The vast majority of private companies raising capital use Rule 506 of Regulation D, which, if complied with, ensures the securities being sold are exempt from registration with the Securities and Exchange Commission (SEC) because the offering of these securities does not involve “any public offering.” One of the primary advantages of a Rule 506 offering is that it is considered an offering of “covered securities,” which means that individual states cannot require issuers who meet the conditions of Rule 506 to register their offerings at the state level. By granting covered security status to Rule 506 offerings, Congress greatly reduced the compliance costs of companies raising private capital who would otherwise have to comply with the unique registration or exemption requirements of each state where one of their investors happened to live. [Read more…]
Is New York’s Form 99 Required When a Rule 506 Offering Has New York Investors?
Intro to Private Equity Funds
A private equity fund is an investment entity formed by an investment adviser (often also referred to as a fund manager or sponsor), that raises capital from investors to make investments in private companies under a specified investment strategy. Typically, the investors commit to investing a certain amount of capital over time, in one or more capital calls made over the course of the private equity fund’s life cycle. The investors are passive and do not participate in the management of the fund or the selection of its investments. The fund manager is responsible for investing the assets pursuant to the fund’s investment strategy. Additionally, private equity funds are often “blind” (in that the investor does not know in advance what their money will be invested in) and anonymous (in that no investor knows the identities of the other investors). [Read more…]
The Legal Pitfalls of Rewards-Based Crowdfunding Campaigns
Rewards-based crowdfunding sites, such as Kickstarter and IndieGoGo, have become a common way to get innovative businesses and products off the ground. The premise behind these crowdfunding sites is that, by raising small monetary contributions from a large number of people interested in supporting the business idea via the Internet, companies and entrepreneurs can amass enough capital to fund a fledgling project or venture. In exchange for supplying the funds, the funders are to receive the product being developed or certain other specified incentives, assuming that the entire funding goal is met by a certain deadline. If it’s not, the funds are to be returned to the backers.
The concept of crowdfunding has actually existed for some time. Players in the music industry launched online campaigns to fund tours and albums as far back as the late 1990s. It wasn’t until the mid to late 2000s when the word “crowdfunding” began to be used, and with the launch of major crowdfunding sites like IndieGoGo in 2008 and Kickstarter in 2009, the phenomenon took off and reached the popularity it sees today.
This post describes the common legal pitfalls associated with conducting a rewards-based crowdfunding campaign and steps to take to alleviate those pitfalls. [Read more…]
Using Side Letters in Private Funds
At some point while raising capital for a private fund, you will likely be asked by one or more potential investors to enter into a side letter. A side letter is an agreement between the fund and one particular investor to vary the terms of the limited partnership agreement with respect to that particular investor (almost always to the benefit of the investor).
[Read more…]
What Do Startups Need to Know About Data Privacy Law?
It’s hard to imagine a startup that does not collect some form of sensitive information in digital form, and the collection, use, and disclosure of such information is regulated under federal, state, and even international laws. The purpose of this post is to outline the legal framework that creates your obligations to safeguard customer data and the consequences of failing to comply with these laws. Startup founders that understand their legal obligations and make the investment to comply with them can reduce the likelihood of liability and ultimately compete more effectively by earning a reputation for protecting their customers. [Read more…]
