Igniters: Stanford Entrepreneurs
and Silicon Valley Founders
More Great Events at: meetup.com/Igniter
BEIJING BOSTON BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCI...
Hank Barry – hbarry@sidley.com
● Michigan, Stanford

● Entertainment law practice NYC – film finance, Broadway,
recordings...
New news - Context
● Securities Act of 1933

● During 1980-2000, average of 311 companies per year went public
in the U.S....
New Approach: JOBS Act April 2012
Title I

Title II

Lifts ban on general solicitation and advertising for Reg D,
Rule 506...
Context: Non-public offerings – pre September 23
● Section 4(a)(2) of the Securities Act exempts from registration
"transa...
SEC Rules July 10 - Section 506 NOW (9-23)
● Now the old Section 506 is the new Section 506 (b)
●

That has not changed

●...
SEC Rules , NOW Rule 506(c)
● Permits general solicitation, so long as:
● All investors actually purchasing securities in ...
Accredited Investors
1. a bank, insurance company, registered investment company, business development
company, or small b...
SEC Proposed Rules July 24, 2013
● Published for comment

● Filing of Form D for 506(c) offerings - “in advance of conduct...
One Example – AngelList Syndicates
 If there can be “general solicitation” – then let’s solicit

 AngelList Syndicates –...
General Solicitations
 Absolutely new playing field – syndicates one example
– Is giving margin to AL the answer?

 Role...
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Finance Hacking: Seed, Angel, and Venture Financing - Hank Barry, former CEO of Napster (Igniters Meetup-Oct 8 2013 @vorkspace)

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Learn all the funding options you have for your venture. Learn how to get funded through seed, angel investing and venture financing from Hank Barry, the former CEO of Napster.

Hank, currently a partner at Sidley Austin, has over 20 years experience in funding early stage companies, both as a lawyer and as a partner at Hummer Winblad Venture Partners.

Find more great events at: http://www.meetup.com/igniter

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Finance Hacking: Seed, Angel, and Venture Financing - Hank Barry, former CEO of Napster (Igniters Meetup-Oct 8 2013 @vorkspace)

  1. 1. Igniters: Stanford Entrepreneurs and Silicon Valley Founders More Great Events at: meetup.com/Igniter
  2. 2. BEIJING BOSTON BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. JOBS Act, Investor Syndications Hank Barry Igniters October 9, 2013
  3. 3. Hank Barry – hbarry@sidley.com ● Michigan, Stanford ● Entertainment law practice NYC – film finance, Broadway, recordings ● Law practice here – WSGR – partner ● Hummer Winblad Venture Partners – investing partner ● Napster, CEO and Board member – 2000-2002 ● Back to HWVP – litigation ● Co-founder Sidley Palo Alto office December 2009. 3
  4. 4. New news - Context ● Securities Act of 1933 ● During 1980-2000, average of 311 companies per year went public in the U.S. ● Many investment banks to support - H&Q, Robertson, Montgomery ● Since 2000, the average has been only 102 IPOs per year ● Drop especially precipitous among small firms ● Many have blamed Sarbanes-Oxley Act of 2002 and 2003 Global Settlement’s effects on analyst coverage for the decline in IPO activity ● General sense that more support needed for capital formation for startup businesses 4
  5. 5. New Approach: JOBS Act April 2012 Title I Title II Lifts ban on general solicitation and advertising for Reg D, Rule 506 offerings Title III Crowdfunding exemption for limited size offerings - $1M of new securities in any rolling 12 month period - investor $$ amount limited Title IV Increases limit of Reg A offerings- $5M to $50M Title V Mandatory registration threshold moved from 500 to 2,000 shareholders (less than 500 non-accredited Title VI 5 Emerging growth company IPO rules - Less than $1B in revenue (Twitter) - Confidential filings, 2 years of financials, - Research by investment bank parties ok Applies Title V principle to financial institutions
  6. 6. Context: Non-public offerings – pre September 23 ● Section 4(a)(2) of the Securities Act exempts from registration "transactions by an issuer not involving any public offering.” ● Rule 506 provides objective standards for meeting the requirements of the Section 4(a)(2) non-public offering exemption. Rule 506 is part of Regulation D. ● NO limit on amount raised, but ● No general solicitation or advertising in marketing the securities ● No more than 35 non-accredited investors ● All non-accredited investors must have sufficient knowledge and experience in financial matters ● Give non-accredited investors specified disclosure documents ● Be available to answer questions from non-accredited investors 6
  7. 7. SEC Rules July 10 - Section 506 NOW (9-23) ● Now the old Section 506 is the new Section 506 (b) ● That has not changed ● New Section 506 (c) removes ban on general solicitations ● Permits issuers to solicit prospective investors generally through all forms of communication, whether or not traditionally viewed as general solicitation, so long as: 7
  8. 8. SEC Rules , NOW Rule 506(c) ● Permits general solicitation, so long as: ● All investors actually purchasing securities in the offering qualify as accredited investors or the issuer reasonably believes that they so qualify ● The issuer takes reasonable steps to verify the accredited investor status of each such investor; and ● the other applicable requirements of the Rule 506 safe harbor are met. ● Whether an issuer has taken "reasonable steps to verify” will be an objective determination. ● Some suggested objective criteria are described 8
  9. 9. Accredited Investors 1. a bank, insurance company, registered investment company, business development company, or small business investment company; 2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million; 3. a charitable organization, corporation, or partnership with assets exceeding $5 million; 4. a director, executive officer, or general partner of the company selling the securities; 5. a business in which all the equity owners are accredited investors; 6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person; 7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or 8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes. 9
  10. 10. SEC Proposed Rules July 24, 2013 ● Published for comment ● Filing of Form D for 506(c) offerings - “in advance of conducting any general solicitation activities” ● File an amendment to Form D after termination of the offering ● Require written materials used in 506(c) offerings to include certian legends and other disclosures ● Require (temporarily) submission of written offering materials to the Commission ● Disqualify issuers from using 506 for future offerings until one year has elapsed after the required Form D filings are made (if did not comply within last 5 years) ● Change Form D to add information 10
  11. 11. One Example – AngelList Syndicates  If there can be “general solicitation” – then let’s solicit  AngelList Syndicates – “back” a “lead” investor – Ultimately an infrastructure for flexible approaches  “Lead Angel” gets a percentage of any gains – carry  No management fee  300 syndicates as of last week  How different from a venture fund – Define “lead” – Ad hoc grouping – Loyalty issues – “Accredited investor” – overhead of regulation 11
  12. 12. General Solicitations  Absolutely new playing field – syndicates one example – Is giving margin to AL the answer?  Role of venture firm as manager for institution – Asset class and portfolio theory – New role for fund of funds?  Practical and legal (loyalty) duty of the lead angel – Paying for “leads” exclusive services – that’s a fund  Continuing to invest in later rounds – pay to play  Percentage of “carry” will not stay fixed  Like it’s 1999? 12
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