New York’s Blue Sky Securities Laws – A Primer for Startups and Other Issuers by Michael Stanczyk

3d blue sky bookAs 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.

Funding Portal Rules for Regulation Crowdfunding a/k/a Equity Crowdfunding

Geefunding_crowdfundingThe 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

Ten Tips for Pitching your Startup to Investors

I volunteer at a couple of small business incubators and programs.  I was sitting in on a mock pitch last week and giving some pointers on how the entrepreneur could polish their pitchdeck and overall presentation. I figured I’d put these up so people can take a look.  The below are offered to any startup looking to raise money: Read more

Intrastate Securities Offering Exemption

I wanted to blog on some of the lesser known and relied on securities exemptions.  In certain situations they can be very helpful.  One of these is the federal Intrastate Securities Offering Exemption.  Simply, if you offer and sell in one state and one state only, and some other factors are met, the issuer is exempt from the federal registration requirement.  Blue sky laws will still apply but some states have limited offering exemptions or other exemptions the issuer can rely on. Read more

SEC allows general solicitation and advertising in Rule 506 offerings

Yesterday, July 10th, under the provisions of the JOBS Act the SEC passed its Final Rules which amended Rule 506 and Rule 144A to lift the ban on general solicitation and advertising in offering and selling securities in a Rule 506 sale as long as all purchasers of the securities are accredited investors. Read more

Series A Participating Preferred Stock and Term Sheet Terms

If your startup just got a term sheet from an investor saying that they want to invest in your company and want to receive participating preferred stock with all of these other rights, you may be a bit overwhelmed.  First off, congratulations on the proposed investment.  Next, I’ll explain what all of those terms on the term sheet mean in this post starting with the participation component of participating preferred shares. Read more

JOBS Act Broker-Dealer Registration Exemption

The JOBS Act contained many provisions which were aimed at making the capital raising process easier, simpler and quicker from a host of angles.  Many things promised in the JOBS Act will not come to fruition until the SEC promulgates the regulations on the specific topic.  Some of these are equity crowdfunding, and the ability for issuers to use general solicitation in Rule 506 offerings.

One of the things contained in the JOBS Act which went into effect immediately, was an exemption for broker-dealer registration for persons or entities acting as brokers in certain 506 offerings.  The SEC just confirmed this in a recent FAQ available here.  I’ll give a quick overview below. Read more

New York’s Proposed Angel Investor Tax Credit

I’ve been following a bill proposed by New York Assembly member Kellner for a while now.  It is an Angel Investor Tax Credit, available to investors in “qualifying businesses”.   New York Bill No. A09958.  Investors would receive a credit based on 25% of their investment, but the maximum investment you can obtain the credit for is capped at $250,000.

A qualifying business is one that:

  1. has gross revenue of less than $1M for the year before the investment;
  2. has no more than 20 full time employees (60% must reside in NY State);
  3. has operated in the State of NY for no more than seven consecutive years; and
  4. has received no more than $2M in investments (eligible for the credit from one or more angel investors)

To be eligible for the credit, the angel investor must be an accredited investor as defined in Rule 501 of Regulation D, except for those that either 1. control fifty percent or more of the company being invested in, or 2. any company whose normal business activities include venture capital investment.

First, the idea is noteworthy.  A number of other states have passed similar credits to encourage angel investing.  In Wisconsin, they passed such a credit and angel investments increase from $30M in 2005 to $180M in 2010.  That’s staggering.   I would prefer to see that the credit be available for seed/angel and venture capital companies, however.  I think excluding them is a bad idea.

There are some critics of state angel investor tax credits.  They are usually out of state VC funds and investors.   They say that these types of credits would discourage interstate investing, such as Boston based VC’s investing in New York startups, and other such situations.  I don’t know if those critiques are warranted, however, as out-of-state investors aren’t penalized in any way other than having more competition in New York State.  As investors in-state are now sure they will at least recoup 25% of their investment in the year after they invest, as well as having the possibility for large returns (i.e. the home run) down the road.

The bill was referred to the ways and means committee in April and held for consideration there in June.  There hasn’t been much action on it since then and won’t be until at least 2013.  It is something to keep in mind however as any incentive that can be put on the table to get the economy moving, especially the startup community is a good idea.  Access to capital is a big issue for many young companies.

To Register or Not to Register?: Broker-Dealers and Finders

If you are involved in a startup you undoubtedly have heard about the company’s need to raise money. If you’ve gone the regular route you may be funded by institutional investors, like an angel or VC fund. The company may also have raised money through a private placement by selling equity to investors directly or through brokers.

You may have heard of another type of person involved in the capital raising process called a “finder”.   Everyone has heard of the term a “finder’s fee” which is known to be about 10% of the overall transaction.   The concept is the same with startup financing or M&A activities, although who can qualify as a finder and how they can be compensated has been a big deal with the SEC in the last couple years.  The real issue is when anyone can act as a finder, and if they really should be registered with the SEC as a broker-dealer. Read more