Business Law & Order: Financing I         Securities Law Basics                          Ann Arbor SPARK                  ...
Agenda What is a Security? What are Securities Laws? Why should I care about Securities Laws Exemptions General Rules...
What is a SecurityDefinition of “security”      “a note; stock; treasury stock; security future; bond; debenture; evidence...
What is a Security Howey Definition of “Investment Contract”    • Investment of money in a    • common enterprise with an ...
What are Securities Laws?“Patchwork” of Federal and State laws designed to regulate the sale of securities in             ...
Why Should I Care about Securities Laws - Registration                              CAVEAT VENDITOR!            Must meet ...
Why Should I Care about Securities Laws - Anti-Fraud Provisions             Federal Law                           State La...
Why Should I Care about Securities Laws - Anti-Fraud Provisions1                         “All that is necessary is that th...
Why Should I Care about Securities Laws - Penalties                               CAVEAT VENDITOR!                        ...
How do I sell Securities - Exemptions1      Exempt         ■    Very specialized under State law     Securities      ■    ...
Exempt Transactions - Federal - Rule 504 Regulation DManner of          No general solicitation or advertising unless regi...
Exempt Transactions - Federal - Rule 505 Regulation DManner of        No general solicitation or advertising.OfferingOffer...
Exempt Transactions - Federal - Rule 506 Regulation DManner of        No general solicitation or advertising.OfferingOffer...
Exempt Transactions - Federal - Rule 701Manner of       Pursuant to a written compensatory plan or contract, including sto...
Exempt Transactions – Michigan                            Limited Offering Exemption (MUSA 202(1)(n)If sale or offer to se...
General Rules                 Advertising                                 Restricted SecuritiesNo general solicitation or ...
Filings- Michigan New Filing Requirement -                                                                      - General ...
Questions and Discussion     Open to Questions and Discussion                                  18
Jeffrey L. LaBine, Esq.      Miller, Canfield, Paddock and Stone, P.L.C.             101 North Main Street, 7th Floor     ...
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February 2011 - Business Law & Order - Jeffrey L. LaBine

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Cash is the lifeblood of any business, especially early-stage, high-growth enterprises. We will discuss: The Capital Fundraising Plan (know how much you need to raise and when to raise it); Grant Funding (what could be better than money you don’t have to repay and doesn’t cost you equity); Securities Law Basics (how to avoid personally obligating yourself to give back every dime of investor money if things don’t go well); How to Structure Investor Funding (what’s the best way for you to take in investor money). And….of course, your questions!

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February 2011 - Business Law & Order - Jeffrey L. LaBine

  1. 1. Business Law & Order: Financing I Securities Law Basics Ann Arbor SPARK SPARK Central Ann Arbor, Michigan February 21, 2011UNITED STATES FLORIDA MICHIGAN CANADA ILLINOIS MEXICO NEW YORK POLAND CANADA CHINA CHINA millercanfield.com POLAND 1
  2. 2. Agenda What is a Security? What are Securities Laws? Why should I care about Securities Laws Exemptions General Rules Filings Questions & Discussion Contact Information 2
  3. 3. What is a SecurityDefinition of “security” “a note; stock; treasury stock; security future; bond; debenture; evidence of indebtedness; certificate of interest or participation in a profit-sharing agreement; collateral trust certificate; preorganization certificate or subscription; transferable share; investment contract; voting trust certificate; certificate of deposit for a security; fractional undivided interest in oil, gas, or other mineral rights; put, call, straddle, option, or privilege on a security, certificate of deposit, or group or index of securities, including an interest in or based on the value of that put, call, straddle, option, or privilege on that security, certificate of deposit, or group or index of securities; put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency; an investment in a viatical or life settlement agreement; or, in general, an interest or instrument commonly known as a "security"; or a certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. 3
  4. 4. What is a Security Howey Definition of “Investment Contract” • Investment of money in a • common enterprise with an • expectation of profits • solely from the efforts of others Efforts of others: -  Howey uses “Solely” most courts moreMoney = flexible: Consideration  Whether efforts of se: Common Enterpri persons other than ant”  horizontal commo nality: Is there a investor are “signific or profits among to the “failure or pooling of revenues investors success of the enterprise ity: Are the  vertical commonal ndent upon the inve stor’s fortunes depe of the promoter efforts and success 4
  5. 5. What are Securities Laws?“Patchwork” of Federal and State laws designed to regulate the sale of securities in the United States generally and each state specifically Federal Law State LawSecurities Act of 1933 Each State has its own state specificSecurities Exchange Act of 1934 securities laws:Dodd – Frank Act ► Uniform Securities Act of 2002 - MichiganPublic Utility Holding Company Act of 1935 ► Uniform Securities Act of 1956Trust Indenture Act of 1939 ► Martin Act – New YorkInvestment Company Act of 1940Investment Advisors Act of 1940 5
  6. 6. Why Should I Care about Securities Laws - Registration CAVEAT VENDITOR! Must meet requirements before offering or selling a security Federal Law Michigan Law“Unless a registration statement is in  A person shall not offer or sell a effect . . . it shall be unlawful…to security in Michigan unless 1 or more of sell [a] security.” Sec. 5(a)(1) the following are met: – The security is a “federal“It shall be unlawful…to offer to sell or covered security” offer to buy…any security, unless a – The security, transaction, or offer registration statement has been filed as to such security.” Sec. 5(c) is exempted from registration under sections 201 to 203 – The security is registered under the act 6
  7. 7. Why Should I Care about Securities Laws - Anti-Fraud Provisions Federal Law State Law Securities Act of 1933 §12(2)  Uniform Securities Act of 2002 §501 Securities Act of 1933 §17(a) Securities Exchange Act of 1934  Uniform Securities Act of 1956 §101 §10(b) Securities Exchange Act of 1934  Martin Act §352 §15(c)(1) Exchange Act Rule 10b-5 Exchange Act Rule 15C1-2 7
  8. 8. Why Should I Care about Securities Laws - Anti-Fraud Provisions1 “All that is necessary is that the facts withheld be material in theMaterial Information sense that a reasonable investor might have considered them important in making his decision“2 Affirmative Fraud “Employ a device, scheme or artifice to defraud”3 Sins of Omission “Make an untrue statement of a material fact or omit to state a fact necessary in order to make the statements made, in light of the circumstance under which they were made, not misleading” 8
  9. 9. Why Should I Care about Securities Laws - Penalties CAVEAT VENDITOR! Implications for failure to comply Federal Law Michigan Law Civil Fines  Civil Fines Criminal Penalties  Criminal Penalties Civil Lawsuits  Rescission Rights  Civil Lawsuits 9
  10. 10. How do I sell Securities - Exemptions1 Exempt ■ Very specialized under State law Securities ■ Virtually no use to Start-ups2 ■ Securities Act of 1933§4(2) “transactions by an issuer not involving Exempt Transactions a public offering”  Regulation D Rules 501-506 ■ Uniform Securities Act of 2002 §202 10
  11. 11. Exempt Transactions - Federal - Rule 504 Regulation DManner of No general solicitation or advertising unless registered in a state requiring use ofOffering a substantive disclosure document or sold under state exemption for sales to accredited investors with general solicitation.Offeree and No requirements.PurchaserRequirementsInformation Delivery of substantive disclosure document required for unrestricted securitiesRequired status. Form U-7 meets requirements.Filing File Form D with SEC not later than 15 days after first sale. Filing not aRequirement condition of the exemption.Blue Sky Need to comply with state blue sky law by registration (Form U-7 may be available) or state exemption (MUSA §202(1)(n)).Other Factors Represents substantial federal delegation to states. Adopted under Section 3(b). Safe harbor from integration. 11
  12. 12. Exempt Transactions - Federal - Rule 505 Regulation DManner of No general solicitation or advertising.OfferingOfferee and No limitation on offerees. Unlimited accredited investors and 35 non-accreditedPurchaser investors. “Accredited investors” include certain institutions; directors, executiveRequirements officers and general partners of issuer; natural persons who with spouse meet $1 million net worth (excluding value of primary residence, net of debt secured by the residence up to the value of the residence) or $300,000 income test, or alone meet $200,000 income test; and entities with over $5,000,000 total assets or owned solely by accredited investors. No qualifications for purchasers under Rule 505.Information None if all purchasers are accredited investors. For any non-accredited investors,Required (a) if 1934 Act reporting company, certain reports or filings or (b) if non-reporting, company, (1) Regulation A narrative information for eligible issuers and otherwise narrative information required by Part 1of available registration form and (2) the following audited financials: (i) up to $2,000,000, a current balance sheet, (ii) up to $7,500,000, the financial information required by Part 1 of Form SB-2 and (iii) over $7,500,000, the financial information require by the available form (with some relief possible); also, a description of resale restrictions. Make available certain other information and opportunity to ask questions.Filing File Form D with SEC not later than 15 days after first sale. Filing not a conditionRequirement of the exemption.Blue Sky Coordinates with state Uniform Limited Offering Exemption (ULOE).Other Factors All conditions must be met but subject to Rule 508 substantial compliance relief. Adopted as safe harbor under Section 3(b). Safe harbor from integration. 12
  13. 13. Exempt Transactions - Federal - Rule 506 Regulation DManner of No general solicitation or advertising.OfferingOfferee and No limitation on offerees. Unlimited accredited investors and 35 non-accreditedPurchaser investors. “Accredited investors” include certain institutions; directors, executiveRequirements officers and general partners of issuer; natural persons who with spouse meet $1 million net worth (excluding value of primary residence, net of debt secured by the residence up to the value of the residence) or $300,000 income test, or alone meet $200,000 income test; and entities with over $5,000,000 total assets or owned solely by accredited investors. All non-accredited investors under Rule 506 must be sophisticated alone or with purchaser representatives.Information None if all purchasers are accredited investors. For any non-accredited investors,Required (a) if 1934 Act reporting company, certain reports or filings or (b) if non-reporting, company, (1) Regulation A narrative information for eligible issuers and otherwise narrative information required by Part 1of available registration form and (2) the following audited financials: (i) up to $2,000,000, a current balance sheet, (ii) up to $7,500,000, the financial information required by Part 1 of Form SB-2 and (iii) over $7,500,000, the financial information require by the available form (with some relief possible); also, a description of resale restrictions. Make available certain other information and opportunity to ask questions.Filing File Form D with SEC not later than 15 days after first sale. Filing not a conditionRequirement of the exemption.Blue Sky Exempt as “covered security” under NSMIA and Federal Covered Security MUSA §201(f).Other Factors All conditions must be met but subject to Rule 508 substantial compliance relief. 13 Adopted as safe harbor under Section 4(2). Safe harbor from integration.
  14. 14. Exempt Transactions - Federal - Rule 701Manner of Pursuant to a written compensatory plan or contract, including stock options.Offering Not available for non-compensatory (i.e., capital raising) offerings.Offeree and Employees, directors, officers and employee-type consultants (including familyPurchaser members receiving securities by gift or domestic relations order) providing bonaRequirements fide services other than in connection with a securities offering. Consultants as defined for Form S-8. No limitation on number.Information No requirements for sales of less than $5 million, except for delivery of a copy ofRequired the written plan or contract. More than $5 million requires specific disclosure, including risks and financial statements.Filing None.RequirementBlue Sky MUSA §202(1)(u) or state rules may provide an exemption.Other Factors Exemption adopted under Sections 3(b) and 28 for compensatory plans for employees and consultants. Exemption remains available for exercise of options outstanding when issuer becomes reporting company. No integration or aggregation. 14
  15. 15. Exempt Transactions – Michigan Limited Offering Exemption (MUSA 202(1)(n)If sale or offer to sell securities by or on behalf of issuer is part of a single issue in which there are no more than 25purchasers (in addition to those purchasers who are institutional investors, federal covered investment advisers orare otherwise exempted by rule or order under the new act) in Michigan during any 12 consecutive months, so longas: (i) no general solicitation or general advertising is used in connection with the offer to sell or sale of the securities, (ii) no commission or other remuneration is paid or given, directly or indirectly, to anyone other than a broker-dealer or agent registered in accordance with the new act, and (iii) the issuer reasonably believes that all Michigan purchasers (other than those purchasers who areinstitutional investors, federal covered investment advisers or are otherwise exempted by rule or order under the new act)are purchasing for investment 15
  16. 16. General Rules Advertising Restricted SecuritiesNo general solicitation or advertising Restrictions on transfer required Includes ads, articles or published notices Shares must be purchased for and seminars where attendees are invited investment, and not for resale by general solicitation or advertising Legend on certificate referring to restrictions on transferability 16
  17. 17. Filings- Michigan New Filing Requirement - - General “Blue Sky Law” Filing Requirement - e filing of er may requir A rule or ord spect to a certain items* with re  Requirements: investment security issued by an ral covered  SEC Form D company that is a fede t igan and is no of Process se curity in Mich t.  Consent to Service under new ac othe rwise exempt g fee of $100 v e y et been  Non-refundable filin  No rule s or orders ha ys of first sale of  To be filed within 15 da issued rity" in Michigan the "f ederal covered secu urrently being  Pro posed rules c er on the first of: e seen wheth  First sale occurs up prep ared - yet to b ted to rules adop rules will be similar  (i) receipt of funds, OR s in other state agreement  (ii) a signed subscription (or equivalent)* Items that could be required: s into an escrow N ote: receipt of fundBefore initial offer of a federal covered security in Michigan: all ing requirementrecords that are part of a federal registration statement filed arra ngement triggers filwith the SEC and the Securities Act, consent to service ofprocess signed by issuer, and $500 fee.After initial offer of a federal covered security in Michigan, allrecords part of an amendment to a federal registration 17statement filed with the SEC under the Securities Act.
  18. 18. Questions and Discussion Open to Questions and Discussion 18
  19. 19. Jeffrey L. LaBine, Esq. Miller, Canfield, Paddock and Stone, P.L.C. 101 North Main Street, 7th Floor Ann Arbor, Michigan 48104 Email: labine@millercanfield.com Telephone: (734) 668-8801UNITED STATES FLORIDA MICHIGAN CANADA ILLINOIS MEXICO NEW YORK POLAND CANADA CHINA CHINA millercanfield.com POLAND 19 19

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