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…]
Friends and Family Round Archives
One More Reason to Comply with Securities Laws: Potential Loss of Your IP
As I’ve mentioned before, it’s very important for growing companies to comply with securities laws, even during the initial seed and friends and family rounds of financing. The possibility of lawsuits and even fines and other criminal penalties give founders a strong incentive to comply with the law. But there’s another consequence that could result from non-compliant sales of securities: loss of the company’s IP. [Read more…]
Can a friends and family round include non-accredited investors? Should it?
The so-called “friends and family” round is often the first capital raise a new startup will engage in. Many entrepreneurs often go into it without any knowledge of securities laws and as a result, end up violating them, sometimes with real and significant consequences later. However, plenty of entrepreneurs do take the time and effort to comply with securities laws and make use of an exemption from the registration requirements under the Securities Act of 1933. Regulation D covers the most often used exemptions (at least by smaller companies). The most common form of a Regulation D offering is one conducted under Rule 506, which essentially requires that the issuer offer the securities only to preexisting contacts (no advertising or widespread communication of the offering) who are accredited investors. An accredited investor is someone who either: (i) has an individual net worth, or joint net worth with that person’s spouse, at the time of purchase, exceeding $1,000,000, excluding the value of the primary residence of such person or (ii) had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.[1] However, it is often the case that an entrepreneur’s friends and family are not accredited and so if he limits his capital raise to accredited investors, the capital raise will go nowhere. Not everyone has a rich uncle. So, if you are an entrepreneur in this situation, can you raise money from investors without those investors being accredited? Yes, you can, but proceed with caution. [Read more…]