1. Nutter
McClennen
&
Fish
LLP
Attorneys
at
Law
Fundraising with Angels
Impact of the JOBS Act and New Advertising/Solicitation Rules
February 20, 2014
Jeremy Halpern
Partner, Nutter McClennen & Fish LLP
Thomas V. Powers
Associate, Nutter McClennen & Fish LLP
Seaport
West,
155
Seaport
Boulevard,
Boston
MA
02210
www.nutter.com

2. Jeremy
Halpern
Biography
› Nutter
McClennen
&
Fish
LLP
-­‐
Partner;
Director
of
Biz
Dev,
ECG
• Top
10
Boston
law
firm
• Represent
clients
in
technology,
hardware,
software,
mobile,
medtech
health
IT,
biotechnology,
cleantech
CPG,
consumer
electronics
› MassVentures
–
Director
&
Investment
Committee
Member
• The
Venture
Arm
of
the
Commonwealth:
providing
seed
and
early
stage
venture
funding
to
high
growth
technology
startups
› Angel
Investor
–
Private
investor
in
multiple
technology
and
consumer
products
companies
› The
Capital
Network
–
Director;
Past
Executive
Chairman
• Providing
education,
resources
and
community
to
high
growth
entrepreneurs
and
angel
investors
as
they
navigate
the
early
stage
capital
process
› Previously:
Co-­‐Founder/VP
Biz
Dev
MobileTek
Corporation
› UC
Berkeley,
B.A.
(Go
Bears!);
UCLA
School
of
Law,
J.D.;
Admitted
to
practice,
CA
and
MA
2

3. Thomas
V.
Powers
Biography
Thomas
V.
Powers
is
an
associate
in
the
Business
Department
at
Nutter
McClennen
&
Fish
LLP
and
is
a
member
of
the
firm’s
Banking
and
Financial
Services
and
Emerging
Companies
practice
groups.
He
works
with
a
broad
range
of
institutional
and
early-­‐stage
clients
on
corporate
law
matters,
including
entity
formation,
corporate
governance,
equity
financings,
securities
laws
and
mergers
and
acquisitions.
Thomas
gained
previous
legal
experience
working
as
an
intern
in
the
Boston
office
of
the
U.S.
Securities
and
Exchange
Commission
and
as
a
judicial
intern
for
the
Honorable
Robert
J.
Kane
of
the
Massachusetts
Superior
Court.
During
law
school,
Thomas
served
as
an
articles
editor
for
the
Review
of
Banking
&
Financial
Law.
Education
Boston
University
School
of
Law,
J.D.
cum
laude
Thomas
has
written
extensively
on
JOBS
Act
implementation,
including
issues
relating
to
private
placements
under
Rule
506(c)
and
the
impact
of
proposed
crowdfunding
rules
on
issuers
and
financial
intermediaries.
He
has
participated
in
previous
TCN
events
on
JOBS
Act
implications
for
startups.
The
Catholic
University
of
America,
B.A.
magna
cum
laude
Bar
Admissions
Massachusetts
New
York
3

4. Nutter’s
Emerging
Companies
Group
As
a
full
service
firm
with
a
dedicated
team
of
lawyers
in
the
Emerging
Companies
Group,
Nu=er
supports
ventures
across
the
innova>on
economy:
• Biomedical
Devices
• Biotechnology
• Pharmaceu6cals
• Life
sciences
• So:ware
• Hardware
• Informa6on
Technology
• Cleantech
• Mobile
• Consumer
Products
• Analy6cs
• New
Media
• Robo6cs
We
provide
entrepreneurs
with
the
full
spectrum
of
support
that
they
need
to
build
their
businesses
and
realize
their
visions:
• En6ty
Forma6on
• Founders
Agreements
• Financing
Strategy
and
Key
Introduc6ons
• Angel
&
Venture
Capital
• Debt
Financing
• Private
Equity
• Ini6al
Public
Offerings
• Private
Placements
• Strategic
Partnering
• Mergers
&
Acquisi6ons
• Employment
support
• Equity
Compensa6on
• Tax
Strategy
• Li6ga6on
• Licensing
• Distribu6on
• Manufacturing
• Supply
Agreements
• Electronic
Commerce
• Patent
and
Trademark
Strategy
&
Prosecu6on
4

5. Fundraising
with
Angels
Impact
of
the
JOBS
Act
and
New
Advertising/Solicitation
Rules
• Overview
of
U.S.
Securities
Law




Regulatory
Scheme
for
Startups
What
is
a
“Security”?
Registration
or
Exemption
Liability
• Fundraising
with
Angels
 Private
Placements
under
Rules
506(b)/(c)
 Pros
and
Cons
of
Rule
506(b)
vs.
Rule
506(c)
Offerings
 What
is
General
Solicitation?
• Rule
506:
Rules
of
the
Road
5

6. Overview
of
U.S.
Securities
Law
Regulatory
Scheme
for
Startups
• Regulators:
– U.S.
Securities
&
Exchange
Commission
– State
Regulatory
Agencies
• Securities
Laws:
– Federal
Law
(Primary)
• Securities
Act
of
1933
• Securities
Exchange
Act
of
1934
– SEC
Rules
and
Regulations
– State
Securities
Laws
• Scope
of
Regulation:
Companies
that
offer
and
sell
“securities”
6

7. Overview
of
U.S.
Securities
Law
What
is
a
"Security"?
Federal
securities
law
defines
the
term
“security”
very
broadly
to
include,
among
many
other
things:
– Stock
(including
Options
and
Warrants)
– Convertible
Debt
– Membership
Interests/Profit
Sharing
7

8. Overview
of
U.S.
Securities
Law
Registration
or
Exemption
• A
Company
that
is
offering
or
selling
securities
must
either:
1. Register
those
Securities
with
the
SEC
(i.e.
engage
in
an
Initial
Public
Offering
(IPO));
or
2. Find
a
Registration
Exemption
• Most
Frequent:
Rule
506
of
Regulation
D
8

9. Overview
of
U.S.
Securities
Law
Liability
Failure
to
Register
or
Find
an
Exemption:
Civil
Liability
(a) SEC

Entitled
to:
– Disgorgement
of
proceeds
– Civil
penalties
– Prejudgment
interest
(b) Investors

Entitled
to:
– Rescission
of
transaction
– Payment
for
any
losses
associated
with
the
transaction
9

10. Fundraising
with
Angels
Private
Placements
Under
Rules
506(b)/(c)
Rule
506
of
Regulation
D
–
Two
Exemptions:
1. Rule
506(b):
Pre-­‐JOBS
Act
Exemption
(a) No
limit
on
maximum
offering
amount
(b) General
solicitation
and
advertising
prohibited
(c) Permits
sales
to
unlimited
number
of
accredited
investors
and
up
to
35
non-­‐accredited
investors
• “Accredited
Investor”
includes:
1)
Individuals
with
$1
million
net
worth
or
$200,000
annual
income
2)
Private
Equity,
Venture
Capital,
and
Angel
Firms
• Self-­‐certification
permitted
10

11. Fundraising
with
Angels
Private
Placements
Under
Rules
506(b)/(c)
2.
Rule
506(c):
JOBS
Act-­‐Created
Exemption
(a) No
limit
on
maximum
offering
amount
(b) General
solicitation
and
advertising
permitted
(c) Permits
sales
to
accredited
investors
only
(unlimited
number)
and
issuer
must
take
reasonable
steps
to
verify
each
purchaser’s
accredited
investor
status
• “Principles-­‐based”
method
of
verification
–
look
to
facts
and
circumstances
• Non-­‐Exclusive
Safe
Harbors
for
Natural
Persons:
o
Reviewing
copies
of
IRS
forms
that
report
income;
o Obtaining
written
confirmation
of
accredited
investor
status
from
a
licensed
broker,
investment
adviser,
accountant
or
attorney
• Self-­‐certification
not
permitted
(unless
investor
participated
in
previous
506(b)/(c)
offering)
11

12. Fundraising
with
Angels
Pros
and
Cons
of
Rule
506(b)
vs.
506(c)
Offerings
Rule
506(b)
Rule
506(c)
Pros
Cons
Pros
Cons
Self-­‐Certification
of
Accredited
Investors
No
general
solicitation
or
advertising
General
solicitation
and
advertising
permitted
Reasonable
verification
burden
on
issuer;
no
self-­‐
certification
Angel
investors
may
be
more
comfortable
with
506(b)
(e.g.,
no
reasonable
verification
requirement)
Reasonable
verification
burden
may
chill
investment
by
angel
groups
and
other
private
investors
Can
sell
to
non-­‐accredited
investors
(but:
significant
additional
disclosure
requirements)
Proposed
SEC
rules
may
require
additional
hoops
(e.g.,
pre-­‐use
disclosure
of
ads
to
SEC;
Form
D
pre-­‐filing)
Can
change
from
506(b)
to
506(c)
offering
Generally
cannot
change
from
506(c)
to
506(b)
offering
Section
4(a)(2)
fallback
exemption
available
No
Section
4(a)(2)
fallback
exemption
No
sales
to
non-­‐accredited
investors
12

13. Fundraising
with
Angels
What
is
General
Solicitation?
What
is
“General
Solicitation”?
Congress
and
the
SEC
have
not
defined
general
solicitation.
Less
Likely
More
Likely
Unknown
Offering
to
individual
investors
with
whom
you
have
a
substantive
pre-­‐existing
relationship
Television,
radio,
print
media
or
social
media
advertisements
Demo
Days,
pitch
events
and
venture
fairs
Meeting
individual
investors
through
personal
introductions
Blast
emails
to
distribution
lists
regarding
offering
Crowdfunding
websites
and
fundraising-­‐oriented
social
networks
(e.g.,
Angellist,
WeFunder,
Gust)
Offering
to
close
friends
and
family
Discussing
offering
with
press/
bloggers
13

14. Rule
506:
Rules
of
the
Road
Key
Initial
Considerations:
• Who
are
my
existing
investors?
• When
was
my
last
offering
and
on
which
exemption
did
I
rely?
• Will
the
angel
groups
I
am
targeting
invest
in
issuers
that
conduct
a
Rule
506(c)
offering?
• Have
I
participated
in
any
activities
in
the
past
six
months
that
might
constitute
an
advertisement
of
my
securities
offering
or
a
general
solicitation
to
potential
investors?
Do:
• Keep
track
of
Company
marketing
activities
• Determine
whether
angel
groups
will
invest
in
Rule
506(c)
raises
• Stay
up-­‐to-­‐date
on
rule
changes
to
Rule
506(b)
and
(c)
offerings
Do
Not:
• Advertise
your
offering
or
generally
solicit
investors
without
first
speaking
to
a
qualified
securities
lawyer
• Advertise
your
offering
or
generally
solicit
investors
unless
you
are
certain
about
conducting
a
Rule
506(c)
(there
is
no
going
back
to
506(b))
14