The VC Experts' Buzz

SEC Approves NASDAQ's BX Venture Market- a New Listing Option for Smaller Companies

Thu, 2 Feb 2012 00:00:00 +0000

The NASDAQ OMX Group has received approval from the SEC to launch its new listing market, the BX Venture Market. The BX Venture Market is intended to serve as a new listing alternative for early stage and smaller companies that do not qualify for a NASDAQ Capital Market listing, bridging the gap between the over-the-counter markets and NASDAQ's existing listing venues. Companies will be able to list common and preferred stock, ordinary shares and ADRs, trust and limited partnership interests, units, rights and warrants. NASDAQ expects to launch the BX Venture Market during 2012.

Some Lenders' Issues In Leveraged Buyouts

Wed, 1 Feb 2012 00:00:00 +0000

Leveraged buyouts entail the use of significant debt in order to fund acquisition price. The forms indicate the emphasis on debt when the transaction is papered. You have seen the secured term loan agreement; asset-based revolving credit agreement, senior indenture agreement, senior subordinated note and denture, note purchase agreement; loan security and intercreditor agreement; asset based revolver pledge and security agreement; lien subordination and intercreditor agreement; guarantor resolutions.

Lock Ups And Other Obstacles To Liquidity

Tue, 31 Jan 2012 00:00:00 +0000

The final act in the IPO drama has to do with stock that is not offered in the initial floatation, but held by the insiders and not scheduled to be sold into the public markets until after the registration statement has become effective. Stock that does not flow through the public offering process is, in the jargon of the trade, "restricted," meaning that it has never been registered but it is nonetheless eligible for sale by the holders subject to certain constraints, the first of which is a contractual constraint imposed generally on the company and its underwriters and called the "lock up."

The Case Against Conversion Discounts for Convertible Debt

Thu, 26 Jan 2012 00:00:00 +0000

Entrepreneurs often turn to economic development organizations or angels for pre-seed or seed funding for start-ups when they're not yet ready for institutional venture capital. A large proportion of these pre-seed or seed financings are structured as convertible debt which is, at first glance, surprising. Looking deeper into this market anomaly provides understanding of why debt is used for early round financings, and also of the strengths and weaknesses of different approaches.

Buyout Nomenclature

Wed, 25 Jan 2012 00:00:00 +0000

Whether Or Not To Go Public

Tue, 24 Jan 2012 00:00:00 +0000

There are two major issues facing a start-up considering an IPO: how to do it most effectively, and, secondly, whether to do it at all. The second is the threshold question. Will the issuer be able to raise capital cheaply and more efficiently on the wings of an IPO than with any other method, taking into account the long-range consequences of becoming a public company (going public)?

Dodd-Frank Act Rulemaking: Form PF Inaugurates Era Of Detailed Reporting By Managers Of Private Fund

Thu, 19 Jan 2012 00:00:00 +0000

Newly adopted Form PF caps a banner year for investment adviser rulemaking and, at least for larger hedge fund managers, promises a burdensome quarterly filing exercise in which extensive enterprise-wide and fund-by-fund reporting will be disclosed to the Securities and Exchange Commission. The form responds to a Dodd-Frank Act information collection mandate and underpins an SEC effort to aid the Financial Stability Oversight Council in assessing systemic risk. Unlike information requested of those advisers on the SEC's amended Form ADV, the Form PF information will be non-public.

Advisers That Only Manage VC Funds Will Be Exempt From Dodd-Frank Registration Requirements

Wed, 18 Jan 2012 00:00:00 +0000

Investment advisers that manage only venture capital funds will be exempt from the new registration requirements imposed upon private fund advisers under the Investment Advisers Act of 1940 (the Advisers Act), as it was recently amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act").

The Marketing Section For Early-Stage Investments

Tue, 17 Jan 2012 00:00:00 +0000

The marketing section is the most troublesome for many founders to write convincingly and should, in view of the significance venture investors pay to the issue, be the most carefully drafted. It is relatively easy to obtain industry statistics and divide by some number. For example:

"Cheap Stock" And Section 409A Considerations For Pre-IPO Companies

Thu, 12 Jan 2012 00:00:00 +0000

Private companies that consider going public may not be aware of the overlap between Section 409A of the Internal Revenue Code and cheap stock accounting issues. If a company makes grants of equity awards prior to going public at share prices that are much lower than the initial public offering price, this could lead to accounting charges for the company. But, perhaps more significantly, this could also highlight tax compliance issues under Section 409A.

Introduction to Leveraged Buyouts

Wed, 11 Jan 2012 00:00:00 +0000

A leveraged buyout involves, by definition, debt incurred to help fund the purchase price of a target company. In recent years, levels of debt have been increasing vis-á-vis traditional benchmarks (shareholders' equity and/or tangible assets) as lenders have come to realize the collateral value of a steady cash flow stream. With heightened emphasis on the role of debt in corporate restructurings, however, has come sharper scrutiny of the relationship of the debtor to the creditor and other parties that have an interest in the buyout, namely the nonassenting creditors and the equity holders.

Negotiation Points

Tue, 10 Jan 2012 00:00:00 +0000

It is clear to the point of obviousness that there are cultural differences between the entrepreneurial mind-set and the corporate mentality, having largely to do not so much with perverse people but with the structure of large institutions. James Buchanan won the 1986 Nobel Prize in economics for elaborating elegantly on a more or less obvious proposition: that people within a political system behave so as to maximize their personal outcomes.

"How do you really feel?" Issa challenges the SEC

Thu, 5 Jan 2012 00:00:00 +0000

In 2011, U.S. House Oversight Committee Chairman Darrell Issa (R., Calif.), sent a sharply worded letter to Chairman Mary Schapiro of the Securities and Exchange Commission (the "SEC"), in which he demanded that the SEC justify several of its rules regarding raising capital, including the "quiet period" that restricts a company's communications ahead of an initial public offering ("IPO") and the rules that limit the number of investors in private companies to 499.

SEC Adopts Final Definition Of "Family Offices" Exempt From Investment Advisers Act

Wed, 4 Jan 2012 00:00:00 +0000

In 2011, the Securities and Exchange Commission (SEC) adopted its final rule (the Family Office Rule) under the Investment Advisers Act of 1940 (the Advisers Act) defining the term "family office" for purposes of the Advisers Act exemption of family offices from the definition of an "investment adviser." ^[1] The Family Office Rule took effect August 29, 2011.

New Form SLT Reporting Requirements In Effect For Certain Investment Advisers

Tue, 3 Jan 2012 00:00:00 +0000

Effective September 30, 2011, the new Treasury International Capital (TIC) Form SLT is required to be filed by certain custodians, investment managers and investors. The first filing deadline was October 24, 2011 for any reporting entity, including an investment adviser that has $1 billion or more of reportable securities as of the last business day of the reporting month. You should note that only aggregate data derived from Form SLT will be published and only in a manner that will not reveal individual responses.

Volcker Rule Permits Bank-Sponsored Hedge Fund Access Platforms

Wed, 28 Dec 2011 00:00:00 +0000

Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (which embodies the so-called Volcker Rule) will impose significant limits on the ability of banks and their affiliates (each, a “banking entity” or “BE”) to engage in proprietary trading and to own or sponsor hedge funds when it comes into effect in July of 2012.

Guidelines From Two Important Delaware M&A Cases - 2011

Tue, 27 Dec 2011 00:00:00 +0000

Recently, the Delaware Court of Chancery issued two decisions providing important guidance on directors' duties in connection with M&A transactions.

Applying the Entire Fairness Standard, Buyer and its Affiliated Directors Held Liable for $1.263 Billion

Sale Transaction Not Enjoined Even Though Customary Value Enhancement Procedures Not Followed

Delaware Court of Chancery Applies Revlon Standard to Half Cash, Half Stock Merger

Thu, 22 Dec 2011 00:00:00 +0000

In May, 2011, the Delaware Court of Chancery denied a motion to enjoin preliminarily a merger in which the stockholders of Smurfit-Stone Container Corporation will receive 50% cash and 50% Rock-Tenn Company stock in exchange for their shares of Smurfit-Stone.

A New European Regime For Venture Capital Funds

Wed, 21 Dec 2011 00:00:00 +0000

Recently, as part of its drive to encourage and facilitate the growth of venture capital in Europe, the European Commission published a proposal for a legislative framework for venture capital funds. If approved, this new regulation will allow managers of "European Venture Capital Funds" (as they will be officially, and exclusively, designated) to raise capital freely throughout the European Economic Area from certain types of investors.

Good Seed; Bad Seed (Preferred That Is)

Tue, 20 Dec 2011 00:00:00 +0000

At the risk of fighting the last war, I am going to come back to the idea (and in some cases reality) of "standard" open source seed preferred documents.

The Benefits of Confidentially Marketed Public Offerings for Medtech Companies

Thu, 15 Dec 2011 00:00:00 +0000

CMPOs are offerings registered with the SEC on a Form S-3 shelf registration statement. Since the SEC liberalized the shelf registration rules, the filing of shelves has become commonplace and a company's market price generally does not move when a shelf is filed. CMPOs primarily are marketed to a targeted group of institutional investors without public announcement. As discussed below, the offering may be "flipped" into a public offering shortly before pricing, and at this point a retail component is often approached. CMPOs have several advantages over traditionally marketed public offerings.

NASDAQ's BX Venture Market - A New Listing Option For Smaller Companies

Wed, 14 Dec 2011 00:00:00 +0000

The NASDAQ OMX Group received approval in May 2011 from the SEC to launch its new listing market, the BX Venture Market. The BX Venture Market is intended to serve as a new listing option for early-stage and smaller companies that do not qualify for listing on national securities exchanges. The objective of the BX Venture Market is to provide a more regulated and more transparent marketplace than those available in the over-the-counter markets.

Avoidance of Liability For Misstatements or Omissions

Tue, 13 Dec 2011 00:00:00 +0000

The level of diligence required in presenting the facts in a private placement is not as well fleshed out in the cases and authorities as in the case of a public offering. A defective-disclosure document in a public offering is scrutinized against the background of §11 of the '33 Act, where liability for misstatements can be close to absolute.

More Process and Disclosure, But Little Change, in Executive Compensation Practices

Thu, 8 Dec 2011 00:00:00 +0000

The recent financial reform legislation, commonly called the Dodd-Frank Act, addressed a pot pourri of corporate governance and executive compensation issues that have been promoted by shareholder activists (including confirming the SEC's authority to adopt its far reaching proxy access rules, which the SEC adopted in late August). However, with regard to executive compensation matters, the Act will not have any effect on privately-held companies, and will generally have limited substantive effect on public companies. This is because the "new" requirements largely mandate or embellish practices already widely in use or add disclosure that may complicate a company's public filings, but that should not have a direct substantive effect on how it pays its executives.

Delaware Court of Chancery Awards $1.26 Billion in Entire Fairness Case

Wed, 7 Dec 2011 00:00:00 +0000

On October 14, 2011, the Delaware Court of Chancery entered a $1.26 billion damages award in In re Southern Peru Copper Corp. S'holder Derivative Litig., a derivative action challenging the fairness of a merger involving a controlling stockholder. This eye-popping award is a stark reminder of the Court's heightened focus on the conflicts associated with transactions involving controlling stockholders, and, as detailed below, it highlights the importance of ensuring adequate procedural protections in such transactions.

Incentive Stock Options (ISOs)

Tue, 6 Dec 2011 00:00:00 +0000

Incentive stock options must be issued pursuant to a "written plan" which includes the aggregate number of shares to be issued and the eligible employees (or class of employees). The option plan must be approved by the shareholders within twelve months before or after board approval, expire after ten years (five years in the case of a 10-percent stockholder), be granted pursuant to a plan less than ten years old, carry an exercise price equal to current "fair market value" (110 percent of such value if the optionee is a 10-percent stockholder), and be nontransferable.

FINRA Focuses On Due Diligence Of Private Placements

Thu, 1 Dec 2011 00:00:00 +0000

Evidently, some broker-dealers and compliance officers did not get the message that FINRA is serious about firms' obligations to conduct a reasonable investigation of issuers and the securities they recommend in private placements. FINRA has been rather busy the first half of 2011 bringing enforcement actions against broker-dealers and compliance officers that failed to conduct reasonable investigations into private placements.

The Treatment of Stock Options in the Context of a Merger or Acquisition Transaction

Thu, 1 Dec 2011 00:00:00 +0000

A principal issue in merger and acquisition transactions is whether, and to what extent, outstanding options will survive the completion of the transaction and whether and when the vesting of options will be accelerated.

Preparation For The Public Offering

Tue, 29 Nov 2011 00:00:00 +0000

The planning steps prior to a public offering are outlined in a number of source materials, emphasizing the increase in formality involved in the transition from a private to a public company. Some of the less obvious points that deserve mention have to do with corporate structure. The requirement that the financial statements be audited is well known. However, issuers on occasion forget that the recent acquisition of a significant, unaudited subsidiary may make it impossible to present the requisite audited financials when desired. Moreover, it is often necessary to recapitalize the enterprise.

Fenwick & West - Venture Capital Survey Silicon Valley Third Quarter 2011

Tue, 22 Nov 2011 00:00:00 +0000

Fenwick & West LLP analyzed the terms of venture financings for 113 companies headquartered in Silicon Valley that reported raising money in the third quarter of 2011. Up rounds exceeded down rounds in 3Q11 70% to 15%, with 15% of rounds flat. This was an increase from 2Q11 when up rounds exceeded down rounds 61% to 25%, with 14% of rounds flat. Series B rounds were exceptionally strong, comprising 38% of the relevant rounds (Series A rounds aren't included as there is no prior round for comparison purposes), and 89% of the Series B rounds were up rounds. This was the ninth quarter in a row in which up rounds exceeded down rounds

Delaware Chancery Court Addresses Application of Revlon Standard To 50/50 Cash And Stock Merger

Thu, 17 Nov 2011 00:00:00 +0000

In a recent opinion issued in the case In re Smurfit-Stone Container Corp. Shareholder Litigation, No. 6164-VCP (Del. Ch. May 20, 2011), Vice Chancellor Parsons of the Delaware Chancery Court narrowed the gap in Delaware jurisprudence on whether the heightened standard of judicial review under Revlon applies to a merger transaction where the consideration payable to target company stockholders consists of a mixture of cash and acquiror stock. The Chancery Court held that Revlon duties applied in a transaction where the merger consideration is 50% cash and 50% acquiror stock, though noted that its position is "not free from doubt". The decision still leaves open the question as to whether some lesser proportion of cash consideration could trigger Revlon duties.

VC Experts Q3 2011 Life Science Valuation Report

Wed, 16 Nov 2011 00:00:00 +0000

VC Experts, the premier provider of valuation & deal term data of private company financing transactions, recently released their Q3 2011 Life Sciences Valuation & Deal Term report. The report, utilizing data found in the Valuation & Deal Term Database, includes details about the investments, terms, and estimated post-money valuation data for companies in the Life Sciences sector who raised capital in Q3 2011. Herein is a sampling from the report.

Overview of Avoidance of Liability - Private Placement

Tue, 15 Nov 2011 00:00:00 +0000

Volcker Rule Regulations Provide Little Relief for Private Fund Investments

Thu, 10 Nov 2011 00:00:00 +0000

On October 11, 2011, the federal banking agencies and the Securities Exchange Commission issued a joint notice of rulemaking implementing the so-called Volcker Rule of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which prohibits proprietary trading and private fund investing by banking entities. ^[1] The Volcker Rule becomes effective on July 21, 2012 and requires (among other things) banking entities to divest their private fund investments by July 21, 2014 (unless they obtain an extension from the Federal Reserve).

Summary of Israeli Private Equity Deals - Q3 2011

Wed, 9 Nov 2011 00:00:00 +0000

In the third quarter of 2011, 13 Israeli private equity deals attracted $803 million, 26 percent above $637 million invested in 17 deals in the previous quarter, and 62 percent up from $495 million invested in 16 deals in Q3/2010. This amount narrowly topped the strong fourth quarter of 2010 with 15 deals that were valued at $800 million. Israeli private equity funds accounted for 40 percent of Q3/2011's activity, mostly reflecting Israel Infrastructure Fund's buyout of Derech Eretz Highways for $208 million.

Unconventional Comparables

Tue, 8 Nov 2011 00:00:00 +0000

There is one often reliable, and almost never discussed, way to price early stage valuations and that is assessing comparable transactions. And, let me distinguish the method I suggest from the conventional 'Comparable Transactions' methods ... let's call my suggestion the "Unorthodox" or "Maverick" Comparable methodology. With conventional comparables, the idea is relatively simple: Find a bunch of transactions involving companies which look like yours and draw obvious comparisons.

Dodd Frank - One Year On

Thu, 3 Nov 2011 00:00:00 +0000

"Either the CFTC or the SEC may prohibit an entity from participating in the US swap markets if it is domiciled in a country whose regulation of swaps undermines the stability of the US financial system".

SEC Enforcement Action Shows Regulatory Focus on Private Equity Managers

Wed, 2 Nov 2011 00:00:00 +0000

On August 29, 2011, the Securities and Exchange Commission took action against a principal partner (the "Partner") of a registered investment adviser to several private equity funds. ^[1] The SEC issued an administrative order alleging that the Partner usurped investment opportunities from the adviser's funds (the "Funds") while failing to disclose a conflict of interest, thereby violating the adviser's code of ethics, as well as violating the anti-fraud provisions of the federal securities laws, and aiding and abetting the violation of other federal securities laws.

The Bull's-Eye Theory Of Forecasting: Shoot High

Tue, 1 Nov 2011 00:00:00 +0000

The art of preparing forecasts in a business plan - and it is an art, not a science. This preparation involves a delicate balancing process by the founder. On the one hand, a forecast is a representation of a fact the founder's state of mind and an intellectually honest founder will represent his state of mind accurately. Indeed, careless, let alone dishonest, preparations may involve liability. On the other hand, the forecast is an element in the negotiation process about price.

Delaware Finds That A Reverse Triangular Merger May Violate A Contractual Non-Assignment Provision

Thu, 27 Oct 2011 00:00:00 +0000

In structuring a business acquisition, there are four commonly used transaction structures: (i) sale and purchase of all of the stock of the target company (Stock Acquisition); (ii) sale and purchase of all or substantially all of the assets of the target company (Asset Sale); (iii) merger of the target company into a subsidiary of the purchaser (Forward Triangular Merger); or (iv) merger of a subsidiary of the purchaser into the target company (Reverse Triangular Merger).

Summary of Israeli High-Tech Company Capital Raising - Q3/2011

Wed, 26 Oct 2011 00:00:00 +0000

In the third quarter of 2011, 137 Israeli high-tech companies raised $522 million from venture investors – both local and foreign. This is down 8 percent from $569 million raised by 145 companies in Q2/2011, but up 53 percent from $341 million raised by 96 companies in Q3/2010. (Chart 1) Four hundred and twenty-two companies attracted a total of $1.57 billion in the first three quarters of 2011. The amount raised was 71 percent above the $918 million raised by 291 companies in the corresponding period of 2010.

Indemnification

Tue, 25 Oct 2011 00:00:00 +0000

The Revised Model Act provides perhaps the most extensive and best-considered provisions on indemnification by the corporation of directors and officers to be found in any codification. Indemnification provisions may be drafted either in the charter or bylaws, but one school of thought, to which this author subscribes, will place them in the charter so as to provide maximum dignity to often controversial provisions. The ultimate belt-and-suspenders approach includes the practice of executing a contract between the corporation and each director, providing that the director has a specific contractual right to be indemnified.

Enhanced Liability Risks For VCs And VC Funds Extending Bridge Loans

Thu, 20 Oct 2011 00:00:00 +0000

A federal appeals court recently handed down a chilling reminder of the risks inherent in failing to address conflicts of interest and process issues in distressed venture capital and private equity financings. InÿCDX Liquidating Trust v. Venrock Associates,ÿNo. 10-1953 (March 29, 2011), the U.S. Court of Appeals for the Seventh Circuit reversed a defense judgment and sent the case back for retrial, reviving the VC directors' exposure to fiduciary duty liability and their funds' exposure to aiding and abetting liability.

Conventional Convertible Preferred vs Participating Preferred Stock

Wed, 19 Oct 2011 00:00:00 +0000

What is the difference between Conventional Convertible Preferred (non-Participating Preferred) and Participating Preferred Stock? How do these effect the outcome for investors when a non-IPO exit is about to happen? See for yourself in these simple examples.

Portfolio Management

Tue, 18 Oct 2011 00:00:00 +0000

In considering the issue of valuation generally, one should understand the environment in which a manager of a venture pool operates; he is investing not in one but in a number of opportunities. One of the foundations of modern portfolio theory is the concept that the return on an asset cannot be viewed by itself; rather it must be judged by its contribution to the portfolio as a whole. Thus, when deciding to invest in a company, the venture capitalist must consider how the expected return on the new investment is correlated with the others he holds, ranking opportunities on both an ordinal and cardinal scale.

Hart-Scott-Rodino Changes Mean the FTC/DOJ Will Read More Strategic Planning Documents

Thu, 13 Oct 2011 00:00:00 +0000

What you need to know:

New Hart-Scott-Rodino requirements will take effect soon, including (i) expanded review of strategic planning documents and (ii) disclosure by private equity funds of competitive portfolio companies in their affiliated funds.

What you need to do:

Companies should consider the potential for future antitrust review whenever they engage a strategic planning consultant. Private equity funds should consider the competitive impact of acquisitions in light of portfolio companies held in their affiliated funds.

Basic Information on LBOs

Wed, 12 Oct 2011 00:00:00 +0000

The typical "buyout" is a noncontroversial device to descend the ownership of certain assets (held in corporate form) from one set of proprietors to another - a "plain vanilla" deal in today's jargon. The more celebrated transactions are denominated "trophy deals," honoring the heroic risks that the heroically egoed promoters take (albeit with other people's money). Buyouts used to be called "leveraged buyouts" (or "LBOs") because, typically, the transaction involves the use of debt by the buyer to leverage the purchase price. When some LBOs failed because the debt burden was insupportable, the industry reacted by ratcheting down typical ratios of debt to equity and euphemistically relabeling LBOs to private equity.

State Of Corporate Domicile: Delaware Or Somewhere Else?

Tue, 11 Oct 2011 00:00:00 +0000

State of Corporate Domicile: If the corporate form is selected, the next issue is where best to be domiciled. Ordinarily one would minimize expense by incorporating the business in the state in which the business is to be conducted, thereby saving the cost of appointing an agent in, say, Delaware, the most popular state for those seeking a flag of convenience. (There is rarely an income-tax advantage to domiciling a business outside of its principal place of operations; the income of a business operated in Massachusetts will generally be subjected to the same Massachusetts income tax whether it is technically a Massachusetts or a Delaware corporation.)

Higher Listing Standards for Reverse Merger Companies

Thu, 6 Oct 2011 00:00:00 +0000

In response to a number of allegedly fraudulent filings by companies that went public through the reverse merger process, the New York Stock Exchange, NYSE Amex and the NASDAQ Stock Market will increase their listing standards for reverse merger companies.

What is a Section 351(a) Tax-Free Exchange?

Tue, 4 Oct 2011 00:00:00 +0000

Generally, transferring property into a corporation in exchange for its stock is a taxable event.

The transaction is treated as if you sold property to the corporation in return for cash. The difference between the stock value received and the tax basis in the property transferred to the corporation will result in a gain or loss.

SEC Rule 10b-5 Now Has A Sister And She's Mean!

Thu, 29 Sep 2011 00:00:00 +0000

Under Rule 10b-5, adopted by the SEC in 1942 pursuant to Section 10(b) of the Securities Exchange Act of 1934, it is unlawful "to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading" in connection with the purchase or sale of securities. This clearly applies to issuers and sellers but the perennial question has been the extent to which intermediaries in a securities transaction can be found liable for the issuer's or seller's primary violation. Somewhat surprisingly, the U. S. Supreme Court has addressed this question three times in the past 17 years.

Reg D (Rule 506) - SEC proposes 'Bad Actor' Disqualification

Wed, 28 Sep 2011 00:00:00 +0000

The Securities and Exchange Commission has proposed amendments to Rule 506 of Regulation D under the Securities Act of 1933 that would disqualify "bad actors" from participating in private placements that rely on Rule 506 for an exemption from the registration requirements of the Securities Act. The proposed amendments, adopted May 25, 2011, can be found in SEC Release No. 33-9211. A copy of the Release is available at http://www.sec.gov/rules/proposed/2011/33-9211.pdf.

Valuation And Pricing

Tue, 27 Sep 2011 00:00:00 +0000

When a founder determines it is worth his while to attempt to raise money for his concept, the basic issue becomes one of price. If, for example, the business needs $500,000 to get started, how much of the equity in that company should $500,000 in fresh cash command? A brief summary of common terminology will help illuminate the subsequent discussion.

SEC Proposes Rule Disqualifying Felons And Bad Actors From Rule

Thu, 22 Sep 2011 00:00:00 +0000

A new rule proposed by the SEC on May 25 would add a hurdle for companies seeking to raise capital in a private placement offering. Rule 506 of Regulation D ("Rule 506") provides a "safe harbor" from the registration requirements of the Securities Act for securities sold to accredited investors and up to 35 non-accredited investors. The SEC's proposed new rule would prohibit the use of Rule 506 if felons or other "bad actors" are involved in the offering.

The S Corporation

Tue, 20 Sep 2011 00:00:00 +0000

A special subtype of the incorporated entity is termed the "S Corporation" (formerly "Subchapter S" Corporation), again the name taken from the location of the governing provisions in the Code. For most purposes, S Corporations are garden-variety corporations under state law, the distinguishing factor being that if they configure themselves to meet special rules of the Internal Revenue Code, no corporate tax is assessed, thereby passing through corporate income and losses directly to the shareholders.

FINRA Rule 5131 Will Affect Lock-Up Agreements for IPO Shares Held

Thu, 15 Sep 2011 00:00:00 +0000

FINRA Ruleÿ5131 (the "Rule"), portions of which became effective on Mayÿ27, 2011, provides new prohibitions and requirements for underwriters when they are pricing and allocating IPO shares.ÿ While the Rule, known as the IPO Allocations Rule, technically applies only to FINRA member firms, as a practical matter, it will also affect IPO issuers, venture capital investors with board seats holding shares subject to lock-up agreements and buyers of IPO shares.

Anti-Dilution Provisions - An Example

Wed, 14 Sep 2011 00:00:00 +0000

Anti-Dilution provisions can be a key negotiating point when it comes to the Deal Terms of a new round of financing, especially in the presence of a Down Round.

Corporation Versus A Limited Liability Company

Tue, 13 Sep 2011 00:00:00 +0000

There are a number of alternatives structures, including general and limited partnerships, business trusts, sole proprietorships, etc. In the final analysis, the choice of entity usually comes down to an election between a corporation, whether S corporation or C corporation, and a limited liability company. The following is a summary of certain important issues.

Section 409A Revisited: Severance Plans and Other Deferred Compensation Programs

Wed, 7 Sep 2011 00:00:00 +0000

In Notices 2010-6 and 2010-80 (dealing with a new correction program for Section 409A documentary compliance defects) the Internal Revenue Service ("IRS") announced its controversial position that a common compensatory arrangement design under which service providers are required to sign release agreements or other documents (such as noncompetition agreements) to receive benefits may not be in documentary compliance with Section 409A. Remedial action may be necessary prior to 2013 to mitigate potential Section 409A risks with respect to arrangements that were in effect on December 31, 2010.

Liquidation Preference - An Example

Tue, 6 Sep 2011 00:00:00 +0000

Liquidation Preference is an important term when negotiating terms of an investment. The term can be made up of essentially two parts that dictates when and how much an investor may receive upon a liquidation, trade sell, or other non-IPO exit. The most recent filing for ZocDoc, Inc. revealed that the latest Series C holders were willing to compromise some on the Liquidation Preference in order to obtain a stake in the company. Liquidation Preferences can best be explained through an example.

Earnouts: A Deal Making Tool In A Tough Economy

Thu, 1 Sep 2011 00:00:00 +0000

Has the difficult economy of the last few years forced you to re-think your plans for selling your business?ÿ Probably.ÿ

Should you wait for a full-blown economic recovery before seriously considering selling your business?ÿ Not necessarily.ÿ

Is there a mechanism that can help bridge the gap between the purchase price you were hoping to receive for your business and the lower purchase price you are likely to receive?ÿ Absolutely!

Q2 2011 Non-Silicon Valley Deal Terms

Wed, 31 Aug 2011 00:00:00 +0000

Fenwick & West LLP, a national law firm that provides comprehensive legal services to technology and life sciences clients of national and international prominence, recently put out their Q2 2011 Bay Area venture Deal Terms report. In light of this, we have provided an early look at some of the analysis that we have compiled thus far covering areas outside of Silicon Valley for Q2 2011. Specific company terms & valuations are available to subscribers of VC Experts Valuation & Deal Term database. In this report, you will see some consistencies in terms with both areas, and also some differences.

Who's Who of Angels

Tue, 30 Aug 2011 00:00:00 +0000

Angel groups have grown significantly in the last decade, as more and more organizations have been established and more individual angels have joined the groups. Angel groups now exist in nearly every American state and Canadian province, and they offer accredited angel investors the opportunity to invest in and help build successful companies - while also having a good time. Every group is different in terms of investment strategy and culture, but ACA member groups offer interested investors a variety of benefits. Most angel groups are looking for new investors to join their group.

New Tech Start-Ups Formed In 2011 Should Consider LLC Format, At Least Initially

Thu, 25 Aug 2011 00:00:00 +0000

It is often said that any new start-up business that is planning on raising equity investments from the private equity/venture capital (PE/VC) world generally needs to organize themselves as a corporation, rather than as a limited liability company (LLC). Although the merits of this statement are debatable, the most oft-cited reason for the statement is that LLCs are generally taxed as partnerships. Many PE/VC investment funds are backed by tax-exempt investors consisting of pension plans, endowments, or similar entities, many of which can have adverse income tax consequences by making an investment in an operating business that is taxed as a partnership. Although there generally are various legal structures available that can mitigate such consequences, the desire for simplicity sometimes mandates that the operating business be organized as a corporation from the outset.

Venture Capital Survey Silicon Valley Second Quarter 2011

Tue, 23 Aug 2011 00:00:00 +0000

Background Fenwick & West LLP analyzed the terms of venture financings for 117 companies headquartered in Silicon Valley that reported raising money in the second quarter of 2011.

Up rounds exceeded down rounds in 2Q11 61% to 25%, with 14% of rounds flat. Although this was a slight decline from 1Q11, when up rounds exceeded down rounds 67% to 16%, with 17% of rounds flat, it was still a very healthy performance. This was the eighth quarter in a row in which up rounds exceeded down rounds.

Delaware Court of Chancery Rules that Metadata Subject to FOIA

Thu, 18 Aug 2011 00:00:00 +0000

In an effort to advise parties to a litigation, the Delaware Court of Chancery released earlier this year its Guidelines for Preservation of Electronically Stored Information. The publication of the Guidelines is timely in light of a decision released January 2011 in Victor Stanley, Inc. v. Creative Pipe, Inc., Civil No. MJG-06-2662 (D. Md. Jan. 24, 2011), where defendants were ordered to pay over $1 million in sanctions for the willful loss and destruction of electronically stored information (ESI).

Why Use A Placement Agent?

Tue, 16 Aug 2011 00:00:00 +0000

Founders, who are desperate for financing, debate whether the faucet will turn on if they engage a placement agent. This is a question to be addressed in a real-world context. In the first place, the great majority of first-round financing is not economically interesting to an investment-banking firm. The fee for a placement is usually in the range of 2 to 5 percent of the amount raised.

Restrictions On Transfer in the Facebook Age

Wed, 10 Aug 2011 00:00:00 +0000

In some states, agreements respecting the corporation's power to restrict the transfer of its shares, once issued, are not deemed to be effective unless they are set out in the charter (and, like all restrictions, "legended" upon the face of the share certificates themselves); moreover, any agreement purporting to bind shareholders not signatories to the agreement may only be legally effective if set out in the charter. The typical restriction, in the nature of a first-refusal restriction, is a significant element of governance in closely held corporations, important to ensure that stock not fall into the hands of strangers without an opportunity in the company (or the remaining shareholders) to buy back some or all of the shares. In small companies, the shareholders feel the need to relate to each other as partners and a maverick shareholder can be disruptive.

SEC Adopts Final Rules Regarding Investment Adviser Registration

Tue, 9 Aug 2011 00:00:00 +0000

On June 22, 2011, the Securities and Exchange Commission (the "SEC") adopted final rules which implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). Among other things, the final rules adopted by the SEC: (i) provide an extension to the SEC registration deadline for advisers currently relying on the "private adviser exemption," including hedge fund and private equity fund advisers, until March 30, 2012, (ii) implement exemptions from SEC registration for certain venture capital fund advisers, private fund advisers and foreign private advisers, (iii) reallocate regulatory oversight of investment advisers among the SEC and the individual states, (iv) expand disclosure obligations, (v) define the term "family offices" that are to be excluded from SEC regulation and (vi) revise the "pay-to-play" rule. Set forth below is a high-level summary of the final rules.

European Regulator Consults On Crucial Details Of The AIFMD

Thu, 4 Aug 2011 00:00:00 +0000

This week, the new European super-regulator, ESMA, issued an eagerly awaited consultation paper setting out its proposed advice to the European Commission on most of the crucial "level 2" implementing measures under the Alternative Investment Fund Managers Directive - the sweeping new regulation for European private equity and venture capital fund managers which was published in the Official Journal of the EU on 1 July 2011, and which has to be implemented by EU member states by mid-2013.

When In Doubt on Pre-Money Valuation, Smart Guys Procrastinate

Wed, 3 Aug 2011 00:00:00 +0000

If there simply is no way to get a handle on the pre-money valuation in an angel round, the trick is to postpone the valuation/pricing decision until a future event. Typically this event is the first professional (some times called the Series A) round of financing, when the company is more mature. At this point, professional VCs are investing and perhaps competing to invest, in which case the price is fairly established by definition through an informal auction.

Summary of Israeli Private Equity Deals - Q2 2011

Tue, 2 Aug 2011 00:00:00 +0000

In the first half of 2011, $965 million was invested in 29 Israeli private equity deals, a decrease of 16 percent from $1.146 billion invested by PE investors in 31 deals in H1 2010. In the 2011 period, 22 foreign PE funds invested $683 million, or 71 percent of the total, up from $565 or 49 percent in the same period last year.

Delaware Supreme Court Upholds Validity of NOL Rights Plan

Thu, 28 Jul 2011 00:00:00 +0000

With the recent uptick in hostile takeover activity, corporate defenses such as shareholder rights plans (a/k/a "poison pills") - which generally can be adopted by a board of directors without shareholder approval - are receiving increased attention. Last summer, the Delaware Court of Chancery upheld the use of a rights plan by Barnes & Noble to fend off a takeover bid by Yucaipa, a private equity fund.

If Regulation D Is Not Available?

Wed, 27 Jul 2011 00:00:00 +0000

While Regulation D has proven in practice to be extremely useful in aiding venture-backed placements, not every issue can or will be sold in compliance with the exemption. Regulation D specifically provides that it is not exclusive; thus, õ4(2) is (at least theoretically) available in time of need. Certainly, however, the occasion for sole reliance on õ4(2) will be infrequent. If Regulation D is lost because there has been a "general solicitation," one can hardly imagine the circumstances that could encourage the issuer to turn to õ4(2).

Delaware Court Refuses To Dismiss Breach Of Contract And Fraud Claims By Jilted Merger Partner

Tue, 26 Jul 2011 00:00:00 +0000

A decision of the Delaware Court of Chancery in late 2010, Narrowstep, Inc. v. Onstream Media Corp.,ÿdemonstrates the unintended consequences that can befall a merger partner who uses superior bargaining power to achieve unusual contractual rights. Pursuant to their Merger Agreement, Narrowstep agreed to yield operational control of its business to Onstream,ÿprior to closing, in order to accelerate integration of the businesses. Despite negotiating multiple delays and purchase price reductions, Onstream chose to terminate the Merger Agreement rather than close the transaction.

New Accredited Investor Net Worth Test to Impact Private Investment

Thu, 21 Jul 2011 00:00:00 +0000

In the Dodd-Frank Act passed last year, Congress required that an individual's primary residence be excluded from the $1million net worth test for accredited investor status. On January 25, 2011, the SEC issued proposed rules to implement the exclusion. The new net worth test will undoubtedly reduce the pool of prospective accredited investors, have a negative impact on companies' prospects for raising capital and will require companies to review and make changes to their offering documents to conform to the new rules.

The State and Municipal Lobbying and Pay-to-Play Regulation of Pension Fund Management Participants

Wed, 20 Jul 2011 00:00:00 +0000

Over the last several years, there has been a trend toward the enactment of general pay-to-play laws and tighter lobbying, campaign finance and ethics laws by many states and localities.ÿ More recently, this trend has included the very specific application of lobbying laws and pay-to-play laws to investment managers.ÿ These laws regulate the government interactions and political contributions of investment advisors, placement agents and other participants in the pension fund management business.ÿ Perhaps the most widely publicized of these laws is the Securities and Exchange Commission's ("SEC") Rule 206(4)-5 under the Investment Advisers Act of 1940.ÿ Generally, this rule is aimed at curtailing "pay-to-play" activity, i.e., preventing advisers from making political contributions or other payments to influence their selection by government officials to provide advisory services for public programs, such as public pension plans and 529 Plans.ÿ Parts of the SEC's rule became effective March 14, 2011 and other parts will be effective September 13, 2011.

Summary of Israeli High-Tech Company Capital Raising - Q2/2011

Tue, 19 Jul 2011 00:00:00 +0000

In the first half of 2011, 285 companies raised $1.048 billion, 82 percent above the $577 million raised in the first half of 2010. The second quarter of 2011 was the best in two years, with 145 Israeli high-tech companies raising $569 million from venture investors - both local and foreign. This reflects a 19 percent increase from $479 million raised by 140 companies in Q1/2011 and a 66 percent increase from $343 million raised by 104 companies in Q2/2010.

Investing in Venture Capital - Limited Partner or Fund of Funds? - Part 2

Thu, 14 Jul 2011 00:00:00 +0000

Huge problems still remain to be solved and massive opportunities loom as major corporations, mid to small businesses all seek competitive advantages via new technologies. The emergence of Software-as-a-Service and Cloud computing are major tectonic shifts occurring in the global software ecosystem. Technology's self-renewing cycle of new wave innovation continues, driven mostly by cost improvements, easier use and vastly greater efficiencies. With new regulatory issues requiring compliance, transparency, privacy, security to high computational performance via cloud computing efficiencies, there's a massive opportunity for a bunch of smart people to do some incredibly great things. There exist a huge community of seasoned serial entrepreneurs with a deep-rooted passion to build new companies. Venture capital enables and to a great extent, propels this entrepreneurial innovation. Understanding how investors gain access to the Venture Capital firms leading funding for these innovations, along with their higher returns, is keenly important.

Investing in Venture Capital - Limited Partner or Fund of Funds? - Part 1

Wed, 13 Jul 2011 00:00:00 +0000

Investor confidence in Venture Capital is at an all time high. The unusually strong Initial Public Offering (IPO) market and its pent up pipeline is due in part over the tremendous success of Venture Capital funded Linkedin's recent public market debut. LinkedIn shares skyrocketed to a high of $92.99 per share from its opening of $45., establishing a market value of $8.9 Billion, virtually overnight. Other high valued IPO candidates include Facebook, Twitter, Groupon, Zygna, to name but just a few. The markets have reinvigorated investor confidence in venture backed companies back to the levels of 2004 when the biggest Internet IPO, Google, followed by Salesforce.com, debuted. This strong IPO pipeline in conjunction with Microsoft's acquisition of SKYPE for $8.5 Billion represents a significant liquidity window for Venture Capitalists and their Limited Partner investors. Though Venture returns have been relatively meager over the past 5 years, Venture Capitalists have been busy re-focusing their firms while continuing to invest and develop their existing portfolios. The timing now seems optimal for realizing liquidity and impressive venture returns.

Delaware Court Declines to Rule that Term Sheet did not Create Binding Obligations

Tue, 12 Jul 2011 00:00:00 +0000

Last fall,ÿPharmAthene, Inc. v. SIGA Technologies, Inc., the Delaware Court of Chancery denied summary judgment to a technology owner who claimed that an unsigned term sheet with a prospective licensee did not create an enforceable contract between the parties. Following the parties' sign-off on the term sheet, the technology "passed some important milestones," leading the technology owner to demand "much more favorable economic terms." Despite a legend to the effect that the unsigned term sheet reflected only non-binding terms, Vice Chancellor Parsons found "a material issue of fact as to whether the parties entered into a binding licensing agreement" that was sufficient to defeat the technology owner's summary judge motion.

Third-Party Plan Releases Require Wide Support by All Creditor Classes

Thu, 7 Jul 2011 00:00:00 +0000

The ultimate objective in a Chapter 11 reorganization is the discharge of pre-existing claims against the debtor. However, in commercial cases, the company's liabilities are often guaranteed by its principals as well, who themselves have not sought bankruptcy protection. Thus, one of the most coveted provisions that the principals will seek to include in the company's reorganization plan is a broad release coupled with injunction and exculpation provisions so that their personal obligations are relieved as part of their company's Chapter 11 case.

Where To Form Your Fund

Wed, 6 Jul 2011 00:00:00 +0000

Canadian Sponsors and managers of private equity and real estate funds will most often choose to utilize a limited partnership domiciled in one of the provinces of Canada, absent reliance upon a statutory provision in Canada's income tax legislation which permits the use of a tax exempt corporation in certain limited circumstances. In addition, foreign sponsors and managers of private equity and real estate funds will often choose to utilize a limited partnership domiciled in one of the Canadian provinces, particularly if they are looking for a vehicle in a reputable jurisdiction which is not American or European. The attractiveness of flow-through tax treatment for investing limited partners more often than not overrides the absence of a detailed corporate governance legislative framework which is available for corporate investment funds. Having selected the limited partnership vehicle, a decision by the manager/sponsor is then required about where in Canada to domicile the limited partnership, taking into account the differing legislation in the various provinces. We set out below the most common criteria which frequently drive this decision as between the most commonly selected Canadian jurisdictions of British Columbia, Alberta, Manitoba, Ontario and QuÇ¸bec.

Fund Raising In The United Arab Emirates To Be Regulated

Tue, 5 Jul 2011 00:00:00 +0000

The Securities and Commodities Authority of the United Arab Emirates ("ESCA") has recently published draft regulations that, if enacted as proposed, will significantly increase the regulation of both foreign and local investment funds active in the United Arab Emirates (the "UAE").