Raising capital post september 23

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New SEC laws permit companies raising funds to make general solicitations (public offerings) for the sale of securities under SEC Rule 506(c), but not without strings attached. Companies making general solicitations will only be able to sell to accredited investors and must take reasonable steps to verify accredited investor status

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Raising capital post september 23

  1. 1. Raising Capital Under the New General Solicitation Rules September 2013 Bo Sartain, CEO © 2013 VentureDocs Inc., all rights reserved 1
  2. 2. • General Solicitation prohibited unless issuer is “going public” • Securities Act Section 4(2) exempts sale of securities sold “not in a public offering” • Rule 506 of Regulation D, a “safe harbor” under Section 4(2) – Unlimited number of “accredited investors” – Unlimited dollars that can be raised – Up to 35 non-accredited investors, but watch out, if you have non-accredited investors there are information disclosure requirements under Rule 502 (PPM) and the non- accredited investors must meet “sophistication” requirements Historical Overview © 2013 VentureDocs Inc., all rights reserved 2
  3. 3. “Quiet” 506 Transactions – Old Securities Act Section 4(2) is now 4(a)(2) – Old Rule 506 is now Rule 506(b) – No “general solicitation” – But, for 506(b) transactions, it is likely that the Form D will be required in the future (it has been optional) (this is a proposed rule) The old rules are still in place (technically) Two Ways to Raise Capital © 2013 VentureDocs Inc., all rights reserved 3
  4. 4. “Noisy” 506 Transactions – New Section 506(c) – General solicitation is allowed – All purchasers must be accredited investors. No exceptions – Issuer must take “reasonable steps” to verify that all investors are accredited investors • Self-certification (a questionnaire or representations and warranties) is not enough Effective Date: September 23, 2013 Two Ways to Raise Capital © 2013 VentureDocs Inc., all rights reserved 4
  5. 5. • Obvious General Solicitations  A website accessible to the general public  Widely disseminated email or social media  Print media, such as a newspaper  Television, Radio • Not Obvious, but they are General Solicitations  A solicitation at a seminar where attendees have been invited by general solicitation or general advertising, such as an unrestricted website DANGER: Pitch Day/Demo Day Competitions (Rice Alliance, Tech Wildcatters, Texas Venture Labs) are general solicitations What is a General Solicitation? © 2013 VentureDocs Inc., all rights reserved 5
  6. 6. • Solicitation of Angels and Angel Groups on Gust, AngelList, EquityNet, etc. ??? “An issuer that solicits new investors through a website accessible to the general public, through a widely disseminated email or social media solicitation, or through print media, such as a newspaper, will likely be obligated to take greater measures to verify accredited investor status than an issuer that solicits new investors from a database of pre-screened accredited investors created and maintained by a reasonably reliable third party.” DANGER: Did the SEC just say that submitting offering materials through Gust or AngelList is a general solicitation? What is a General Solicitation? © 2013 VentureDocs Inc., all rights reserved 6
  7. 7. • Any General Solicitation makes the whole offering subject to the 506(c) rules – A perfectly good 4(a)(2) or 506(b) offering becomes a 506(c) offering if any general solicitation is made. • Integration under Rule 502(a) – 6-month look forward and backward – A perfectly good 4(a)(2) or 506(b) offering becomes tainted by a subsequent 506(c) offering if the two are integrated. DANGER: What you do later may invalidate what you have done before What is a General Solicitation? © 2013 VentureDocs Inc., all rights reserved 7
  8. 8. • Facts and circumstances test/“principles- based approach” • Factors to consider – The nature of the purchaser and the type of accredited investor – The amount and type of information the issuer has about the purchaser – The nature of the offering, such as the manner in which the purchaser was solicited • Examples – High minimum investment makes it more likely they are accredited – Solicitation to the public at large versus a database of pre-screened accredited investors requires more verification steps What are “Reasonable Steps” © 2013 VentureDocs Inc., all rights reserved 8
  9. 9. • Non-Exclusive Safe Harbor for Individuals – Invalidated if issuer has knowledge that an investor is not an accredited investor – Income Test • Investor has earned at least $200K (or $300K together with spouse) in each of the last 2 years and is expected to earn at least that much in the current year • Review of IRS forms that report revenue (W-2, Form 1099, Schedule K-1 or filed Form 1040) • Written representation from such person that he or she has a reasonable expectation of reaching the income level in the current year. DANGER: There may be no way to rely on this safe harbor in the first quarter of any year before W-2s, 1099s, K-1s or 1040s are prepared. What are “Reasonable Steps” © 2013 VentureDocs Inc., all rights reserved 9
  10. 10. • Non-Exclusive Safe Harbor for Individuals – Net Worth Test • Investor has a net worth of $1,000,000 excluding primary residence • A written representation that all liabilities necessary to make a net worth determination have been disclosed • Assets: review of bank statements, brokerage statements, other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports issued by independent third parties • Liabilities: review of consumer report from at least one of the nationwide consumer reporting agencies • Data may not be more than 3 months old What are “Reasonable Steps” © 2013 VentureDocs Inc., all rights reserved 10
  11. 11. • Non-Exclusive Safe Harbor for Individuals – Reliance on Third Parties • Registered broker-dealer, SEC-registered investment advisor, a licensed attorney or a CPA • Written confirmation that such person has taken reasonable steps within the last 3 months to verify that the purchaser is an accredited investor. – Grandfather provision for existing investors • Issuers do not have to take reasonable steps to verify accreditation for existing investors who self-certified before in 506 transactions What are “Reasonable Steps” © 2013 VentureDocs Inc., all rights reserved 11
  12. 12. 1. The issuer closes a new round with investors that the issuer contacted directly and with whom the issuer has a prior relationship. 2. Same facts as 1, but then the issuer then wishes to finish out the round and does a quick pitch at the Rice Alliance. 3. Same facts as 1. 5 months later, the issuer launches a new round by making an announcement on its website. DANGER: It may be virtually impossible for startups to avoid general solicitation. Examples © 2013 VentureDocs Inc., all rights reserved 12
  13. 13. • Disqualifies the transaction from Rule 506(b) and 506(c) • New Rule 506(d) • Disqualification occurs if: – issuer, any predecessor of the issuer, any affiliated issuer, any director, executive officer, other officer participating in the offering, general partner or managing member of the issuer, any beneficial owner of 20% or more of the issuer’s outstanding voting equity securities, or any promoter or placement agent (or their managers, officers and directors) – has been convicted of a felony or misdemeanor involving securities, is subject to any order or injunction involving securities, is barred from engaging in the business of securities, banking or insurance, has had a securities license revoked Basically, disqualification occurs if anyone connected with the transaction or issuer has a history with a securities criminal conviction or disciplinary action “Bad Actor” Provisions under Dodd-Frank Act © 2013 VentureDocs Inc., all rights reserved 13
  14. 14. • Stay tuned, new proposed rules may: – require filing an “Advance Form D” 15 days before any general solicitation is made for 506(c) transactions – require filing a Form D within 15 days after the first sale of securities in the 506(b) or 506(c) offering (This is already the rule) – require filing a Form D within 30 days after the offering is completed or cancelled (for 506(b) and 506(c)) – require filing an updated Form D at least annually if the offering is ongoing – allow a 30 day cure period for 1 late form D filing in any offering – require specific legends and other disclosures to be added to all offering documents – require filing all offering documents used in a general solicitation with the SEC no later than the first day a general solicitation is made – increase the information required to be filed in Form D DANGER: failure to comply will automatically disqualify an issuer from using Rule 506(b) and 506(c) for 1 year following the cure of any failure to file a Form D or a breach of these new rules Proposed Regulation D Rules © 2013 VentureDocs Inc., all rights reserved 14
  15. 15. • Assume that your offering will contain a general solicitation • Assume that offerings will be integrated together • “Best Practice” may be to file Advance Form D immediately if/when proposed rules become effective • Ensure company profiles on Angellist, Gust, etc. do not indicate your company is raising capital (why take that chance?) Takeaways © 2013 VentureDocs Inc., all rights reserved 15
  16. 16. Contact: Bo Sartain 214.403.8039 bo@venturedocs.com © 2013 VentureDocs Inc., all rights reserved 16

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