Capital Raising

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Before 2013, issuers were prohibited from using any means of general solicitation or advertising when raising capital in the private markets.  The prohibition was perceived by many to be the single biggest impediment to raising capital privately, particularly since it foreclosed the use of perhaps the greatest capital raising tool ever created: the Internet.

That all changed in 2013 when the Securities and Exchange Commission created new Rule 506(c) under the JOBS Act of 2012, which allowed companies for the first time ever to seek investors through general solicitation and advertising without registering with the SEC, so long as they sold only to accredited investors and used reasonable methods to verify accredited investor status. 

So what are reasonable methods of verification?  It clearly involves something more than what would meet the “reasonable belief” standard for determining accredited investor status for purposes of the 35 non-accredited investor cap for Rule 506(b) offerings, which as a practical matter means self-attestation through an investor questionnaire. That would not fly under Rule 506(c)’s reasonable verification method standard.Continue Reading (Minimum Investment) Size Matters, When it Comes to Rule 506(c) Verification

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In the world of early stage investing, there exists a range of structures from the most founder friendly to the most investor friendly. 

The most investor-friendly structure involves some type of a priced round in which the investor receives shares of a class of preferred stock with a negotiated set of enhanced economic, management and exit rights.  These rights and other terms are memorialized in a group of governance documents and agreements among the company, the investors and the founders.

On the other hand, the most founder-friendly investment structure is the simple agreement for future equity, or SAFE, which is similar to a convertible note but notably lacks an interest component and a maturity date.  Next along the range of investor friendliness is the convertible note, which contains several investor protections, including interest, maturity, some reps and warranties and (sometimes) security.  In the real world, however, more sophisticated investors routinely augment their protection under both SAFEs and convertible notes by negotiating side letters that provide them with more enhanced rights.

Documentation for priced rounds and SAFEs have benefited from standardization.  The National Venture Capital Association website open sources a set of standard Series A documents which are a convenient starting point for initial VC rounds.  Ted Wang of Fenwick & West developed a set of standard Series Seed documents in 2010 for use in lower dollar amount priced rounds.  Gust Launch, a SaaS platform for founding, operating and investing in startups open sources a slightly more elaborate set of Series Seed documents.  And Y Combinator, which created the SAFE, open sources its several varieties of the SAFE on its website.  Only convertible notes have lacked standardization and the efficiencies that come with it.Continue Reading Planting Seeds:  New Standard Convertible Note Could Disrupt Angel Investing

SEC

Identifying potential investors is one of the most difficult challenges facing early-stage companies.  The range of amounts sought at this stage is typically greater than what could be provided by the founders and friends and family, but below what would attract a VC or a registered broker-dealer.  The problem is even more acute in geographic…

A major theme of this Blog has always been ongoing legislative, regulatory and market initiatives to reform capital markets by targeting unreasonable or outdated impediments to capital formation to make it easier for early-stage companies to raise capital.  These impediments are not always obvious or direct.  One such indirect impediment has been the venture capital adviser exemption under the Investment Advisors Act of 1940, the eligibility requirements of which disincentivize VC investment in secondary transactions and in other VC funds, thereby unnecessarily hampering liquidity in the innovation ecosystem.  If a new piece of proposed legislation passed by the House Financial Services Committee becomes law, however, this impediment will be eliminated.Continue Reading Proposed Reform of Venture Capital Fund Advisor Exemption Will Boost Startup Investment and Founder Liquidity

The collapse of Silicon Valley Bank will have enormous repercussions for startups and VCs in ways seen and unseen.  As for the unseen, SVB had deep relationships among the various players in the venture ecosystem.  Founders and investors established banking relationships with SVB in part because of the opportunities SVB provided to network within the space.  It will be difficult for other lenders who don’t have these deep relationships to replace SVB in this capacity and fill this valuable role.Continue Reading Bumpy Ride Ahead for Startups After Silicon Valley Bank Crash

Two startups with competing, equally compelling technologies at the same stage of development are pitching venture capital investors for Series A funding.  One startup is led by a serial entrepreneur founder, the other by a novice.  Assume each will get funded.  In all likelihood, the deal will happen quicker and the amount funded and pre-money…

2021 was a spectacular year for the American venture capital ecosystem, with VC investments, fundraising and exits all setting new highs.  That according to the latest PitchBook-NVCA Venture Monitor, the self-described definitive review of the U.S. venture capital ecosystem.  Nevertheless, it is difficult to predict how 2022 will turn out for the VC industry,…

Perhaps the most vexing threshold issue faced by any company considering a capital raise is which securities exemption to pursue.  The chosen exemption largely depends on the targeted amount of the raise, as well as the manner in which potential investors will be solicited and the type of disclosure to be provided.  But this presents…

For the second time in nine days, I recently drove ten hours round-trip to drop my son off at school for spring semester.  The first time around, he ended up returning home with me the next day for unexpected oral surgery to remove his wisdom teeth after completing his mandatory one-day COVID quarantine at school. …

A freeze on government regulation is generally perceived by most people as being a positive development for private enterprise.  Not necessarily so, however, when the regulation being frozen is itself a reform of preexisting regulatory burdens.

Among the many Presidential Actions taken by President Biden on his first day in office was one entitled Regulatory…