For startups looking to raise capital, Rule 506 of Regulation D is probably the most commonly used exemption from securities registration requirements. It allows a company to make offers and sales to an unlimited number of accredited investors in order to raise an unlimited amount of money. One of the key conditions placed on a Rule 506 offering is that no general solicitation or general advertising can be used by the issuer or any person acting on its behalf in connection with the securities offering. This means that a startup looking to raise capital currently cannot advertise its offering publicly and generally must limit its investors to the personal connections of the company’s principals. The SEC has stated in its various rulings that the key consideration is whether there is a “substantive pre-existing relationship” between the issuer or its agent and the offerees. Of course the vagueness of this standard provides a great amount of legal uncertainty for startups looking to raise capital, as there are any number of situations that could arise that fall within a grey area.
Capital Raise Archives
This last week, the Senate passed the “JOBS Act,” leaving it one step away from final passage by Congress and Signature by President Obama. The JOBS Act contains a number of provisions which are aimed at reducing the securities compliance burdens of small companies and startups. One of the major provisions within the JOBS Act is the so-called “crowdfunding” provision.
Crowdfunding has an enthusiastic following online and within the entrepreneurial community. Obviously, that following is very excited about the bill’s Senate passage. Unfortunately, I don’t think they should be popping the champagne corks anytime soon. Before passing the bill, the Senate passed an amendment to the bill substituting a new version of the crowdfunding law by Senators Merkley, Bennet, and Brown in place of the one written by Rep. Patrick McHenry. All signs point to the Republican leadership in the House conceding to the Senate’s amendment this week in order to get the bill to the president’s desk for signature as soon as possible. [Read more…]
Recycling is generally considered a good thing when it comes to trash. It helps the environment and conserves resources. However, in the context of legal work, it is not such a good thing. Of course, when I use the word “recycle,” I don’t mean recycling the paper that the legal documents are on. I’m talking about recycling the actual words on the page. When a client “recycles” their lawyer’s work which was performed on a previous deal and uses it in a new deal, the client is asking for trouble. [Read more…]
The U.S. House of Representatives recently passed the Entrepreneur Access to Capital Act (H.R. 2930), which creates an exemption from the registration requirements of the Securities Act of 1933, allowing startups to engage in crowdfunding (i.e. raising capital from a large number of investors over the Internet). Action is still pending in the U.S. Senate. While the actual usefulness of this new exemption will depend largely on how the SEC interprets it in implementing regulations, it’s worth thinking ahead about how such an exemption would actually work (assuming of course that the bill passes). Here are some of my thoughts: [Read more…]
Previous, I summarized the Entrepreneur Access to Capital Act (H.R. 2930), a bill which provides for a crowdfunding exemption to the registration requirements of federal and state securities laws. The bill was recently passed by the U.S. House of Representatives, and now awaits U.S. Senate action. In this post, I’ll provide some of my thoughts on what is to come. [Read more…]