Professional Documents
Culture Documents
GREGORY C. YADLEY
Shumaker, Loop & Kendrick, LLP, Tampa, FL http://www.slk-law.com/
ELIZABETH A. BLEAKLEY
Bleakley Law LLC, Chicago, IL http://buslawcounselor.com/
NANCY FALLON-HOULE
Velocity Law LLC, Downers Grove, IL https://www.velocitylaw.com/
ERIC K. GRABEN
Wyche, PA, Greenville, SC https://wyche.com/
BONNIE J. ROE
Cohen & Gresser LLP, New York, NY https://cohengresser.com/
GARY J. ROSS
Ross & Shulga PLLC, New York, NY http://www.rsglobal.law/
What do I need to know about the securities laws?
When do my clients need to worry about the SEC?
What are my clients’ alternatives for
raising capital?
What traps can I help clients avoid through
proper planning?
What documentation and disclosures
are required?
Accredited Investors, Finders
JOBS Act; developments regarding
“private” financings
General Solicitation: Rules 506(b) & (c)
Crowdfunding and Regulation A+
Rule 147 and Intrastate Offerings;
Rule 504
Practice Pointers and Liability
Founders are 3 friends from college:
Brown, a Georgia computer engineer, Green, a
SC bioengineer, Orange, a CA MBA
Developed a human nerve and computer chip interface, allowing
nerves to communicate directly with the chip.
Universities hold the patents on their inventions
Formed a Delaware corporation on LegalZoom “Telepathy Now,
Inc.” that has obtained licenses to the patents from the
universities. Telepathy is headquartered in GA
Telepathy seeks to develop the computer chip to be implanted
in humans, under skin at base of skull. Will receive and transmit
signals to and from the brain, wirelessly up to 2 miles.
Telepathy Raised $100,000 in working capital from friends and
family under 4(a)(2) securities exemption.
Received a US DoD grant $250,000 to develop chip for implant into
special ops personnel, allowing them to communicate telepathically
during operations.
Believe they can raise only a few hundred thousand more from
friends and family
Needs to raise $2 million to complete development of prototype
chip implant
Needs an additional $7 to 10 million to conduct trials to determine
whether human brains can learn to communicate effectively with the
chip implants
• Securities Act §4(a)(2): “Transactions by an issuer not involving any
public offering.”
• The founders’ round, and an early seed round, are usually exempt
from federal registration under 1933 Act Section 4(a)(2).
• No filing with the SEC - self-executing exemption.
• Most states have self-executing small offering exemptions (SC: 25 or fewer
purchasers in SC in any 12 month period subject to conditions)
• Some states may require filings for small offering exemptions
• 4(a)(2) initial round has very few investors - typically <10 investors.
• 4(a)(2) investors are either:
• Extremely close personal connections to the issuer’s principals,
or
• Highly sophisticated accredited investors with deep knowledge
and experience in the industry and/or startups.
Who are commonly 4(a)(2) Investors?
Founders
Founders’ family: parents, grandparents, uncles, aunts, siblings, in-
laws
Very close friends of founders: college roommates; parents of
childhood friends
Venture capital or angel investor, member of established angel
group
Investor or executive with prior experience in company’s space or
other startups as a board member, executive, or financial officer
Investor who has professional training or degree (CPA, CFA, MBA,
JD)
Registered broker-dealer or investment advisor
Investor with significant private offering investment experience
Federal and state laws prohibit a person from engaging
in the business of effecting transactions in securities
without registration as, or licensure or affiliation with, a
broker-dealer
“transaction based compensation” (commissions and other
contingent payments, based upon amount, closing, etc.)
exception for “finder’s fees” paid in set amount, regardless
of whether sale results
dealing with unregistered intermediaries presents
significant problems for the issuer: rescission rights,
regulatory enforcement, fraudulent representations
general solicitation
Income in each of the last two years was, and is
reasonably expected to be in the current year, at
least $200,000
Rule 506(c)
similar, but permits general solicitation; all
investors must be accredited
Offering may be made to an unlimited number of “accredited
investors” and up to 35 non-accredited investors – issuer must
have reasonable belief as to accredited investor qualification
(self-certification and no red flags)
Minuses
Not ideal for B2B
More expensive and time-consuming that Rule 506
More SEC scrutiny
$1 million maximum (in any 12 months) (raised to
$1.07 million due to cost-of-living adjustment)
Will not be integrated with a separate concurrent
exempt offering
Have to use an intermediary that is either a
registered broker or an approved funding portal
Examples – WeFunder, Republic, SeedInvest, StartEngine
Advertising Restrictions
Any communication regarding offering must have link
Communications limited to “tombstone” information, such as
price and nature of securities, max offering amount and closing
date, and basic information about issuer
Form C must be filed with SEC before offering
Contains
Info about directors, officers, 20% shareholders
Description of company’s business
Target offering amount, deadline to reach target
Financial Statements
– If maximum offering amount is less that $107,000
• Financial statements must be “certified” by CEO
– If maximum offering amount is $100,001 to $535,000
• Financial statements must be reviewed by independent
accountant
– If maximum offering amount is over $535,000
• First-time Reg CF issuers – same as above
• Repeat Reg CF issuers – audited financials
Limits for investments in all Reg CF offerings in
any 12 months
Income/net worth <$107k – greater of $2.2k or 5% of
income or net worth/year
Income/net worth >$107k – lesser of 10% of income or
net worth/year, up to $107k
Applies to accredited investors as well
Reg CF Securities cannot be resold for one year
Except to
Issuer
Accredited Investor
Registered offering (e.g. IPO)
Family member, trust, upon death/divorce, etc.
Tier 1 Tier 2
Offering Limits $20,000,000 $50,000,000