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Bob White is a business, corporate and technology lawyer. He is a member of Gunster’s Corporate and Securities and Corporate Governance Practice Groups, and he is the Co-Chair of the Technology and Emerging Companies Practice Group. He works with innovative companies, entrepreneurs and in-house lawyers on a wide variety of topics including mergers and acquisitions, venture capital and private equity investments, corporate structuring, corporate contracts and technology matters.

Corporate Venture Capital
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Corporate venture capital has quickly developed into a major funding source for startup companies. This type of startup funding is available to some innovative startups and early stage companies, and the dollars involved are significant. This all sounds great, but is this type of funding right for your startup?

According to the National Venture Capital Association and PWC’s Money Tree survey, 905 corporate venture capital deals were closed during 2015 with $7.5 billion invested (primarily in high growth startup companies). These transactions comprised 21% of the total number of venture capital deals closed in 2015 and represented 13% of the total venture capital funds invested in that year. Not surprisingly, the biggest chunk of these investments went to software companies ($2.5 billion in 389 deals, which represented 33% of all corporate venture deals in 2015), while biotech deals were second ($1.2 billion in 133 deals, which represented 16% of all corporate venture deals that year).

Many large and familiar companies have implemented venture capital programs. Some of the most well-known corporate venture funds are Alphabet’s GV (formerly Google Ventures), Microsoft Ventures, and Salesforce Ventures. Most of these corporate venture funds are sponsored by large technology companies, but Airbus Group Ventures is an example of a fund established by a non-technology company in a specific industry space. While each of these programs has some independent characteristics, the commonalities are a strong desire to foster innovation (either generally or in specific industry segments) and an ability to step out of the normal corporate mold and commit funds to situations with higher risk profiles when compared to normal corporate investments like real estate and straightforward corporate industry acquisitions.

There are a number of significant potential advantages associated with corporate venture capital. For me, two of the biggest potential advantages are the broader investment scope and the more long-range expectations which may result in a corporate venture investment as compared to a normal external venture investment. A corporate venture capital investor can
Continue Reading Corporate venture capital investments – Good for startups?

Photo by Dieter Drescher
Photo by Dieter Drescher

After much anticipation, the SEC adopted final crowdfunding rules on October 30, 2015. These rules (called Regulation Crowdfunding) will become effective 180 days after they are published in the Federal Register. Here are links to the SEC’s press release and a helpful summary of these new rules as well as some good background commentary from Chair White. Click here for the final rules. VentureBeat also recently posted a helpful and practical summary of Regulation Crowdfunding.

There is a lot of optimism regarding these crowdfunding rules and their potential positive impact on capital raising, and there is certainly a high degree of good intent behind these rules. I continue to doubt, however, that crowdfunding will have a major impact on capital raising for many companies because of the associated regulatory requirements and high costs (particularly the costs associated with audited financial statements and the use of an intermediary).

The most important components of these crowdfunding rules are:

  • Issuers can raise up to $1 million during each 12 month period in crowdfunding offerings.
  • There are substantial limits on the amounts that an investor can invest. If an investor has less than $100,000 in either annual income or net worth, that investor can only invest the greater of $2,000 or 5% of their annual income or net worth in all crowdfunding transactions over a 12 month period. Investors whose annual income and net worth are both at least $100,000 can invest up to 10% of their annual income or net worth in all crowdfunding transactions over a 12 month period. It is important to note that during this 12 month period the aggregate amount of securities sold to an investor in all crowdfunding transactions cannot exceed $100,000.
  • Certain entities, such as Exchange Act reporting companies, non-U.S. companies, “blank check” companies and certain disqualified companies, are not eligible to use Regulation Crowdfunding.
  • Issuers must submit detailed reports to the SEC and to investors in connection with each crowdfunding transaction and also annually. These reports must contain, among other things, information about the issuer’s officers, directors and principal shareholders, related party transactions and the use of proceeds. Audited financial statements (prepared by an independent accounting firm) are generally required, although there is some relief from the audit requirement for certain issuers who are utilizing Regulation Crowdfunding for the first time. In these cases the financial statements must be reviewed. The issuer’s principals may be required to disclose certain personal financial information.
  • Securities purchased in a crowdfunding transaction can generally not be resold for one year.
  • Holders of securities obtained in a crowdfunding transaction will generally not be counted in the determination of whether an issuer must register under Section 12(g) of the Exchange Act.
  • An intermediary (called a funding portal) must be used. The requirements for an intermediary under Regulation Crowdfunding are complex and contain numerous important provisions and restrictions that are specific to crowdfunding transactions.

The SEC’s press release also described some interesting proposed
Continue Reading SEC adopts final crowdfunding rules – Last gasp of the JOBS Act (plus some bonus proposed new rule amendments)

Courtesy of JasonHerbertEsq
Courtesy of JasonHerbertEsq

The SEC continued its program of enforcement actions in connection with the Federal EB-5 Program by bringing charges against two firms which raised approximately $79 million for EB-5-related situations. This matter is a little different in that it is the first SEC action to be brought in connection with unregistered broker-dealer activities in the EB-5 context. This action is important and should be reviewed by all participants in the EB-5 arena because it demonstrates the SEC’s willingness to exercise its enforcement powers in connection with these immigration-related matters. It also shows the SEC’s willingness to partner with other regulatory agencies (in this case the U.S. Citizenship and Immigration Services (CIS)). The SEC’s action is summarized in its June 23 press release.

The Federal EB-5 Immigrant Investor Program is designed to provide a way for foreign nationals to achieve legal residency in the U.S. by investing in certain approved U.S.-based businesses or designated regional economic development centers. The requirement for investment in a regional economic development center is generally less than the amount required to invest in a U.S. business under this program.

According to the SEC’s Order, Ireeco LLC and a successor company, Ireeco Limited, acted as unregistered broker-dealers in raising funds from a number of foreign investors. According to the Order, these companies promised to help investors locate the best regional center in which to make their investments, but they allegedly only directed these investors to a small number of regional centers. These regional centers allegedly made payments to the Ireeco companies once the CIS granted certain approvals for conditional residence to the investors. The SEC alleged that the two Ireeco companies raised approximately $79 million in this manner


Continue Reading SEC charges unlicensed broker/dealers in EB-5 Program

Doom over crowdfunding?The first enforcement action involving a crowdfunding project was recently brought by the Federal Trade Commission. It involved the development of a board game which did not go well despite a successful crowdfunding campaign. This matter is interesting and instructive not only because it is the first such case, but also because it highlights some of the significant risks inherent in the crowdfunding process. The FTC’s official press release on this matter contains a good summary of the relevant events.

According to the FTC complaint, Erik Chevalier discovered an idea for a board game called The Doom that Came to Atlantic City! This game was designed to be a dark fantasy take on the traditional Monopoly board game. The game had originally been developed by two designers, but Chevalier planned to take their concept and produce and distribute a finished game. To raise money for this venture, Chevalier turned to Kickstarter, probably the best known crowdfunding platform. According to the FTC complaint, Chevalier represented to investors that the funds raised would primarily be used for the development, production, completion, and distribution of this game, and that participants would receive certain rewards, such as copies of the final game and action figures, in return for their participation in this campaign.

This crowdfunding campaign was very successful. Chevalier’s original goal was to raise $35,000, but this campaign raised more than $122,000 for the development of this game. Unfortunately, things went bad as the game development process encountered delays.

According to the FTC complaint,
Continue Reading First crowdfunding fraud enforcement action

SAFE and KISSEarly stage and startup companies often face difficulty in obtaining initial financing.  These companies normally do not have access to traditional venture capital, angel, or bank financing.  Even when a startup finds an investor, the company may not have the time or the funds to pursue the long and complicated negotiation and documentation process required for a convertible debt or preferred stock investment.

Y Combinator (a Silicon Valley technology accelerator) developed a possible solution for this situation:  the SAFE (Simple Agreement for Future Equity). This is a short document that contains the basic terms of an investment in an early stage company. Y Combinator’s goal was to create a standard set of terms and conditions that the investor and the startup can agree upon without protracted negotiations so that the startup can obtain its initial funding relatively quickly and cheaply. Y Combinator offers both a summary of SAFE concepts and sample SAFE documents on its site.  Y Combinator first proposed this instrument in December 2013, but it is just now beginning to be used outside of Silicon Valley.

While the SAFE has appeared in a number of forms, the basic concept is that the investor provides funding to the company in exchange for the right to receive equity upon some future event.  The standard SAFE contains no term or repayment date, and no interest accrues.  The investor gets the right to receive the company’s equity when a future event occurs (normally a future equity financing). There is no need to spend time or money negotiating the company’s valuation, the terms of the conversion to equity or any similar items (which can often be tough and protracted negotiation items) – all of those decisions can be deferred into the future. The investor will receive shares in the subsequent offering, often at a discount to the price that other investors pay in that offering. The parties can also negotiate a cap on the valuation used in connection with the SAFE, and this may provide additional protection to the investor.

The beauty of the SAFE concept (from the company’s standpoint) is that it
Continue Reading SAFEs and KISSes – Alternative investment vehicles can help early stage companies get financed

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On September 19, Chinese e-commerce giant Alibaba completed the initial public offering of its stock. The underwriters for the offering subsequently exercised their option to buy additional shares, making this the largest IPO in history at $25 billion. The stock’s price immediately jumped by a huge amount, finishing its first day of trading at $93.89, a 38% increase over its $68.00 IPO price. The stock has since lost some ground, closing at $87.17 on Tuesday.

What does this massive IPO mean for U.S. technology companies? I see four possible areas of impact:

  1. U.S. technology companies may delay their IPOs until they see how the Alibaba stock performs. This could be a short delay if the stock price holds up or does well. Right now U.S. technology companies Hubspot, Lendingclub.com, GoDaddy.com and Box, among others, are expected to conduct IPOs this fall.
  2. If the substantial demand for Alibaba stock holds up, fund managers may reduce their
    Continue Reading Alibaba’s record IPO – How will it affect U.S. technology companies?
Waiting for the results of the JOBS Act?
Photo by Gueorgui Tcherednitchenko

President Obama signed the JOBS Act into law on April 5, 2012 amid much fanfare and optimism. Small and medium sized fast-growing technology companies and their executives were especially sanguine about this new act as it appeared that it would provide access to much-needed additional expansion capital. These companies were still reeling from the recession and the substantial reduction in available venture capital financing, and they saw the JOBS Act as a potentially positive event. A little more than two years later, has this initial optimism proved to be warranted? Let’s take a look at some of the provisions of the Act.

A new regulatory structure for crowdfunding was initially the most anticipated provision of the JOBS Act. I never believed that crowdfunding would be as beneficial as some people did, but I hoped that it could provide some additional access to capital for smaller companies which were starved for funds. Unfortunately we are still waiting for the SEC’s final crowdfunding regulations. The SEC appears to be caught between two complaining factions here – one which thinks the proposed rules are too restrictive and won’t work, and one which thinks
Continue Reading The JOBS Act – Any results yet?

SEC may change identity of angels
Illustration by Royce Bair

Potential Changes.

Accredited investors have long been critical participants in private financing transactions, and the success of most private financings is largely determined by the participation of these investors and the availability of their capital. State and Federal securities laws have been written or amended to foster and facilitate investment by these accredited investors. Based on recent developments, the standards for qualification as an accredited investor may be changing, and these changes could pose problems for companies seeking financing.

The current requirements for accredited investor status are contained in Rule 501(a) of the 1933 Act. The most commonly used standards for individual investors are a $200,000 annual income (or $300,000 combined income with a spouse) or a $1,000,000 net worth (excluding the value of the investor’s primary residence). Other than the exclusion of the investor’s primary residence (which became effective in 2012), these standards have been in place since 1982 without any changes to reflect the effects of inflation during that period.  

Based on these current standards, observers estimate that there are approximately 8.5 million accredited investors in the United States. Some critics have asserted that this number is far higher than it should be, and that many of these people only qualify as accredited investors because
Continue Reading Accredited investors – potential changes and some helpful guidance

States creating own exemptions for crowd funding
Photo by Josh Turner

The JOBS Act’s crowdfunding provisions were once one of the most eagerly anticipated items contained in that Act. Many companies and their advisors had high hopes that these crowdfunding provisions would open up new arenas for financing smaller companies while easing the costs and challenges associated with securities regulatory compliance. These hopes and dreams have been substantially curtailed as the SEC’s proposed crowdfunding rules (issued in 2013) did not provide the anticipated relief. The SEC received a significant number of comments on these proposed crowdfunding rules, and these comments were predominantly critical due to the perceived regulatory and cost burdens that the proposed Rules seemed to contain.

Hope springs eternal, however, and many people are still eagerly awaiting the SEC’s final crowdfunding regulations to determine if the SEC will adopt a more reasonable position that may be useful to small companies seeking financing. The Federal crowdfunding exemption from registration will not be effective until the SEC issues these final regulations. Many people just want to know what they are actually dealing with here and whether crowdfunding will offer any viable opportunities for small company financing. Somewhat surprisingly given the significant amount of attention and publicity that crowdfunding has generated, the SEC still has not issued those final regulations despite the JOBS Act’s deadline. This situation has caused a significant amount of frustration in the corporate finance community.

Given the uncertainty regarding the status of Federal crowdfunding regulation, some states have seen an opportunity and have taken somewhat bold steps in establishing crowdfunding exemptions on the state level. The states moving ahead of the SEC is somewhat unusual, but it appears that the initial impact of these state crowdfunding initiatives may be economically beneficial to these states.

The predominant model for these state crowdfunding structures is the creation of an intrastate crowdfunding exemption from registration. The states have been very creative in their efforts, as they appear to have used the strong desire for a useful crowdfunding regulatory structure to create state structures that will help to provide economic growth in the states. This is also very compatible with the nature of crowdfunding – since many crowdfunding projects are smaller and localized, they may not be affected by being required to be contained in any one state.

The participating states have mainly modeled their crowdfunding regulations to be
Continue Reading States take the lead on crowdfunding