilution provision generally lists certain issuances of stock that do not trigger adjustment of the conversion price. These carve-outs comprise various common situations that are distinct from the typical capital raise, including the following:

  •  stock issued upon the conversion of any preferred stock or as a dividend or distribution on preferred stock;
  • stock issued upon conversion of any debenture, warrant, option, or other convertible security;
  • common stock issued upon a stock split, stock dividend, or any subdivision of shares; and
  • common stock or options issued to employees, directors, or consultants as part of an equity compensation plan.

In addition, other issuances that do not trigger conversion can be negotiated by the parties. Other possible exclusions include the following issuances of common stock, options, or convertible securities:

  • to banks or other financial institutions pursuant to a debt financing;
  • to equipment lessors pursuant to equipment leasing;
  • to real property lessors pursuant to a real property leasing transaction;
  • to suppliers or service providers in connection with the provision of goods or services;
  • in connection with an M&A transaction, reorganization, or joint venture; and
  • in connection with sponsored research, collaboration, technology license, development, OEM, marketing, or similar.

Any of these exclusions can contain a limit on the number of shares or underlying shares that can be issued, and can require the approval of the director(s) appointed by preferred stockholders or even the vote of the preferred stockholders. Founders should be careful to review the carve-outs and make sure that the customary ones are contained in the term sheet. In addition, if the founders anticipate that the company may need to make use of any of the optional carve-outs described above, they should consider asking for those as well. Investors shouldn’t find the most typical of these carve-outs to be particularly problematic.

Pay to Play Provisions

“Pay to play” provisions work together with anti-dilution provisions to encourage venture capital investors to participate in subsequent rounds of financing. When such a provision is in effect, if an investor does not participate in a subsequent round, the anti-dilution provision does not apply. (The investor may lose other rights of a preferred stockholder as well, depending on how the provision is structured.) Because the investor will want that protection, it has an incentive to participate. Such a provision is favorable for the company because it prevents the investor simply from sitting out a down round and passively receiving the benefits of the anti-dilution provisions without committing more capital to the company. A pay to play provision is certainly something that a company can ask for when negotiating a term sheet, though the company should expect to receive some push back. A company is only likely to get a pay to play provision if it has considerable leverage going into a deal.

In the next post, we’ll discuss redemption rights.


© 2014 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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SEC’s Reg. A+ Proposal Has the Potential to Actually Be Useful http://www.strictlybusinesslawblog.com/2014/03/16/secs-reg-proposal-potential-actually-useful/?utm_source=rss&utm_medium=rss&utm_campaign=secs-reg-proposal-potential-actually-useful http://www.strictlybusinesslawblog.com/2014/03/16/secs-reg-proposal-potential-actually-useful/#respond Sun, 16 Mar 2014 21:23:47 +0000 http://www.strictlybusinesslawblog.com/?p=1717 On December 13, 2013, the SEC issued a proposed rule, which contains a draft of the long-awaited regulations implementing Section 401 of the Jumpstart Our Business Startups Act (JOBS Act), creating a new securities registration exemption commonly known as “Reg. A+.” The rule is actually a revision to an existing exemption called Regulation A.  Reg. […]

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On December 13, 2013, the SEC issued a proposed rule, which contains a draft of the long-awaited regulations implementing Section 401 of the Jumpstart Our Business Startups Act (JOBS Act), creating a new securities registration exemption commonly known as “Reg. A+.”

The rule is actually a revision to an existing exemption called Regulation A.  Reg. A currently exempts small public offerings of up to $5 million in one year from federal securities registration requirements. To make use of the exemption, issuers must file an offering statement, which is a simpler version of the prospectus required in a registered offering.  The offering statement must be cleared (or “qualified” in the language of Reg. A) by the SEC. Issuers can “test the waters”[1] with potential investors before filing the offering statement.  Reg. A permits general solicitation and general advertising, and the securities issued are not “restricted securities” and thus not subject to limitations on resale.  In addition, purchasers need not be accredited investors.  Although Reg. A offerings are simpler and less costly than registered offerings and more permissive in scope than private placements, Reg. A has rarely been used compared to registered offerings or private placements under Rule 506 of Regulation D. This is largely because the Rule 506 exemption is less expensive to comply with and preempts state securities law (so issuers do not need to comply with costly and complicated state requirements) and allows issuers to raise an unlimited amount as opposed the $5 million allowed under Reg. A. The increased costs associated with a Reg. A offering (both the SEC qualification and the state-by-state requirements) are rarely justified in an offering under $5 million.  Consequently, Reg. A has not offered a useful alternative to issuers.

Section 401 of the JOBS Act may change that. It added a new section to the Securities Act instructing the SEC to increase exemption eligibility for small offerings of up to $50 million of securities in any one year. This larger exemption has been dubbed “Reg. A+,” though that is not an official name.  The proposed rule bifurcates Reg. A, creating a “Tier 2” offering exemption for offerings up to $50 million in addition to the existing Reg. A exemption for $5 million, now called a “Tier 1” offering. Changes to the rule comprise issuer eligibility requirements, requirements for the content and filing of offering statements, and ongoing issuer reporting requirements. Use of Tier 2 will trigger:

  • Enhanced disclosure requirements, including a requirement to provide audited financial statements.
  • Electronic filing of annual and semiannual reports and updates and other reporting requirements so long as stock is held by at least 300 record holders or until the issuer begins reporting under the Exchange Act.
  • A requirement that the investors’ purchase in the Reg. A offering be no more than 10% of the greater of their net worth or net income.
  • Preemption of state securities law registration.

In my view, the last item on that list is the most significant element of the proposed rules. The JOBS Act amended the Securities Act to add securities sold in a Tier 2 offering to the category of securities exempt from state registration if they were either offered or sold on a national securities exchange or offered or sold to a “qualified purchaser,” as defined by the SEC. The SEC took a very expansive approach to preemption, as the proposed rules do not require that the Tier 2 securities be listed on a national exchange, but rather that they be offered or sold to “qualified purchasers,” and define that term as all purchasers in a Tier 2 offering. If adopted, this would mean that all Reg. A Tier 2 offerings would have preemption, just as Rule 506 offerings do. Without preemption, issuers in a Tier 2 offering would have to either register or seek an applicable exemption in each state in which they wished to offer securities. With state preemption, issuers may find the new exemption an effective alternative for capital formation.

I’m generally supportive of the SEC’s approach, which if adopted as proposed will contribute to making Reg. A a meaningful capital raising tool for small issuers.  Perhaps predictably, the leadership of the North American Securities Administrators Association (NASAA) has issued a formal objection to the proposed rules’ preemption of state registration requirements. NASAA’s position is that because state authorities are closer to resident issuers and investors, they are better equipped to monitor offerings to prevent and punish securities laws violations as well as to improve the overall quality of offerings. It points out that many violations resulting in incarceration and restitution stem from Reg. D offerings. It proposes a new coordinated, multi-state review program under which issuers would make central filings which are then distributed electronically to all states for a 10-day review. Issuers would interact solely with “lead examiners,” who make a binding determination to clear each application. The entire process should take a minimum of 30 days.

If all states buy into the coordinated review program, it could prove a workable alternative to preemption, although it does add some time and some extra expense to the process. In its request for public comment, the NASAA notes that issuers need to select which states it intends to apply to upfront; it may not be possible to add states later. This means an issuer must be certain about the scope of the offering when it makes the initial filing. Given that Reg. A offerings permit general solicitation and advertising, they are likely to be conducted nationwide. In that case, issuers will want to select all states. If all states don’t sign on to the program, however, issuers will still have to consider the registration requirements and any applicable exemptions in those states that don’t utilize the program, or try to avoid those states, rendering the review program a far less desirable alternative to state preemption. I certainly understand the position of state regulators and investor advocates, but the disclosure and reporting regime required by Reg. A already provides a good deal of investor protection.

The one major downside of the proposed rule is that companies that use a Tier 2 offering are still subject to the ongoing Exchange Act reporting requirements which kick in when an issuer’s total assets exceed $10 million and its security holders reach 2,000 people or 500 who are not accredited investors (who must have a certain net worth or income or meet other conditions).  This will almost certainly be the case, since the issuer’s shares will likely be more widely held. This requirement may reduce the attractiveness of the exemption, as such reporting constitutes an expensive and time-consuming burden for the issuer. In my view, the SEC should consider exempting securities issued in a Reg. A offering from Exchange Act reporting requirements for a limited time (e.g., two years), especially since the proposed rules already have a more modest but thorough reporting regime built-in.

With that said, while it has gotten the least amount of coverage in the press, Reg. A+ may turn out to be the most useful of the three major new exemptions under the JOBS Act (the other two being Rule 506(c) and crowdfunding).  As proposed, it allows for (a) general solicitation, (b) purchase by non-accredited investors, and (c) state preemption, a combination that no other exemption currently features.  Of course, in response to the concerns expressed by NASAA, the SEC may water down or eliminate preemption completely, which would greatly curtail the usefulness of the exemption, though perhaps not eliminate it completely.  In either event, we are likely to see a greater frequency of the use of Reg. A offerings in the near future.


Footnotes

[1] Essentially, testing the waters means talking to investors prior to the qualification of the offering statement.  In most cases, testing the waters is prohibited in a registered offering.


© 2014 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Venture Capital Term Sheet Negotiation — Part 7: Anti-dilution Provisions http://www.strictlybusinesslawblog.com/2014/03/08/venture-capital-term-sheet-negotiation-part-7-anti-dilution-provisions/?utm_source=rss&utm_medium=rss&utm_campaign=venture-capital-term-sheet-negotiation-part-7-anti-dilution-provisions http://www.strictlybusinesslawblog.com/2014/03/08/venture-capital-term-sheet-negotiation-part-7-anti-dilution-provisions/#respond Sat, 08 Mar 2014 15:15:59 +0000 http://www.strictlybusinesslawblog.com/?p=1714 This post is the seventh in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet.  In the prior six posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, discussed […]

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This post is the seventh in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet.

 In the prior six posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, discussed dividends on preferred stock, explained how liquidation preferences work, discussed the conversion rights and features of preferred stock, and examined voting rights and investor protection provisions. This post will discuss anti-dilution provisions.

Dilution

Dilution refers to the phenomenon of a shareholder’s ownership percentage in a company decreasing because of an increase in the number of outstanding shares, leaving the shareholder with a smaller piece of the corporate pie. The total number of outstanding shares can increase for any number of reasons, such as the issuance of new shares to raise equity capital or the exercise of stock options or warrants.

However, all dilutive issuances are not harmful to the existing shareholders.  If the corporation issues shares but receives sufficient cash in exchange for the shares, the shareholders’ ownership percentages may be reduced but the value of the corporation has increased enough to offset the lower ownership percentage.  On the other hand, if the cash received is insufficient, the increase in the value of the corporation will not be enough to offset the reduction in ownership percentages.

In venture capital deals, the transaction documents typically include negotiated provisions designed to deal with a dilutive issuance that would otherwise reduce the value of the preferred investors’ shares (relative to the price the preferred investors paid for their shares).  These provisions are referred to as “anti-dilution provisions.”

Anti-dilution

In venture capital terms, dilution becomes a concern for preferred stockholders when confronted with a “down round” — a later issuance of stock at a price that is lower than the preferred issue price.  Anti-dilution provisions protect against a down round by adjusting the price at which the preferred stock converts into common stock.  We previously discussed the concept of the preferred stock being convertible into common here, noting that many of the preferences of the preferred stock are based on the number of shares of common into which the preferred converts (e.g., voting rights, dividend rights, liquidation).

There are three common alternatives for anti-dilution provisions described in the NVCA’s model term sheet: full ratchet, weighted average, and no price-based anti-dilution protection.

Full Ratchet

A “full ratchet” provision is the simplest type of anti-dilution provision but it is the most burdensome on the common stockholders and it can have significant negative effects on later stock issuances.  Full ratchet works by simply reducing the conversion price of the existing preferred to the price at which new shares are issued in a later round. So if the preferred investor bought in at $1.00 per share and a down round later occurs in which stock is issued at $0.50 per share, the preferred investor’s conversion price will convert to $0.50 per share.  This means each preferred share now converts into 2 common shares.

Full ratchet is easy and it’s the most advantageous way to handle dilution from the preferred investor’s standpoint but it is the most risky for the holders of any common stock.  With this approach, the common stockholders bear all of the downside risk while both common and preferred share in the upside.

Full ratchet can also make later rounds more difficult.  If the corporation needs to issue a Series B round and the stock price has decreased, it may be difficult to get the Series A investors to participate because they are getting a full conversion price adjustment.  In essence, the Series A investors are getting more shares without putting more cash in the Series B round.  In addition, the full ratchet provision will reduce the amount the Series B investors will be willing to pay in a down round (simply because full ratchet results in more shares outstanding on an “as converted” basis).

Weighted Average

A second and more gentle method for handling dilution is referred to as the “weighted average” method. [1]  Following is the calculation for a typical weighted average anti-dilution provision presented by the NVCA’s term sheet (it looks a little intimidating at first glance but it’s actually pretty simple):

CP2 = CP1 * (A+B) / (A+C)

CP2    =     Conversion price immediately after new issue

CP1    =     Conversion price immediately before new issue

A        =     Number of shares of common stock deemed outstanding immediately before new issue [2]

B        =     Total consideration received by company with respect to new issue divided by CP1

C        =     Number of new shares of stock issued

Let’s suppose a company has 1,000,000 common shares outstanding and then issues 1,000,000 shares of preferred stock in a Series A offering at a purchase price of $1.00 per share.  The Series A stock is initially convertible into common stock at a 1:1 ratio for a conversion price of $1.00.

Next, the company conducts a Series B offering for an additional 1,000,000 new shares of stock at $0.50 per share. The new conversion price for the Series A shares will be calculated as follows:

CP2 = $1.00 x (2,000,000 + $500,000) / (2,000,000 + 1,000,000) = $0.8333.

This means that each of the Series A investor’s Series A shares now converts into 1.2 shares of common (Series A original issue price/conversion ratio = $1.0 /$0.8333 = 1.2).

Under the discussion of full ratchet above, we noted that the preferred shares became convertible into 2 common shares post-issuance.  Under weighted average, the preferred shares became convertible into 1.2 shares.  This simple example illustrates that the weighted average approach is much less beneficial for the preferred investor but much less onerous for the common stockholders.

However, to provide a little more context, let’s assume our hypothetical company is sold and liquidated for $10,000,000 after the Series B round.  We’ll also assume, for simplicity, that there was no dividend preference for the preferred shares and that we’re using a non-participating structure.  Here’s how the cash gets distributed with full ratchet and weighted average, respectively:

anti-dilution full rachet

 

 

 

 

anti-dilution weighted average

 

 

 

 

 

Note how much more the Series A investors get with full ratchet and how much this reduces the amounts distributable to Series B investors and common stockholders.

No Price-Based Anti-dilution Protection

The third alternative for anti-dilution in the NVCA’s term sheet is no price-based anti-dilution protection.   In this scenario, the preferred investor bears the risk of a down round along with the common stockholders.  This is the fairest from the standpoint of the common stockholders but many preferred investors will not agree to take the down round risk without any anti-dilution protection.

In the next post, we’ll continue discussing anti-dilution and focus on some of the carve-outs that typically don’t trigger dilution adjustments as well as “pay to play” provisions.


Footnotes

[1] Note that there are variations on weighted average formulas.  For a discussion of “broad-based” and “narrow-based” formulas see this post: http://www.startupcompanylawyer.com/2007/08/04/what-is-weighted-average-anti-dilution-protection/

[2] The number of shares of common stock deemed to be outstanding immediately prior to new issue includes all shares of outstanding common stock, all shares of outstanding preferred stock on an as-converted basis, and all outstanding options on an as-exercised basis; and does not include any convertible securities converting into this round of financing.


© 2014 Casey W. Riggs — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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SEC Provides Exemption from Broker-Dealer Registration Requirements for M&A Brokers http://www.strictlybusinesslawblog.com/2014/03/02/sec-provides-exemption-broker-dealer-registration-requirements-ma-brokers/?utm_source=rss&utm_medium=rss&utm_campaign=sec-provides-exemption-broker-dealer-registration-requirements-ma-brokers http://www.strictlybusinesslawblog.com/2014/03/02/sec-provides-exemption-broker-dealer-registration-requirements-ma-brokers/#respond Sun, 02 Mar 2014 20:39:14 +0000 http://www.strictlybusinesslawblog.com/?p=1704 On January 31, 2014 (revised February 4, 2014), the SEC issued a no-action letter to a group of attorneys who requested assurance on an issue that has long been on the minds of securities lawyers: are people who facilitate the sale of a controlling interest in a business involving a transfer of stock — which the […]

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On January 31, 2014 (revised February 4, 2014), the SEC issued a no-action letter to a group of attorneys who requested assurance on an issue that has long been on the minds of securities lawyers: are people who facilitate the sale of a controlling interest in a business involving a transfer of stock — which the Supreme Court has held to be a sale of securities under federal securities laws — required to register as broker-dealers under the Securities Exchange Act of 1934, with all of the attendant expenses and obligations?

Who is Affected

The attorneys requesting the no-action letter used the term “M&A Broker” to describe a person engaged in facilitating mergers, acquisitions, business sales, and business combinations. In its no-action letter, the SEC defined the term as follows:

 a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company (as defined below) through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company. A buyer could actively operate the company through the power to elect executive officers and approve the annual budget or by service as an executive or other executive manager, among other things.

A “privately-held company” is one that isn’t a reporting company under the Exchange Act; it must be an operating company and not a “shell” company.

What M&A Brokers Can Do

Generally, the no-action letter gives assurance that the SEC staff would not recommend enforcement action if an M&A Broker effected securities transactions in connection with the transfer of a privately held company without registering as a broker-dealer by engaging in the following specific activities:

  1. Represent the buyer, seller, or both, as long as both receive disclosure and give written consent.
  2. Facilitate a transaction with a buyer or buyer group that, upon completion of the transaction, will control the business.
  3. Facilitate a transaction involving the purchase or sale of a privately-held company no matter its size.
  4. Advertise a company for sale with information such as the description of the business, general location, and price range.
  5. Advise the parties to issue securities or accomplish the transaction by means of securities, and assess the value of any securities sold.
  6. Receive transaction-based compensation, which generally means a commission or compensation the receipt of which depends on whether a transaction is successful, and/or the amount of which is determined by the size of the transaction. This is significant because the SEC has previously taken a hard line on transaction-based compensation (see this 2010 denial of a no-action letter), stating that transaction-based compensation is a “hallmark” of broker-dealer activity, requiring registration. The new no-action letter is a partial reversal of that position.
  7. Participate in negotiations.
  8. Receive “restricted securities,” which are securities acquired from the issuer or an affiliate in a transaction not involving any public offering (see prohibition on public offerings below). Restricted securities can’t be sold freely; in order to sell them, the recipient must qualify for an exemption from securities registration requirements, typically by holding the securities for one year and meeting other conditions.

What M&A Brokers Can’t Do

In issuing the no-action letter, the SEC noted the requesters’ representations that an M&A Broker would not do any of the following:

  1. Bind a party to a transaction.
  2. Directly or indirectly provide financing for a transaction.
  3. Handle funds or securities issued or exchanged in connection with a transaction or other securities transaction for the account of others.
  4. Be involved in a public offering of securities.
  5. Assist in forming a buyer group.

In addition, the M&A Broker and its officers, directors, and employees must not have been suspended or barred from association with a broker­dealer by the SEC, any state, or any self-regulatory organization.

Implications for State Broker-Dealer Registration

Federal securities law is not the only law that requires broker registration. State “blue sky” securities laws typically require registration of brokers who transact business in that state — whether they have an office in that state or do business with buyers or sellers in that state — and these laws aren’t affected by the SEC’s no-action letter. M&A brokers must determine whether their activities require registration in any given state or whether any exemptions from registration apply in that state, and perhaps confine their activities to the scope allowed by such exemptions. California, for example, does not require broker-dealer registration for “merger and acquisition specialists,” or those who effect securities transactions in California only in connection with mergers, consolidations, or asset purchases and do not receive, transmit, or hold for customers any funds or securities.  As an example of an exemption that applies to brokers doing business in a state other than where its office is located, Kentucky law exempts from registration a broker-dealer with no place of business there that during any period of 12 consecutive months does not direct more than 15 offers to sell or to buy into Kentucky to persons other than the issuers of the securities involved, other broker-dealers, or certain listed financial institutions or institutional buyers. This exemption may apply to some M&A brokers, especially given that the no-action request letter contemplates that such brokers may participate in only one or several transactions per year. In any event, state registration may turn out to be less burdensome than SEC registration because some states do not require FINRA or SIPC membership as part of the registration process.

Conclusion

The SEC’s new stance that business brokers do not need to register to conduct a broad range of M&A activities or receive transaction-based compensation would seem to open up new opportunities in the industry. In order for business brokers to take full advantage of these opportunities, however, states need to craft exemptions or adopt guidance that mirrors the M&A Broker definition and permitted activities in the no-action letter, or else brokers may still need to undertake the expensive and time-consuming process of registering and maintaining their registration in any states in which they hope to do deals.


© 2014 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Venture Capital Term Sheet Negotiation — Part 6: Voting Rights and Protective Provisions http://www.strictlybusinesslawblog.com/2014/02/09/venture-capital-term-sheet-negotiation-part-6-voting-rights-protective-provisions/?utm_source=rss&utm_medium=rss&utm_campaign=venture-capital-term-sheet-negotiation-part-6-voting-rights-protective-provisions http://www.strictlybusinesslawblog.com/2014/02/09/venture-capital-term-sheet-negotiation-part-6-voting-rights-protective-provisions/#comments Mon, 10 Feb 2014 01:42:20 +0000 http://www.strictlybusinesslawblog.com/?p=1702 This post is the sixth in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet. In the prior five posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, discussed […]

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This post is the sixth in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet.

In the prior five posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, discussed dividends on preferred stock, explained how liquidation preferences work, and discussed the conversion rights and features of preferred stock.  This post will explain how voting rights are typically addressed in a venture capital transaction as well as describe customary investor protection provisions.

Voting Rights

Delaware corporate law, by default, requires that each class of stock vote and approve any amendment to a corporation’s certificate of incorporation.  The NVCA model legal documents override this, and provide that generally all the shares vote together as a single class on an “as-converted basis” (see our previous post on what that means).  The most important application of this is that no separate approval of the preferred stockholders is necessary to approve an increase in the number of authorized common shares as long as a majority of all stockholders approve the change.  However, venture capital investors typically require that they have the power to elect a certain number of seats on the company’s board of directors.  The number of board seats is typically a matter of negotiation and depends on the overall size of the board as well as the size of the investment being made.

Protective Provisions

In addition to the right to appoint a certain number of board seats, in venture capital deals investors often secure other rights that protect them from changes being made that could potentially harm them or reduce the value of their investment.  These provisions typically require that a certain percentage (often a majority, but sometimes a supermajority) of the preferred stockholders vote to approve certain actions.  The actions typically included are:

  • dissolving the company;
  • making any changes to the certificate of incorporation or bylaws that adversely affect the preferred stockholders;
  • authorizing or issuing new stock on parity with or senior to the preferred stock;
  • purchasing or redeeming any stock prior to the preferred stock;
  • taking on debt;
  • engaging in certain transactions involving subsidiaries of the company; and
  • changing the size of the board.

In addition, you will also typically find provisions that require the vote of one or more of the directors appointed by the investors in order for the board to take any of the following actions:

  • making any investments (either debt or equity) in any other companies;
  • extending any loans to any persons, including employees and directors;
  • guaranteeing any debt;
  • making investment decisions inconsistent with approved policies;
  • incurring indebtedness in excess of a certain amount other than in the ordinary course of business;
  • entering into any other transactions with any director, officer, or employee;
  • hiring, firing, or changing the compensation of executive officers;
  • changing the principal business of the company;
  • selling, assigning, licensing, or using as collateral to a loan any of the company’s material intellectual property, other than in the ordinary course of business; and
  • entering into any strategic relationship involving any payment or contribution in excess of a certain amount.

The protective provisions are often overlooked by founders when they negotiate term sheets, perhaps with the exception of the number of board seats the investors are getting.  Since they don’t impact the economics of the deal in any direct way, they are often deemed unimportant.  Most of the protective provisions involve company decision-making in one way or another and at least initially, the founders typically envision involving their investors in major decision-making.  Early on, it would usually be unthinkable for the company to take a major action that its largest investor opposes.  However, after a number of investment rounds, there could be any number of potential vetoes of company actions and the governance process may become unwieldy.  Some of the protective provisions, such as a requirement to get the investor-appointed director’s approval for any strategic relationship involving a payment or contribution in excess of $X, may give one particular investor too much ability to veto new opportunities for the company that were not envisioned early in its life.

In addition, founders should pay attention to how the protective provisions interact when there have been multiple rounds of financing.  For instance, if there have been five rounds (e.g., Series A, B, C, D, and E), it would probably not be appropriate to require the approval of a director appointed by each series to approve every license of material intellectual property.  Therefore, when a company takes on a new investment round, the company’s management should look at making appropriate changes to the previous round’s investor’s protective provisions.  Often, the new investor can be helpful in this process by making such changes a condition of closing the new round.

In the next post, we’ll discuss anti-dilution provisions.


© 2014 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Venture Capital Term Sheet Negotiation — Part 5: “As Converted” and Conversion Rights of Preferred Stock http://www.strictlybusinesslawblog.com/2014/01/31/venture-capital-term-sheet-negotiation-part-5-converted-conversion-rights-preferred-stock/?utm_source=rss&utm_medium=rss&utm_campaign=venture-capital-term-sheet-negotiation-part-5-converted-conversion-rights-preferred-stock http://www.strictlybusinesslawblog.com/2014/01/31/venture-capital-term-sheet-negotiation-part-5-converted-conversion-rights-preferred-stock/#comments Fri, 31 Jan 2014 17:54:28 +0000 http://www.strictlybusinesslawblog.com/?p=1698 This post is the fifth in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet.  In the prior four posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, discussed […]

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This post is the fifth in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet. 

In the prior four posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, discussed dividends on preferred stock, and explained how liquidation preferences work. This post will explain what “as converted” means and discuss conversion rights and features of preferred stock.

“As Converted”

When reviewing the National Venture Capital Association’s (NVCA) Model Legal Documents, you’ll notice use of the phrase “on an as-converted basis” in several areas.  For example, the NVCA term sheet section on dividends provides under Alternative 1 that dividends will be paid on the preferred “on an as converted basis when, as, and if paid on the common.”  Similarly, under the discussion of voting rights, the NVCA term sheet provides that the preferred votes together with the common “on an as-converted basis.”

This “as converted basis” concept means that, when determining the right or benefit of the preferred stock, it is assumed that the preferred shares have been converted into some number of common shares. To determine the number of common shares into which the preferred shares are deemed to convert, you simply multiply the number of shares of preferred stock in question by the conversion ratio.  The conversion ratio is the price paid for the shares of preferred stock (e.g. the Series A Original Issue Price) divided by the then current conversion price.  Initially, the conversion price is usually set to equal the issue date price so that the initial conversion ratio is 1:1.

As an example, assume 25,000 shares of Series A Preferred stock is initially purchased for $10.00 per share (the “Series A Original Issue Price”) and has a $10.00 per share Series A Conversion Price so that the initial conversion ratio is 1:1.  If there have been no adjustments to the Series A Conversion Price after the issuance of the Series A, then 25,000 shares of Series A Preferred will be deemed to convert into 25,000 shares of common stock for purposes of determining the rights or benefits of the preferred stock (e.g. voting rights).

However, if there have been diluting events, the conversion price may have been adjusted downward (we’ll discuss anti-dilution calculations more specifically in a future post).  If we assume a conversion price of $8 per share due to dilution adjustments, the new conversion ratio would be 1.25, which equals $10 (the Series A Original Issue Price) / $8 (the current Series A Conversion Price).  This means our 25,000 shares would be deemed to convert into 31,250 shares of common for purposes of determining the right or benefit of the preferred stock (again, if we are determining voting rights, for example, this will mean the 25,000 shares of preferred stock receive 31,250 votes).

Optional and Mandatory Conversion

The “as converted” concept is fictional in the sense that the preferred shares have not actually been converted.  Instead, we are assuming conversion simply to calculate the quantity of votes or dividends or some other right of the preferred stock.

However, the preferred stock may convert into common stock upon certain events.  As noted in the NVCA term sheet, there is a section called “Optional Conversion” which simply states that preferred stock may be converted into common stock at any time at the option of the stockholder and notes the initial 1:1 conversion ratio.

Why would a stockholder convert his or her shares from preferred to common?  Depending on the structure and economics of the deal, the stockholder may receive more cash upon liquidation if the shares are converted into common shares.  For example, a common structure on liquidation might be for the preferred stockholder to either (i) receive a liquidation preference equal to return of its initial investment (or some multiple thereof) or (ii) to convert to common and give up the liquidation preference (i.e. this is a non-participating preferred structure, which we’ve discussed previously).  If the sale price is high enough, the stockholder will receive more by giving up its liquidation preference and participating as a common stockholder.  To reuse our example from our post on liquidation preferences, let’s say that a venture capital fund takes a 20% interest in Company X for $2.0 million.  The price is $1 per share with a non-participating 1x liquidation presence and no preferred dividends.  Assuming there are 8 million common shares outstanding, the VC fund would receive 2 million preferred shares.  If Company X is sold a few years later for net proceeds of $30 million, the VC would receive $2.0 million if it chooses not to convert, but would receive $6.0 million if it converted its shares to common stock.

The NVCA term sheet also provides for mandatory conversion upon an initial public offering, provided certain minimum thresholds are achieved, or upon written consent of the Series A stock.  In this model term sheet, the minimum thresholds for conversion upon an IPO are that the IPO stock be sold for some minimum multiple of the initial preferred purchase price and that the company receives some minimum amount of proceeds.  These thresholds provide some assurance to the holders of preferred stock that it receives a reasonable return before being forced to convert its shares to common stock.

In negotiating the term sheet, founders should press for a relatively low multiple of the original purchase price (perhaps 2x to 3x) and total proceeds required to be received to minimize disruption of an IPO by the preferred stockholders.

In the next post we’ll discuss voting rights and protective provisions.


© 2014 Casey W. Riggs — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Thoughts on the Proposed Crowdfunding Regulations http://www.strictlybusinesslawblog.com/2013/12/30/thoughts-proposed-crowdfunding-regulations/?utm_source=rss&utm_medium=rss&utm_campaign=thoughts-proposed-crowdfunding-regulations http://www.strictlybusinesslawblog.com/2013/12/30/thoughts-proposed-crowdfunding-regulations/#respond Mon, 30 Dec 2013 17:12:02 +0000 http://www.strictlybusinesslawblog.com/?p=1691 On October 23, 2013, the Securities and Exchange Commission issued proposed regulations to implement Title III of the JOBS Act, which will allow for the public sale of securities using crowdfunding under an exemption from registration under securities laws. Since it has been some time since the regulations were proposed, I won’t attempt to summarize […]

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On October 23, 2013, the Securities and Exchange Commission issued proposed regulations to implement Title III of the JOBS Act, which will allow for the public sale of securities using crowdfunding under an exemption from registration under securities laws.

Since it has been some time since the regulations were proposed, I won’t attempt to summarize them in this post.  There are a number of great summaries of the regulations out there; here are two: (1) Kiran Lingam of SeedInvest’s summary and (2) Kevin Laws of Angelist’s summary.  In addition, all 585 pages of the proposed regulations can be found here.

Here are some of my thoughts on the proposed regulations.  I have six main points I’ll highlight in this post.  I’ve ordered the points from most optimistic/positive to more pessimistic/negative.  As you can see there is a lot to like and a lot to dislike.

  1. The SEC was not hostile to the concept of crowdfunding in its implementation of Title III.  My biggest fear was that the SEC, being hostile to the concept of deregulating securities markets, would make the crowdfunding regulations as difficult to use as possible.  The crowdfunding section of the JOBS Act is very poorly drafted, leaving many ambiguities.  The SEC could have, at every turn and every attempt to resolve these ambiguities, taken a more restrictive approach, but it didn’t.  For example, Sec. 302(a) provides for caps on the amount that an investor can invest in crowdfunding offerings in any 12-month period.  It is poorly drafted, making terrible use of the word “or,” causing the amount of the investment caps to be unclear in many situations.  The SEC resolved these ambiguities using interpretations that allow for larger rather than smaller amounts.  Another example is that the SEC had to decide whether to allow companies to use crowdfunding while also raising money through other types of offerings (i.e., using other exemptions, such as Rule 506).  The SEC decided to allow companies to raise money using crowdfunding and other exemptions simultaneously.[1]  These are just two of many examples showing that the SEC had real opportunities to make life more difficult for users of crowdfunding but declined to take advantage of them.

  2. The SEC may have improved upon Title III.  People who followed the passage of the JOBS Act know that the crowdfunding provisions were completely rewritten at the eleventh hour.  Prior to the rewrite, the crowdfunding provisions originally written by Rep. Patrick McHenry provided that funding portals had to provide communication channels to allow users of the site to discuss the offering.  The premise is that the “wisdom of the crowd” (i.e., the sheer number of people on the internet who would be willing to debate the merits of an investment) would help distinguish the good investments from the bad.  The version of the crowdfunding exemption that eventually passed omitted this provision.  However, in its proposed rules, the SEC has restored this provision, which arguably will help make the exemption more effective.

  3. Funding portals may actually have a workable business model…  One aspect of the proposed regulations that I found particularly surprising was that the SEC will allow funding portals to accept transaction-based compensation.  The SEC has long taken a hard line against anyone other than a registered broker-dealer taking compensation for raising capital if that compensation is contingent on money being raised or is proportionate to the amount actually raised.  Therefore, I fully expected the SEC to take the position that funding portals would not be permitted to accept such compensation.  Since startups would be very reluctant to pay a large fee for a capital raise that may or may not be successful if the fee wasn’t structured as some kind of contingent fee based on the amount raised, I previous had a lot of difficulty seeing how funding portals could actually make money.  To my surprise, the SEC has no issue with funding portals taking a percentage of the amount actually raised as a fee.  The SEC reasoned that funding portals actually are brokers under the Securities Exchange Act, but are not required to register as such because they can register as funding portals.  Since they are brokers, they can take the same fee that brokers customarily take: transaction-based compensation.

  4. …or they may not.  Funding portals may be subject to considerable potential liability that, over the long run, may make it too expensive for them to stay in business.  Rule 301 of the proposed regulations requires that funding portals have a reasonable basis for believing that an issuer seeking to offer and sell securities in reliance on the crowdfunding exemption through the funding portal’s platform complies with the requirements of the exemption.  It also requires funding portals to deny access to its platforms to issuers when the platform “[b]elieves that the issuer or the offering presents the potential for fraud or otherwise raises concerns regarding investor protection.”  In addition, if a funding portal becomes aware of information after it has granted access to its platform that causes it to believe that the issuer or the offering presents the potential for fraud or otherwise raises concerns regarding investor protection, the funding portal must remove the offering from its platform.  Thus, the proposed rules require funding portals to take an active role in screening for fraud and impose upon them a duty to protect investors.  At the same time, under the JOBS Act, funding portals are prohibited from offering investment advice.  The SEC has interpreted this to limit the ability of funding portals to curate the offerings conducted through their sites.  The SEC has further interpreted the regulations as imposing liability on funding portals for fraud.  Thus the SEC is asking them to use a significant amount of discretion to protect investors (and to face liability if they fail to do so), but at the same time is prohibiting them from having much discretion in the first place.  All of this could put funding portals in a no-win situation. If all of these items remain in the final rule, funding portals may find that the mere risk of operating is just too high.

  5. There is an awful lot of disclosure required.  The JOBS Act itself requires that issuers (and consequently intermediaries) provide a significant amount of disclosure to potential investors, including narrative descriptions and discussions of the issuer’s business plan, financial condition, intended use of proceeds, and capital structure.  The SEC further added to this burden by requiring disclosure of other small items such as biographical information about the issuer’s officers and directors.  The regulations also flesh out the required disclosure items listed in the statute.  Upon reading these it becomes quite apparent that a crowdfunding offering will have a lot more required disclosure than your typical small Rule 506 or Rule 504 offering.  This equates to potentially high legal bills.  This isn’t really the fault of the SEC, as most of this is mandated by Congress, but reading the proposed regulation really hammers home that the use of this exemption will not be simple and routine (as many who advocate for crowdfunding hope).

  6. This whole thing may still prove to be too expensive to make it worth anyone’s while.  My main concern about the crowdfunding exemption has always been that the cost of compliance with the exemption may not be justified by its benefits.  This still remains the case after the release of the proposed regulations.  Kiran Lingam of SeedInvest posted a really great spreadsheet that illustrates this point.  It can be found here.  Kiran essentially has tallied up all of the costs associated with using the crowdfunding exemption, such as commissions, legal fees, accounting fees, insurance, and other costs, so that a potential issuer can see the amount of proceeds the offering will actually yield and how much of the proceeds will be used to incur the additional expenses associated with pursuing a crowdfunding campaign.  The results are not pretty.  Let’s say a issuer wanted to raise $100,000.  Under Kiran’s calculations, it would actually cost more than $100,000 to raise the money.  Under his projections a $500,000 offering would net around $351,650, which would mean that about 42% of the proceeds will ultimately be used for expenses.  At $1,000,000, his calculations estimate that 25% of the proceeds will be used for expenses.  If true, this really limits the utility of crowdfunding and places an unacceptably high cost of capital on startups using it.  I can’t quibble with Kiran’s estimates, as he works at a crowdfunding site, and I don’t think he’s overestimated the expenses to “be conservative,” given that he estimates only $5,000 in initial legal costs (see point 5 above on why the legal costs won’t be insignificant).  He estimates a 10% commission going to the funding portal.  Perhaps some platforms will offer a lower commission.  At the same time, since compliance work that is required to be done in future years is included in his costs, there may be some economies of scale realized by having multiple rounds of $1,000,000 raised using crowdfunding over a period of years.

The comment period on the proposed regulations is open until February 3, 2014.  Given their complexity, I would expect we will not have a working crowdfunding exemption in place until late summer of 2014 at the earliest and most likely not until fall 2014.


Footnotes

[1] However, the SEC did caution that the exemptions could not be used in clearly incompatible ways.  For instance, if a company were to engage in a crowdfunding campaign and simultaneously engage in a Rule 506(b) offering, which cannot make use of public advertising, it couldn’t accept investors into the Rule 506(b) offering who were found through the crowdfunding campaign.


© 2013 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Venture Capital Term Sheet Negotiation — Part 4: Liquidation Preferences http://www.strictlybusinesslawblog.com/2013/12/26/venture-capital-term-sheet-negotiation-part-4-liquidation-preferences/?utm_source=rss&utm_medium=rss&utm_campaign=venture-capital-term-sheet-negotiation-part-4-liquidation-preferences http://www.strictlybusinesslawblog.com/2013/12/26/venture-capital-term-sheet-negotiation-part-4-liquidation-preferences/#comments Thu, 26 Dec 2013 19:44:43 +0000 http://www.strictlybusinesslawblog.com/?p=1686 This post is the fourth in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet.   In the prior three posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, […]

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This post is the fourth in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet.  

In the prior three posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions, discussed valuation, cap tables, and the price per share, and discussed dividends on preferred stock.  This post will focus on liquidation preferences.

The liquidation preference is essentially what makes preferred stock “preferred.”  It is the most important economic provision in a venture capital financing transaction other than the valuation. The liquidation preference provisions govern how the proceeds will be distributed to shareholders when and if the company is actually liquidated or is sold in an M&A transaction (called a “deemed liquidation”).  Shareholders with a liquidation preference receive the proceeds of liquidation or deemed liquidation before the common shareholders, and may, depending on the exact terms of the liquidation preference, receive a percentage of the proceeds that is greater than their percentage ownership of the company (resulting in other shareholders receiving a percentage of the proceeds that is less than their percentage ownership).  The liquidation preference does not come into play if the company goes public, as the preferred stock issued to investors converts to common stock and the liquidation preference goes away.

The amount of a liquidation preference can vary, but is usually linked to the purchase price of the stock itself. For instance, if a VC buys the preferred stock for $1 per share, then the liquidation preference will be equal to $1 per share.  This is known as a 1x liquidation preference.  However, liquidation preferences can be equal to multiples of the purchase price, resulting in 2x, 3x, or higher liquidation preferences.  They can also be combined with preferred dividends.  For example, a VC term sheet could provide for a 2x liquidation preference plus an 8% cumulative non-compounding preferred return.  After three years, the liquidation preference would be 224% of the original purchase price (2x the purchase price plus three 8% returns).  High liquidation preferences combined with preferred dividends can easily wipe away any economic reward for the common shareholders, so it’s important for a startup not to give away too much in this area.

There are two basic types of liquidation preference provisions: participating preferred and non-participating preferred.  Holders of participating preferred shares receive the liquidation preference applicable to those shares and also receive a portion of the proceeds after all liquidation preferences have been paid out as if they had converted their preferred stock to common stock.  Holders of non-participating preferred shares receive only the liquidation preference and cannot “participate” as common shareholders.  However, since preferred shareholders can usually convert their shares to common shares at any time, in practice, this means that holders of non-participating preferred shares receive the greater of their liquidation preference or what they would have received if they were common shareholders.  Participating preferred shareholders receive more than their percentage ownership of the company on an as-converted-to-common-stock basis (and consequently cause common shareholders to receive less), whereas with non-participating preferred shares, the liquidation preference will become meaningless if the company sells for a high enough amount.

Founders prefer that investors receive non-participating preferred shares while investors prefer to receive participating preferred shares.  This point can be particularly contentious in a term sheet negotiation.  One potential compromise is to issue participating preferred shares subject to a cap on participation. A cap on participation limits the amount received by the preferred shareholders to a fixed amount. The cap is often set as a multiple of the original investment amount, such as 2x or 3x. Once the preferred shareholders have received the cap amount, they stop participating in distributions with the common shareholders.  Consequently, if the exit event amount is high enough, the holders of preferred shares would be better off converting them to common shares, similar to the way they would be if they held non-participating preferred stock with a liquidation multiple.

Let’s take a look at an example.  Let’s say that a venture capital fund takes a 20% interest in Company X for $2.0 million (an $8.0 million pre-money and $10.0 million post-money valuation).  The price is $1 per share with a 1x liquidation presence and no preferred dividends.  Assuming there are 8 million common shares outstanding, the VC fund would receive 2 million preferred shares.

Let’s say Company X is sold a few years later for net proceeds of $30 million.  The results would be as follows upon liquidation:

lpchart1

In an alternative scenario, if Company X sold for a disappointing $3 million, the results would be as follows:

lpchart2

As you can see, how a liquidation preference is structured can make a big difference when the proceeds of a sale of the company are divvied up.  Therefore, founders of startups should pay particular attention to this provision when negotiating term sheets.

In the next post, we’ll discuss the conversion features of preferred stock.


© 2013 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Venture Capital Term Sheet Negotiation — Part 3: Dividends http://www.strictlybusinesslawblog.com/2013/11/17/venture-capital-term-sheet-negotiation-part-3-dividends/?utm_source=rss&utm_medium=rss&utm_campaign=venture-capital-term-sheet-negotiation-part-3-dividends http://www.strictlybusinesslawblog.com/2013/11/17/venture-capital-term-sheet-negotiation-part-3-dividends/#comments Sun, 17 Nov 2013 23:44:19 +0000 http://www.strictlybusinesslawblog.com/?p=1683 This post is the third in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet.  In the prior two posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions and discussed valuation, cap tables, and price per share.   This post […]

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This post is the third in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet. 

In the prior two posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions and discussed valuation, cap tables, and price per share.   This post will focus on dividends on the preferred stock issued in a venture deal.

Dividends are one of the rights often which make preferred stock “preferred” (relative to common).  In short, dividends increase the total return to the preferred stockholders and decrease the total return to the common stockholders.  Dividends are often stated as a percentage of the original issue price for the preferred stock (e.g. a dividend may be stated as 5.0% of the “Series A Original Issue Price”; the original issue price is simply the price paid for the stock by the preferred investors).  There are at least three common ways dividends are structured in venture capital deals, which are as follows:

  • Cumulative dividends
  • Non-cumulative dividends
  • Dividends on preferred stock only when paid on the common stock

Cumulative dividends are the most beneficial to the preferred stock and the most burdensome on the common.  Cumulative dividends accrue on the original issue price and are typically paid on liquidation of the startup or upon redemption of the preferred stock (most startups do not have funds to pay dividends currently, so that’s the reason for payment upon liquidation or redemption).  The accruing dividends represent a future obligation of the startup to the preferred stockholders which reduces funds available for common stockholders.  Cumulative dividends may be structured on a simple basis, where the accruing dividend is calculated on the original issue price but not on any previous accrued and unpaid dividends, or on a compound basis, where all prior accrued and unpaid dividends are taken into account in determining future dividends (the same concept as simple versus compound interest).

Non-cumulative dividends, on the other hand, are paid on the preferred stock only if the Board of Directors declares them; if they are not paid, they do not accrue and do not result in a future obligation to the preferred stockholders.  So you may have an 8.0% dividend preference for the preferred stock; however, if the Board of Directors does not declare the dividend, then it’s forfeited.  This is a significantly better structure for the common stockholders.

The third common method of structuring dividends in a venture deal is to have a dividend paid on the preferred only if paid on the common. In this scenario, the preferred is treated as if it had been converted into common at the time the dividend is declared and the preferred and common stock share in the dividend as if all shares were converted to common.  This is the least beneficial to the preferred stock (this structure does not result in a dividend preference to the preferred stock at all) and the most beneficial to the common stock.

For a sample term sheet containing these three options, see the National Venture Capital Association’s term sheet here.

For startups negotiating a venture deal, you should understand the various ways dividends can be structured and consider (i) the likelihood that cash flow will be available to pay dividends currently (as opposed to upon liquidation, for example) and (ii) the dividend structure’s impact on the total return to the preferred stockholders and the diminution in total return to the common stockholders.  Cumulative dividends can particularly affect the returns if the holding period is relatively long (and this is even more true if the unpaid dividends are compounded).

In the next post, we’ll discuss another item which makes the preferred stock “preferred,” which are the liquidation provisions.


© 2013 Casey W. Riggs — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Venture Capital Term Sheet Negotiation — Part 2: Valuation, Capitalization Tables, and Price per Share http://www.strictlybusinesslawblog.com/2013/10/14/venture-capital-term-sheet-negotiation-part-2-valuation-capitalization-tables-price-per-share/?utm_source=rss&utm_medium=rss&utm_campaign=venture-capital-term-sheet-negotiation-part-2-valuation-capitalization-tables-price-per-share http://www.strictlybusinesslawblog.com/2013/10/14/venture-capital-term-sheet-negotiation-part-2-valuation-capitalization-tables-price-per-share/#comments Mon, 14 Oct 2013 23:10:04 +0000 http://www.strictlybusinesslawblog.com/?p=1679 This post is the second in a series giving practical advice to startups on understanding and negotiating a venture capital term sheet.  Previously, we provided a general overview of venture capital terms sheets and some of the pitfalls a startup may encounter when it comes to “binding” vs. “non-binding” provisions. In this post, we will […]

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This post is the second in a series giving practical advice to startups on understanding and negotiating a venture capital term sheet. 

Previously, we provided a general overview of venture capital terms sheets and some of the pitfalls a startup may encounter when it comes to “binding” vs. “non-binding” provisions. In this post, we will discuss the issue that is usually in the forefront of most founder’s minds: the valuation of the company.

Valuation in the context of a venture capital transaction can be expressed in terms of pre-money valuation or post-money valuation. Pre-money valuation refers to the valuation of the company prior to the investment whereas post-money valuation refers to the value after an investment has been made. Most founders, when they think of the concept of valuation are referring to pre-money valuation. Calculating pre-money valuation is not intuitive or straightforward. When most people talk about a venture capital investment, usually the investor will say “I’ll give you $1.2 million for 10% of the company.” What is the implied pre-money valuation in this example? You might think the answer is $12 million, but that is actually the post-money valuation, not the pre-money valuation. To get the pre-money valuation, you need to first calculate post-money valuation and then back into the pre-money valuation.

Post-money valuation is pretty straightforward to calculate. You take the dollar amount of the investment and divide it by the percent that the investor is getting. In our example above $1.2 million is divided by 10% yielding a post-money valuation of $12 million. But prior to the $1.2 million investment, the company is not worth $12 million. This is because once you add $1.2 million worth of cash on to the company’s balance sheet the company has just increased in value by $1.2 million. Therefore to calculate pre-money valuation you need to take a second step which is to subtract the amount of investment from the post-money valuation. In the example above, the company is being valued at $10.8 million. This is calculated by taking the $12 million post-money valuation and subtracting the amount of the investment ($1.2 million).

Once we calculate the valuation, we need to figure out how many shares the investor gets for its investment and this is determined using a capitalization table. This also is not always as straightforward as you might think, because there may be holders of options or warrants in the company and there may be an employee stock pool as well. So if the founders have 4.5 million shares of the company they might think that giving the investor 10% in the company involves selling investor 500,000 shares. But venture capital firms often consider more than just the shares issued to founders and previous investors. They will often also include, in the capitalization table, the employee stock pool and any outstanding warrants. This is what is referred to as the fully diluted post-money capitalization. In our sample capitalization table below, you can see that the company must issue more than 500,000 shares to give our potential venture capital investor 10% in the Company.

Pre and Post-Financing Capitalization

Pre-Financing

Post-Financing

Security

# of Shares

%

# of Shares

%

Common – Founders

4,500,000

83.33%

4,500,000

75%

Common – Employee Stock Pool
                  Issued

0

0%

0

0%

                  Unissued

900,000

16.66%

900,000

15%

Common – Warrants

0

0%

0

0%

Series A Preferred

0

0%

600,000

10%

Total

5,400,000

100%

6,000,000

100%

Because even the unissued employee stock is considered in the fully diluted post-money capitalization, in order to give the investor 10% of the company, 600,000 shares must be issued.

The final issue we’ll tackle in this post is the per share price.  Calculating this is relatively straightforward.  Once you know how many shares the company will be issuing to the investor, just divide the amount of the investment by the number of shares issued.  In the example above, the share price would be $2 per share calculated by dividing the investment amount ($1.2 million) by the number of shares issued (600,000).

While valuation and share price may be the most basic and fundamental item on the term sheet, they are not always as straightforward as you might think.  Aspects such us outstanding warrants and employee stock pools affect the pricing of the deal when the valuation is calculated on a fully diluted basis.  Having a full understanding of how these concepts work together will help you understand the economics of the deal being proposed.

Next time we’ll cover preferred dividends.


© 2013 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Venture Capital Term Sheet Negotiation — Part 1: Introductory Remarks http://www.strictlybusinesslawblog.com/2013/09/29/venture-capital-term-sheet-negotiation-part-1-introductory-remarks/?utm_source=rss&utm_medium=rss&utm_campaign=venture-capital-term-sheet-negotiation-part-1-introductory-remarks http://www.strictlybusinesslawblog.com/2013/09/29/venture-capital-term-sheet-negotiation-part-1-introductory-remarks/#comments Sun, 29 Sep 2013 23:12:00 +0000 http://www.strictlybusinesslawblog.com/?p=1675 This post is the first in a series giving practical advice to startups on understanding and negotiating a venture capital term sheet. One of the most significant events in a startup company’s life cycle is raising its first round of venture capital.  Up to that point, most companies have survived by owners “bootstrapping it” with […]

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This post is the first in a series giving practical advice to startups on understanding and negotiating a venture capital term sheet.

One of the most significant events in a startup company’s life cycle is raising its first round of venture capital.  Up to that point, most companies have survived by owners “bootstrapping it” with perhaps some help from friends and family and maybe an angel or two.  These earlier rounds of financing are usually relatively simplistic and don’t involve overly complex securities or intense negotiations with the investors.  However, when the startup enters the venture world, all this changes dramatically: complexity and intense negotiation is the norm, and startups are now faced for the first time with concepts such as participating preferred stock, conversion rights, anti-dilution, and a whole host of other fairly new and complex topics.

In this series of blog posts we’ll try to explain, in relatively simple terms, many of the key concepts that arise in a typical venture capital transaction.  Our goal will be to explain these concepts to those startups who are newcomers to the venture world.  To do this, we’ll walk you through the National Venture Capital Association’s (NVCA) term sheet which is posted on their website at the link below and provide some commentary which we hope will be helpful:

http://www.nvca.org/index.php?option=com_content&view=article&id=108&Itemid=136

However, before we get to the term sheet, we’d like to make one preliminary observation, which is that many startups find themselves in the unenviable position of being at the mercy of a single venture capital source as they seek financing without having tentative agreement on some basic terms.  All too often it seems the startup is so eager or desperate to find financing that it locks in on a single VC firm and ends up with very little leverage when it comes time to negotiate the deal.  The end result is often unfavorable terms or perhaps terms that are not as fair as could have been obtained.  To avoid this result, it’s prudent to avoid, if possible, limiting your options to a single VC firm until you’ve agreed on many of the tentative deal terms that will be set forth in a term sheet.   Or even better, if your startup is lucky enough to have multiple potential financing sources, it may be wise to get a signed term sheet before focusing on one source.

Turning to the NVCA model term sheet, in this first post we’ll make two main comments. First of all, it’s very important to note which portions of the term sheet are binding and which are not. We’ve discussed binding and non-binding provisions in a term sheet herehere and here. The preamble to the NVCA term sheet sets out the “No Shop/Confidentiality” provisions as binding and lists the “Counsel and Expenses” provisions in brackets indicating that sometimes they may be binding and sometimes they may not. We’ll get into the substance of these provisions in a future post but our purpose now is simply to illustrate that some provisions in the term sheet constitute a binding legal contract while others do not. Importantly, this model term sheet makes clear that it does not constitute a legal commitment by the VC firm to make any investment in the startup. Therefore, startups should recognize that execution of a term sheet, while a key milestone towards receiving funding, is mostly non-binding on the VC firm and is certainly not an assurance that any such transaction/financing will actually close.

Second, in some jurisdictions a term sheet that expressly states that it is non-binding may nonetheless create an enforceable obligation to negotiate the terms set forth in the term sheet in good faith.  A startup that for some reason thinks it can get out of a VC deal (perhaps if it comes into a better offer) should realize that good faith negotiations may be required and that simply pulling out of the deal may result in legal liability.

In the next post in this series, we’ll discuss some of the basic offering terms set forth in the model NVCA term sheet, such as the pre-money valuation, capitalization table, and the price share for the stock to be sold.


© 2013 Casey W. Riggs — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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First Enforcement Action Taken Against Crowdfunding Site http://www.strictlybusinesslawblog.com/2013/09/15/first-enforcement-action-taken-crowdfunding-site/?utm_source=rss&utm_medium=rss&utm_campaign=first-enforcement-action-taken-crowdfunding-site http://www.strictlybusinesslawblog.com/2013/09/15/first-enforcement-action-taken-crowdfunding-site/#respond Sun, 15 Sep 2013 23:37:44 +0000 http://www.strictlybusinesslawblog.com/?p=1672 For the first time, regulators are taking action against one of the many crowdfunding sites that have sprung up since the passage of the JOBS Act.  The Ohio Division of Securities issued a notice of intent to issue a cease-and-desist order against the Cincinnati-based crowdfunding platform SoMoLend and majority owner/CEO Candace Klein in June. If […]

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For the first time, regulators are taking action against one of the many crowdfunding sites that have sprung up since the passage of the JOBS Act.  The Ohio Division of Securities issued a notice of intent to issue a cease-and-desist order against the Cincinnati-based crowdfunding platform SoMoLend and majority owner/CEO Candace Klein in June. If issued, the order will shut down SoMoLend.

SoMoLend advertises itself on its website (www.somolend.com) as “a debt-based funding platform that connects small business borrowers with corporate, institutional, organization and individual lenders, such as friends and family or accredited investors.” According to the Ohio Division of Securities notice, SoMoLend’s business model consists of posting loan requests from businesses, selling promissory notes issued by those businesses to investors, and servicing the repayment of the notes. Candace Klein is a well-known proponent of crowdfunding who has been featured in Entrepreneur, among other publications.

In the notice, the Ohio Division of Securities made four sets of allegations. First, it alleged that SoMoLend engaged in an unregistered sale of its own securities, improperly relying upon the exemption from registration provided in Regulation D of federal securities laws and corresponding Ohio securities laws. SoMoLend allegedly offered securities to potential investors with whom it had no previous relationship in violation of Regulation D’s prohibition on general solicitation and general advertising (rules permitting these activities in certain types of offerings have not yet taken effect). Second, SoMoLend allegedly committed securities fraud by making false statements and engaging in other fraudulent activity in making securities sales. According to the notice, the fraudulent statements covered financial projections, current and past performance, and relationships with banks, among other matters. For example, SoMoLend claimed in March of 2013 to have transacted $15 million dollars in loans when the true figure at that time was $234,000. Third, SoMoLend allowed the offer and sale of unregistered securities by business issuers on its platform. It claimed to have provided offering information for 198 businesses, only three of which had made the required filings with the Ohio Division of Securities. Finally, it charged fees for transactions on its platform without being licensed as a dealer or salesperson as required by Ohio securities laws.

Candace Klein resigned on August 14, 2013, telling Cincinnati.com that she did so voluntarily.  According to Cincinnati.com, a hearing is scheduled for October, and the platform has stopped making offers and sales of securities in Ohio (but continues to make loans in other states).  Apparently, there have not been any investor complaints; if that’s true, the regulators decided to take this action on their own initiative, which is quite rare for a securities enforcement action.

The sheer number of crowdfunding sites, some of which are operating outside the law (at least until the JOBS Act regulations are finalized) and regulators’ general hostility to this form of offering indicate that this is likely to be the first of many such actions.


© 2013 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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AngelList Posts Thoughtful Comments to Proposed SEC Form D Regulations http://www.strictlybusinesslawblog.com/2013/08/28/angellist-posts-thoughtful-comments-proposed-sec-form-d-regulations/?utm_source=rss&utm_medium=rss&utm_campaign=angellist-posts-thoughtful-comments-proposed-sec-form-d-regulations http://www.strictlybusinesslawblog.com/2013/08/28/angellist-posts-thoughtful-comments-proposed-sec-form-d-regulations/#comments Wed, 28 Aug 2013 23:33:27 +0000 http://www.strictlybusinesslawblog.com/?p=1670 On August 12, 2013, the crowdfunding platform AngelList submitted some really great and thoughtful comments to the SEC with respect to the SEC’s proposed Reg. D amendments related to new Form D filing requirements and enhanced penalties for failure to file (which you can read more about here). AngelList expressed its concern that the newly […]

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On August 12, 2013, the crowdfunding platform AngelList submitted some really great and thoughtful comments to the SEC with respect to the SEC’s proposed Reg. D amendments related to new Form D filing requirements and enhanced penalties for failure to file (which you can read more about here). AngelList expressed its concern that the newly proposed Form D rules would result in “disastrous unintended consequences” for startups, observing that proposed rules reflect how sophisticated Wall Street issuers, investment banks, and law firms, rather than early stage businesses, engage in capital raising.

The new Form D rules, among other things, require the filing of Form D 15 days before engaging in any general solicitation, require the filing of general solicitation materials with the SEC, require certain legends to appear on general solicitation materials, and require an additional amendment Form D filing when an offering is complete. It also added a harsh penalty for failing to make any Form D filing: a ban on follow-on Reg. D offerings that continues for one year after the company corrects the problem.  AngelList made the argument that, while sophisticated issuers would be aware of these rules and should not find compliance overly burdensome, startups could easily find themselves in violation of the rules. AngelList suggests that such rules should not apply to startups because they often do not have the resources to engage lawyers and investment bankers to advise them about, or even apprise them of the existence of, such rules. If they fail to comply with rules they don’t even know apply, the penalties for noncompliance will prevent them from raising capital at all and they will fail, which AngelList suggests is contrary to the spirit of the JOBS Act.

AngelList argues that unlike sophisticated issuers, startups generally need a small amount of funds and raise capital continuously, without formal start or end dates. Their offering materials tend to be more informal, consisting of dynamic online photos and profiles, as opposed to a formal private placement memorandum, and they communicate frequently and instantaneously with potential investors via e-mail and postings on private online forums. They will likely use online media that doesn’t lend itself to lengthy disclosures, such as Twitter. AngelList argues that this type of information sharing is transparent and “supports good investment decisions” — which would change if startups are required to file every change with the SEC, because they would stop posting information online and instead move to exchanging information verbally. AngelList also expressed its concern that, because it facilitates financing by startups, AngelList itself could be implicated in the failure of an “affiliate” or “promoter” of a startup to comply with the new rules and also be subject to the one-year ban on financing.

As solutions to the problems it outlined, AngelList suggested that the SEC allow third parties to do a brief filing on an issuer’s behalf via an application programmer interface on which crowdfunding platforms can automatically register simple company data with the SEC; allow the company or a third-party to provide the SEC a URL where it can access the financing materials online; require legends and disclosures only when terms are communicated and not when the offering is merely mentioned in the media, social media, conferences, and the like; eliminate the requirement to file the Form D in advance; rather than impose severe penalties for noncompliance, reduce the costs of compliance by making more of the Form D information confidential; and don’t extend penalties to crowdfunding platforms, incubators, and VCs that support startups.

AngelList’s response is well argued and reasonable.  If other players in the startup world continue to make their voices heard in this way, hopefully the SEC will listen.


© 2013 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Selling Your Business — Practical Tips for Sellers — Part 13: Recap and Concluding Thoughts http://www.strictlybusinesslawblog.com/2013/08/18/selling-your-business-practical-tips-for-sellers-part-13-recap-and-concluding-thoughts/?utm_source=rss&utm_medium=rss&utm_campaign=selling-your-business-practical-tips-for-sellers-part-13-recap-and-concluding-thoughts http://www.strictlybusinesslawblog.com/2013/08/18/selling-your-business-practical-tips-for-sellers-part-13-recap-and-concluding-thoughts/#comments Mon, 19 Aug 2013 00:43:25 +0000 http://www.strictlybusinesslawblog.com/?p=1661 This is the final part of our series discussing the sale of a business from the seller’s perspective. We’ve covered commencement of a potential deal through the closing and discussed certain post-closing items (primarily indemnification). To wrap up, we’ll recap some of the major items we’ve discussed and some of the tips we’ve provided. In […]

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This is the final part of our series discussing the sale of a business from the seller’s perspective. We’ve covered commencement of a potential deal through the closing and discussed certain post-closing items (primarily indemnification). To wrap up, we’ll recap some of the major items we’ve discussed and some of the tips we’ve provided.

In Part 1, we started with a discussion of two basic types of transactions, asset sales and stock sales, and noted the potential for different tax consequences and how transaction structure affects risk allocation. We suggested sellers get advisors involved early in the process to, among other things, consider the transaction structure.

In Part 2, we discussed seller financing and noted the significant risk involved with sellers accepting promissory notes from buyers. We suggested sellers do some investigation of buyers (evaluate creditworthiness) when seller financing is involved and consider asking for protections such as collateral, guaranties, and covenants from the buyer and/or its owners.

In Part 3, we discussed earn-outs and noted their potential for added complexity. We suggested sellers keep earn-out terms short, carefully consider the earn-out measure (e.g. revenues or EBITDA), and consider their ability to control or influence the business after closing and during the earn-out period.

In Part 4, we discussed the letter of intent (“LOI”), which usually starts the deal process. We suggested sellers will get the maximum benefit of the LOI by including not only the major business points but some of the legal points that will be important too. We also suggested sellers be very careful to delineate the binding and non-binding provisions and be aware of the expectation setting that naturally occurs during negotiation of the LOI.

In Part 5, we discussed due diligence and suggested that sellers consider doing a pre-transaction review of books and records before starting the deal process to clean up and organize items a buyer will want to review. We also noted the importance of protecting confidential information and gave several practical tips for responding to diligence requests from buyers.

In Part 6, we started discussing the definitive deal document (i.e. the asset or stock purchase agreement) and provided three important tips: clearly defining the interests to be sold and or retained, carefully describing the purchase price and other consideration, and clearly defining the closing event.

In Part 7, we continued our discussion of the purchase agreement by focusing on negotiations of some typical representations and warranties that a seller would be asked to give. We suggested that sellers consider who should give the representations and warranties (the selling entity and/or shareholders), discussed the importance of narrowing representations and warranties and the effect this has on risk allocation, and discussed the importance of producing adequate disclosure schedules.

In Part 8, we discussed pre-closing covenants and conditions to closing and suggested that sellers should carefully consider these items to avoid giving a buyer “walk rights” and to maximize the likelihood that the deal closes.

In Part 9, we discussed the closing process and provided some practical tips, including using checklists, getting third-party signatures in advance, double checking wiring instructions, and coordinating schedules of everyone who needs to sign documents for the closing.

In Part 10, we began discussing indemnification, one of the more esoteric yet important points concerning a deal. We discussed the inter-relationship between representations and warranties and indemnification and noted the importance of reviewing these sections very carefully. We also discussed the importance of carefully reviewing retained liabilities.

In Part 11, we finished our discussion of indemnification by discussing deductibles and caps, the term of the indemnity, the importance of making indemnity the exclusive remedy, and limiting the type of recoverable damages.

In Part 12, we discussed some of the more important ancillary agreements, including non-competition agreements and employment agreements. We noted the importance of carefully reviewing and limiting restrictive covenants and some of the basic employment or consulting agreement terms.

In conclusion, selling a business is a very complex process and is often subject to intense negotiation. Wise sellers will do some homework in advance to understand the process and engage experienced advisors to help.


© 2013 Casey W. Riggs — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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SEC’s Proposed Regulation D Rules Generates Wide Ranging Concern http://www.strictlybusinesslawblog.com/2013/08/08/secs-proposed-regulation-d-rules-generates-wide-ranging-concern/?utm_source=rss&utm_medium=rss&utm_campaign=secs-proposed-regulation-d-rules-generates-wide-ranging-concern http://www.strictlybusinesslawblog.com/2013/08/08/secs-proposed-regulation-d-rules-generates-wide-ranging-concern/#respond Fri, 09 Aug 2013 00:49:25 +0000 http://www.strictlybusinesslawblog.com/?p=1659 In my last post, I discussed new proposed Regulation D rules which impose new obligations upon issuers of securities in private placements. In that post, I expressed some concern that these new rules could be quite burdensome, especially the rule disqualifying issuers from using Rule 506 on future securities offerings for failing to file Form D […]

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In my last post, I discussed new proposed Regulation D rules which impose new obligations upon issuers of securities in private placements. In that post, I expressed some concern that these new rules could be quite burdensome, especially the rule disqualifying issuers from using Rule 506 on future securities offerings for failing to file Form D in a timely fashion. Others involved with startup capital formation have also expressed similar concerns. In this post, I’ll compile the comments I’ve seen thus far.

To start at the “top,” Congressmen Patrick McHenry (R-NC) and Scott Garrett (R-NJ) wrote a rather strident letter in opposition to some of the requirements within the proposed rules. In particular, they opposed the requirement that Form D be filed 15 days prior to any general solicitation, going so far as to say that the requirement violates the text of the JOBS Act and may thus exceed the SEC’s authority. They also opposed the new Rule 510T, which would require that issuers submit copies of all advertising materials to the SEC prior to their use, on the basis that such a requirement would be too costly for small businesses and would be unnecessary. Third, they opposed the requirement that certain “canned” disclosures be incorporated into all advertising materials, making the (in my view) very good point that more standard disclosures are just likely to be ignored by investors and are of limited value. Strangely, they did not address the disqualification of issuers who had failed to file Form D in the past, which in my view is the worst part of these new rules. Of course, this isn’t the first time Rep. McHenry has come into conflict with the SEC over the implementation of the JOBS Act. It probably won’t be the last either.

Fellow blogger Joe Wallin has used a number of posts to sound the alarm about the potential problems that these new rules would cause:

Proposed Rules Hard On Startups

He also wrote a great article in the Wall Street Journal about it available here.

Another legal blogger, William Carleton wrote a good article about it in TechCruch, available here.

There is a website www.saveregd.org which has been posted advocating a letter writing to the SEC to get them to back down on some of the worst parts of these rules.

Of course various parties have begun to submit their comments to the SEC. All official comments to the proposed rules can be found here.  The deadline to submit a comment is September 23, 2013.


© 2013 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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