Previously announced amendments to the Securities and Exchange Commission’s exempt offering rules went into effect on March 15, 2021. As per the SEC, the rule changes are intended to “harmonize, simplify, and improve the multilayer and overly complex exempt offering framework,” as well as “promote capital formation and expand investment opportunities while preserving or improving important investor protections.” The amendments include extensive changes to existing offering exemptions from the registration requirements of the Securities Act of 1933 (the “Securities Act”) that should make it easier for private companies to raise capital. In addition, rule changes also make a significant change overall to the private offering framework which will be helpful to these companies: overhauling the integration rules and safe harbors.[Read more…]
Startups and Venture Capital
Now that we have considered the principal reasons a startup may choose to issue convertible notes to investors in lieu of selling shares – namely, to raise capital efficiently and without a fixed valuation – let’s get a better understanding of how a convertible note offering works. Because a startup investor’s strategy is fundamentally high-risk high-reward, convertible notes look much different than, for example, a traditional bank loan to a small business. The goal of a small business lender is to collect interest income whereas the goal of a convertible note investor is to acquire equity in a startup (at a discount) and eventually participate in a liquidity event in the form of a company sale or IPO. Therefore, the deal terms of a convertible note offering differ significantly from more traditional forms of debt financing and are more negotiable. For this reason, it is important for founders and investors to understand the typical deal terms when issuing or investing in a convertible note.[Read more…]
A Private Placement Memorandum, or “PPM,” is a disclosure document often used in connection with a private offering of securities. It contains a compilation of information about the company issuing the securities, the terms of the securities, and the risks of investing in those securities. This article explains the legal background underlying why a PPM is commonly used and overviews what is typically included in a PPM.
For the past 10 years or so, founders of early-stage startups have been increasingly turning to convertible notes and convertible equity instruments to structure investment rounds, particularly for their first capital raise. While some in the angel investment community have argued that it would be best if founders did fewer convertible note rounds and more equity deals, it’s important to consider why the convertible note structure has made such a big splash in early-stage financing world in the first place. What are the primary benefits for founders and their investors to opt for a convertible note offering over a stock offering? In future posts, we will consider the key deal terms to consider for your convertible note offering but first let’s look at the key benefits of the convertible note structure to determine if it is right for your company.[Read more…]
When raising capital, a company must comply with securities laws. As previously discussed, all offerings of securities, must either be registered with the SEC or exempt from such registration. Rule 506(b) is the most commonly used securities exemption for private companies. Even after complying with the basics of this exemption, there are many nuanced requirements that, if missed, can jeopardize qualifying under the exemption. Failure to comply with Rule 506(b) can subject an issuer and its officers and directors to various penalties. The SEC and state regulators can institute investigations and administrative and civil actions, enter various orders, and impose significant monetary penalties, and can transmit evidence to the U.S. Attorney General, who can bring criminal proceedings. In addition, violating securities registration requirements entitles the purchasers to rescission rights under federal and state laws. This blog post compiles some of the best practices for conducting a 506(b) offering in a bullet-pointed list for easy reference.[Read more…]