As a younger lawyer I was regularly working on securities offerings. For the bulk of the offerings they were private placements to accredited investors under SEC Rule 506(b), which involved filing a Form D and state notice filings. In most states it was pretty straightforward. New York, however, was not straightforward then, and still remains a mystery to many people. Over the years I searched for a book that covered the basics of New York’s Martin Act (the law covering securities offerings in the State), but never found exactly what I was looking for. I kept working on deals and writing posts for this blog (in addition to memos and white papers, etc.), and over time I compiled a decent amount of information and knowledge of the subject and decided to put it all into one place. Next thing you know I had the beginnings of a book. Link to see it on Amazon here.
Now I don’t profess to being a specialist in the field of securities, as there are many complexities and rabbit holes to go down if you get outside the more “vanilla” type offerings. Startups, emerging companies and even investment funds, however, generally are raising money through private placements under SEC Rule 506(b). This book gives the basics and is, like its titled, a primer. I tried to walk a fine line to allow it to be read by non-lawyers, with enough citations to assist legal practitioners.
Admittedly, this book is a niche product. The prospective audience is those whose companies are looking to raise money, or individuals otherwise involved in some aspect of companies raising money. I hope it can be helpful to such individuals, including younger attorneys just getting started in the field.
In any event, the book is for sale in paperback and e-book on Amazon. I personally feel the paperback is easier to read and to flip back and forth to things, and to view the exhibits and addenda, which should be consulted. I have a number of copies of the book, and if any readers of this blog or friends and colleagues of mine would like a free copy, feel free to reach out. Thanks for the support.
Here is a quick list a company can refer to prior to issuing stock options to its employees. I’ve covered the basics of stock options in a previous post, as well as a more in depth pricing item related to stock options, but wanted this post to give the broad overview to founders. Read more
The JOBS Act from way back in 2012, set forth the Crowdfunding exemption to the securities laws, and required that any Funding Portal that engaged in Crowdfunding registered with the SEC and became a member of FINRA. In late 2015, the SEC came out with the Regulation Crowdfunding Final Rules and forms to permit companies to offer and sell securities through Crowdfunding and to regulate the intermediaries which can sell the crowdfunded securities. The latest Funding Portal rules have been finalized by the SEC and FINRA. Read more
On February 16, 2016, the Securities and Exchange Commission issued an investor bulletin addressing the new crowdfunding opportunities that will be available to investors starting as of May 2016. The SEC issues these alerts so that investors will be knowledgeable about such offerings, especially the risks inherent in same.
The full bulletin can be found here – SEC Crowdfunding Investor Alert.
The alert does a good job breaking down the ways investors calculate their net worth and how much can be invested in any twelve month period. It also cautions investors on the risks of crowdfunding investing and the structure of how such offering can be conducted through portals.
The SEC’s Final Rules for Regulation Crowdfunding were published on October 31, 2015, and are considered effective 180 days after such publication. Meaning that on May 16, 2016, Regulation Crowdfunding will be a go.
On that date, a company will be able to raise money under the new rules and file Form C (which still does not appear on the SEC’s Form Page).
To get a head start prior to the final rules allowing sales, and to catch up to broker-dealers who can also act as intermediaries and sell securities through the Regulation Crowdfunding final rules, Funding Portals were allowed to begin registering with the SEC on January 29, 2016, by filing the Form Funding Portal, among other things.
I’ve blogged on this before (here and here) and will be doing a number of posts solely on Regulation Crowdfunding in the near future to make sure that the basics are covered and will dig into some advanced topics.
Anyone company looking to take advantage of the new rules should start getting its house in order, by preparing its financials, its legal structure and investigating which intermediary it wishes to use for the sale of its shares, whether a broker-dealer or a funding portal.
After a further review of the new Regulation Crowdfunding rules I think they exemption provided may best serve companies looking to raise smaller amounts, such as below $500,000 (to avoid the audited financial requirement), or who are raising equity capital for the first time. There is a huge need for smaller companies to get access to capital. The Regulation Crowdfunding rules may allow investments to happen which otherwise wouldn’t, which is what Congress intended by passing the JOBS Act to modernize the antiquated securities laws. Companies that can attract accredited investors will likely continue to rely on the private placement exemption under Rule 506(b) due to its relative simplicity compared to other offerings. But again, I do think the Regulation Crowdfunding rules have a specific subset of issuers that can benefit from them.
So on October 30, 2015, the SEC adopted final rules which will, after the comment period is done (60) days and they are adopted, allow crowdfunding a/k/a Regulation Crowdfunding a/k/a Equity Crowdfunding in the United States.
At first glance the final rules appear similar to the previously issued versions, with individuals only authorized to invest a portion of their annual salary or net worth through crowdfunding each year. See the press release here.
Portals which will offer the securities of companies offering same through Regulation Crowdfunding will be effective January 29, 2016 so hopefully a decent number of platforms will be available to start the party in early 2016.
The final rules will be effective 180 days after they are published in the Federal Register. The below is a brief summary in FAQ form covering the Regulation Crowdfunding rules. Read more
If your company operates in New York and meets the definition of a “qualified emerging technology company” (a “QETC”) it is eligible for New York tax credits. Additionally if you are a New York State taxpayer and interested in investing in a QETC you may be eligible to claim a credit as well. Read more
In addition to the other ways we’ve discussed here (stock options, phantom stock, stock appreciation rights), another way to compensate individuals working for a startup is to give them a cash payment upon a change in control of the company, called in the industry a “strip right”.
For example if a startup company has four founders each owning 25% of the shares, and they bring on another but don’t grant him or her shares, the initial founders can agree to pay the new individual a percentage of the “net proceeds” received from a “change in control” of the corporation. “Net proceeds” is usually defined as the gross proceeds received minus transaction costs and brokers commissions as well as some other items. A “change in control” is defined as it normally is in these agreements, and covers if the company merges with another or sells substantially all of the company’s assets. In such a case, the shareholders would receive cash (or assets it can sell for cash, like tradeable shares of the acquirer). The strip right agreement would require the shareholders that granted it to pay to the holder of the strip right, either a percentage or flat fee before they received their cash for the change of control.
In the example, if the four founders grant a 10% strip right, and a couple years down the road the company is sold for one million dollars, with transaction fees of $100,000, the holder of the strip right would receive $90,000 (net proceeds of $900,000 x ten percent). The shareholders would split the rest of the $810,000 and each receive $202,500.
One of the benefits of the granting of the strip right is that it is not taxable to the recipient. The downside, at least to the recipient is that they are not a shareholder of the corporation and they may never receive a cent if there is never a change in control. Due to its tenuous nature, the strip right is usually granted in connection with other compensation awards.
On March 25, 2015, the SEC adopted final rules amending Regulation A, referred to now as Regulation A+. These amendments were required by Congress via Title IV of the JOBS Act which was passed some time ago. (we are all still waiting for the Regulation Crowdfunding rules to be finalized).
The general rule is that when a company offers or sells a security, the security must either be registered or an exemption from registration must be relied upon. Regulation A has been on the books for a long long time and has been relied on very little.
Now the SEC has a tough job, its tasked with allowing companies to raise money via offerings of securities but on the other hand it needs to ensure that fraud does not run rampant. These two goals don’t have to be mutually exclusive, but the SEC has generally focused on the latter of the two at the expense of the first. Read more
First of all, I won’t advise anyone to withdraw their 401(k) funds early as the tax hit the IRS enacts is insane. If you are thinking about doing that, please don’t, or at least don’t do so until you’ve spoken to your accountant.
This post will, however, detail how to use your qualified retirement plan or IRA to start a new, or buy an existing, business. This name given to the process I’ll discuss is rollovers as business startups (“ROBS”). The main gist is that an individual’s current retirement plan is rolled over into a newly established 401(k) plan sponsored by a startup company and then used to purchase the startup company’s stock. The ROBS arrangement allows income taxes and penalties (see IRC Section 72(t))to be avoided because it is a rollover from one qualified plan to another. Read more