Where is the MoneyTree?
    ABC 01/27 reporting on PwC MoneyTree report
    — VC invested in Atlanta firms down 27.5% in 2...
Where to go pick up your check?
    — Founders, Friends & Family
    — Angels
    — Venture Capital firms
    — State prog...
Business Plan
    Does yours answer:
    — What you do?
      — Who you are like?
      — Your competitors are?
    — Who ...
Executive Summary
    — Obvious – grammar, spelling
    — Format!
       — Visually appealing
       — Easy to find sectio...
Every securities offering is either:

    • Registered
    • Exempt
    • Illegal


    Illegal is L Bad!

6   www.360vlaw...
Securities Act of 1933

    Drafted while looking in a mirror
    — Every securities offering must be registered with
    ...
Help is on the way

    — Regulation D, promulgated pursuant to Section
      4(2) of the Securities Act of 1933
    — 3 s...
Reg D – Rule 506
    — Unlimited offering amount
    — Unlimited number of “Accredited” investors
    — No more than 35 (s...
No General Advertising
     Issuer Cannot: (ie L Bad!)
     — advertise in any media (i.e. newspapers, TV,
       radio, o...
No General Solicitation
     — SEC staff’s view is that there must be a nexus between the
       solicitor and his targets...
Best Defense – keep good records

     — How do you “prove”:
        — no general solicitation or advertising?
        — Y...
Best Defense – keep good records
     — Use an Investor Questionnaire, require it to be
       completed
     — Numbered P...
Reg D – Rule 505
     — Up to $5,000,000
     — Unlimited number of “Accredited” investors
     — No more than 35 UN-accre...
Reg D – Rule 504
     — Can issue up to $1,000,000
     — To qualify, Newco:
        — must not already be registered with...
Summary of Regulation D

     — Rule 506 = J Very Good!
     — Rule 505 = ehhh
     — Rule 504 = not so much
     — Sectio...
UN-accredited investors – are they
     worth the hassle?

     — Non-accredited investors trigger a larger
       disclos...
Form D – E-File is Here
     As of March 16, 2009, all Form D fillings with the SEC
     must be made on a new form that i...
Section 4(2) – Exempted Transactions

     — 4(2) “transactions by an issuer not involving a
       public offering”
     ...
Section 4(2) – Exempted Transactions

     — Why use an old school 4(2)?
        — Classic limited private placement - to ...
Blue Sky – Georgia Style

     — Georgia Uniform Securities Act of 2008
           (effective July 1, 2009)
     — Superse...
GA Limited Offering Exemption
     The exemption formerly known as OCGA 10-5-9(13)
     is now found in OCGA 10-5-11(14).
...
Employee Benefit Plan Exemption

     — Prior GA Law OCGA 10-5-9(7) and 10-5-9(9)
       limited the registration exemptio...
Recap

     — A few, large, experienced investors =
       JGood!
     — Lots of small, novice investors, from
       mult...
Practice Tip: Convertible Notes
     Short Version:
     — Starts as an investor loan
     — Investor gets a convertible p...
Convertible Notes

     Why?
     — Kicks the can down the road on valuation
     — Keeps the capital structure cleaner
  ...
Convertible Note
     But wait, maybe not so simple
     — Is the note secured? By real property, other hard assets,
     ...
Convertible Note: Qualified Financing

     — Type of Stock - An equity financing selling Series
       A Preferred stock
...
Convertible Note: Conversion Discount
     or Warrant Coverage

     Conversion? At a “discount”?
     — $100K Note. 20% C...
Convertible Note: Conversion Discount
     or Warrant Coverage

     Warrant Coverage?
     — $100K Note. 25% Warrant Cove...
The Holy Grail – A Venture Deal
     Transaction Docs
     — Securities Purchase Agreement
     — Restated Certificate of ...
Series A Deal Terms
     — Dividends
     — Liquidation Preference (participating, non-participating)
     — Conversion: o...
Series A Deal Terms
     Control terms - Under GA law (and DE), preferred stock
       votes with common stock on an as-co...
Series A Deal Terms

     Governance
     — Investors to demand right to appoint certain
       number of directors, proba...
Series A Deal Terms

     — Registration Rights
        — Demand Rights
        — Piggyback rights


     — Redemption – r...
Series A Deal Terms

     Agreements with Founders/Management team
     — Restricted stock – retroactive vesting
     — Op...
Raising Capital
Raising Capital
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Raising Capital

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Raising Capital - Practical and Legal Considerations. Presentation to lawyers at CLE seminar January 2010.

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Raising Capital

  1. 1. Where is the MoneyTree? ABC 01/27 reporting on PwC MoneyTree report — VC invested in Atlanta firms down 27.5% in 2009 vs 2008 — Nationally VC down 37% year over year — Georgia companies received $302 million in 2009 — Average VC check (Georgia):$6.9m in 2009, $5.2 in 2008 — Energy and Software hot sectors - $112m, $42.6m — All companies stages down, except later stage up 50% 2 www.360vlaw.com
  2. 2. Where to go pick up your check? — Founders, Friends & Family — Angels — Venture Capital firms — State programs — Federal grants and loans — SBA – Small Business Admin — SBIR – Small Business Investment Companies — Commercial Banks — Specialty banks (SVB, Comerica, RBC) 3 www.360vlaw.com
  3. 3. Business Plan Does yours answer: — What you do? — Who you are like? — Your competitors are? — Who you do it to? — Size and growth rate of market? — How can you defend? – proprietary technology, business model — Management team? Have one! — Use of Proceeds 4 www.360vlaw.com
  4. 4. Executive Summary — Obvious – grammar, spelling — Format! — Visually appealing — Easy to find sections, data — Draws attention to main points — PDF – send using Adobe PDF — 1 pager?? – I am not a believer — Well laid out, not cramped — Images, graphs, white space — Content – tailor your highlights, bullet points to your audience. 5 www.360vlaw.com
  5. 5. Every securities offering is either: • Registered • Exempt • Illegal Illegal is L Bad! 6 www.360vlaw.com
  6. 6. Securities Act of 1933 Drafted while looking in a mirror — Every securities offering must be registered with the SEC except: — Section 3 – Exempt Securities — Section 4 – Exempt Transactions 7 www.360vlaw.com
  7. 7. Help is on the way — Regulation D, promulgated pursuant to Section 4(2) of the Securities Act of 1933 — 3 safe harbors: J Good — Rule 504 — Rule 505 — Rule 506 8 www.360vlaw.com
  8. 8. Reg D – Rule 506 — Unlimited offering amount — Unlimited number of “Accredited” investors — No more than 35 (sophisticated) UN-accredited investors — No specified disclosure format if all offerees Accredited — If UN-accredited offerees – big disclosure — No general advertising — No general solicitation 9 www.360vlaw.com
  9. 9. No General Advertising Issuer Cannot: (ie L Bad!) — advertise in any media (i.e. newspapers, TV, radio, or the Internet) — engage in a mass mailing (snail or email) — conduct informational meetings with potential investors — issue a press release that discusses the existence of the private placement 10 www.360vlaw.com
  10. 10. No General Solicitation — SEC staff’s view is that there must be a nexus between the solicitor and his targets. — A “substantial pre-existing” relationship. — all offerees should be people with whom your company, or any licensed selling agents has a substantial and pre- existing relationship. — Sufficient to enable the Company to determine the financial well-being and investor sophistication of the offeree. 11 www.360vlaw.com
  11. 11. Best Defense – keep good records — How do you “prove”: — no general solicitation or advertising? — You had sufficient knowledge of their financial condition? Sophistication? 12 www.360vlaw.com
  12. 12. Best Defense – keep good records — Use an Investor Questionnaire, require it to be completed — Numbered PPMs/Exec Summaries — Lots of (self serving) disclaimers — This is not an offering — If it is, it is being done only to accrediteds — You must burn after reading — Control Sheet to track above — Due Diligence file archived for transaction 13 www.360vlaw.com
  13. 13. Reg D – Rule 505 — Up to $5,000,000 — Unlimited number of “Accredited” investors — No more than 35 UN-accredited investors (can be UN- sophisticated) — No specified disclosure format if all offerees Accredited — If UN-accredited offerees – big disclosure — No general advertising — No general solicitation — Not a “covered security” under NSMIA, so no state preemption. 14 www.360vlaw.com
  14. 14. Reg D – Rule 504 — Can issue up to $1,000,000 — To qualify, Newco: — must not already be registered with SEC — Aggregate of ALL securities sold in last 12mos > $1m — General solicitation and advertising is permitted if offering is registered under a state reg that permits. — Not a “covered security” under NSMIA, so no state preemption. — Sounds good on paper, rarely used in practice. 15 www.360vlaw.com
  15. 15. Summary of Regulation D — Rule 506 = J Very Good! — Rule 505 = ehhh — Rule 504 = not so much — Section 4(2) = in a pinch 16 www.360vlaw.com
  16. 16. UN-accredited investors – are they worth the hassle? — Non-accredited investors trigger a larger disclosure obligation (more time and money) — Non-accredited investors tend to be more hostile than accredited investors — Non-accredited investors can hinder an acquisition — ANSWER: NO 17 www.360vlaw.com
  17. 17. Form D – E-File is Here As of March 16, 2009, all Form D fillings with the SEC must be made on a new form that includes new disclosures. • Annual Amendment • “Date of First Sale” now defined. Must file within 15 days • New disclosures: • List expected exemption • whether BD or finder used • issuer revenue range. 18 www.360vlaw.com
  18. 18. Section 4(2) – Exempted Transactions — 4(2) “transactions by an issuer not involving a public offering” — Reg D is a safe harbor for 4(2). Provides clarity. — BUT Reg D specifically provides that it is not exclusive 19 www.360vlaw.com
  19. 19. Section 4(2) – Exempted Transactions — Why use an old school 4(2)? — Classic limited private placement - to 1 or 2 institutional investors. If compliance with Reg D is considered a bother. — After-the-fact justification - client comes to you after 18 months of sporadic capital raising by “any means necessary”. 20 www.360vlaw.com
  20. 20. Blue Sky – Georgia Style — Georgia Uniform Securities Act of 2008 (effective July 1, 2009) — Supersedes the Georgia Securities Act of 1973 — Georgia became 15th State to adopt the Uniform Securities Act of 2002 (promulgated by NCCUS) 21 www.360vlaw.com
  21. 21. GA Limited Offering Exemption The exemption formerly known as OCGA 10-5-9(13) is now found in OCGA 10-5-11(14). • Keeps the prohibition on general solicitation/advertising • Keeps 15 Georgia purchaser maximum • New prohibition on paying commissions • “purchase for investment” statement no longer required but the issuer must reasonably believe all GA purchasers are purchasing for investment 22 www.360vlaw.com
  22. 22. Employee Benefit Plan Exemption — Prior GA Law OCGA 10-5-9(7) and 10-5-9(9) limited the registration exemption to employees or the issuer or the issuers affiliates. — NEW OCGA 10-5-11(21) allows grants to consultants and advisors, so long as: — Advisors are natural persons — Advisors are providing services to issuer at time of offering. 23 www.360vlaw.com
  23. 23. Recap — A few, large, experienced investors = JGood! — Lots of small, novice investors, from multiple states = L Bad! 24 www.360vlaw.com
  24. 24. Practice Tip: Convertible Notes Short Version: — Starts as an investor loan — Investor gets a convertible promissory note that will convert into stock on the next (first) round of funding — No immediate dilution to founders, no shareholder to babysit — Investor gets a financial spiff for being early, typically a conversion discount or warrant coverage 25 www.360vlaw.com
  25. 25. Convertible Notes Why? — Kicks the can down the road on valuation — Keeps the capital structure cleaner — Can be seen as win-win — Usually easier & less contentious to negotiate (less time and money) 26 www.360vlaw.com
  26. 26. Convertible Note But wait, maybe not so simple — Is the note secured? By real property, other hard assets, intellectual property? — Is there a personal guarantor? — What is the term? — Is there a price cap? — Can the Newco prepay? What happens to the conversion? — Holder’s discretion? Company discretion? Or automatic? — What if Newco is purchased before maturity or conversion (“Liquidity Event”)? 27 www.360vlaw.com
  27. 27. Convertible Note: Qualified Financing — Type of Stock - An equity financing selling Series A Preferred stock — Amount - Aggregate receipts to the company of at least $1,000,000 — One or more transactions — By certain date 28 www.360vlaw.com
  28. 28. Convertible Note: Conversion Discount or Warrant Coverage Conversion? At a “discount”? — $100K Note. 20% Conversion Discount — Series A comes in at $1 per share. — So, Note holder will pay $0.80/share — $100K in Note turned in for shares at $0.80 a piece = 125,000 Series A shares 29 www.360vlaw.com
  29. 29. Convertible Note: Conversion Discount or Warrant Coverage Warrant Coverage? — $100K Note. 25% Warrant Coverage. — So, Note Holder received penny warrants to purchase Series A shares equal to $125K. — Series A comes in priced at $1 per share. — Note Holder exercises Warrants and receives 125,000 shares. 30 www.360vlaw.com
  30. 30. The Holy Grail – A Venture Deal Transaction Docs — Securities Purchase Agreement — Restated Certificate of Incorporation or Certificate of Designation — Investor Rights Agreement (reg rights, affirmative and negative covenants, preemptive right) — Voting Agreement (board seats, drag along rights) — Right of First Refusal and Co-Sale Agreement (founders give company, then investors ROFR or allows investors to sell into proposed purchase) 31 www.360vlaw.com
  31. 31. Series A Deal Terms — Dividends — Liquidation Preference (participating, non-participating) — Conversion: optional (at holders request), mandatory (QIPO) — Anti-Dilution Protection: structural (splits, recaps), price protection: — Weighted average = (reasonably) J Good for company — Full Ratchet = (ridiculously) L Bad for company — Pay to Play provisions 32 www.360vlaw.com
  32. 32. Series A Deal Terms Control terms - Under GA law (and DE), preferred stock votes with common stock on an as-converted basis unless otherwise provided. — Protective Provisions (aka blocking rights) — Issuance of any other securities or any authorization or increase — Liquidation of company, sale of all or substantially all — Exclusive license — Declaration/payment of dividends — Incur debt over $xyz______ — Any amendment to shareholder agreement, charter, etc. 33 www.360vlaw.com
  33. 33. Series A Deal Terms Governance — Investors to demand right to appoint certain number of directors, probably majority, e.g. Common nominates and elects 2, Series A investors nominate and elect 3 — Observer rights — Information rights 34 www.360vlaw.com
  34. 34. Series A Deal Terms — Registration Rights — Demand Rights — Piggyback rights — Redemption – rarely (ever?) exercised, used as leverage for investor 35 www.360vlaw.com
  35. 35. Series A Deal Terms Agreements with Founders/Management team — Restricted stock – retroactive vesting — Option Plan — Employment Agreements — Invention Assignment — NDA — Non-solicit, non-recruit 36 www.360vlaw.com

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