Raise Capital

SAFEs: The (Not So) Simple Agreement for (Potential) Future Equity

By Brian Novell and Daniel DeWolf

Historically, most start-up companies were funded either by the offering of equity or by loans in the form of convertible promissory notes. Recently, however, there have been some hybrid instruments created to fund start-ups. Most notably, and quite popular these days, is the use of an instrument called a SAFE. “SAFE” is an acronym for “simple agreement for future equity.”

Tax Court Decision Provides Opportunities for Foreign Investors Investing in the U.S.

BY David Salamon

On July 13, 2017, the U.S. Tax Court issued its opinion in Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner, in which the Tax Court held that a non-U.S. person who sells an interest in a partnership engaged in a U.S. trade or business generally is not subject to U.S. federal income tax, except to the extent such interest is attributable to the non-U.S. person’s share of the partnership’s U.S. real property interest.

Various Ways to Raise Capital

The world of raising capital has been evolving over the last several years.  Offerings of securities generally used to fall into two main buckets: (i) private placements under the old Rule 506 or (ii) a public offering. With the implementation of various provisions of the JOBS Act now mostly complete, the array of choices has increased exponentially and include crowd funding, crowd sourcing by general solicitation for accredited investors, IPO light under the new Reg A+ rules, and confidentially submitted initial public offerings.

Regulation Crowdfunding: A Six-Month Update

By Samuel Effron

It has been almost seven months since issuers across the country began raising money through Regulation Crowdfunding (“Reg CF”), which went into effect on May 16, 2016. In the six months since Reg CF went into effect, 160 initial filings for crowdfunding offerings on Form C were made with the SEC. The following summary of the highlights and trends are based on data collected from those Form C filings through November 16, 2016.

Revised Rule 504: Another Tool in the Toolkit to Raise Capital

By Daniel DeWolf and Brian Novell

If there is one common theme that entrepreneurs tend to have, it is fire – meaning, many entrepreneurs are passionate about an exciting idea that they seek to turn into a business.  However, entrepreneurs often quickly realize that, in order to make their fire glow high and bright for the world to see, they need fuel – meaning, capital.  While bootstrapping is a smart practice that can keep the embers burning for a period of time, even fantastic ideas will likely sooner or later need a major capital injection – thereby adding fuel to the fire – to take the venture to the next level.  This is where the newly revised Rule 504 of Regulation D may be a good option for early stage companies.  For qualifying companies, Rule 504 provides an exemption from the registration requirements of the Securities Act of 1933, thereby facilitating the ability of startups to raise capital.  Often well-suited for friends and family or seed rounds of funding, Rule 504 provides flexibility to smaller companies seeking assistance with capital formation.

No Action Letter On Behalf Of Citizen VC

By Daniel DeWolf and Samuel Effron

The SEC has finally provided clarity as to how an issuer of securities can conduct a private placement in a password protected web page under Rule 506(b), without it being deemed a “general solicitation” and thereby being subject to the additional requirements imposed by the new Rule 506(c). The guidance has been provided by the issuance of the Citizen VC No Action Letter (the “CVC Letter”), which request was authored by Mintz Levin.

What is Venture Capital?

By Daniel DeWolf

Most of us go through our lives down a certain path. We grow up in our house or apartment; we go to school; we get a job; and eventually we grow up (one way or another) and live out our lives: sometimes happily, sometimes not so happily, and most times a little bit of both. In the course of this journey, many of us dream about starting something new, such as a new business based on a new concept or new paradigm. For many of us it is just a daydream. But for some, it is a call to action. Time and time again, an individual figures out a new way to look at things. Then from a scrap of an idea, and against great odds, this individual begins to build a new business.

What is a Term Sheet?

By Daniel DeWolf

When a venture capital firm is interested in a company it will meet with the management team numerous times to understand fully the business model and to learn more about the management. At some point in the process, the venture capital firm will decide that the investment is worth pursuing and will present a Term Sheet to the company. The Term Sheet (which is a nonbinding letter of intent) sets forth the basic terms and premises upon which the venture capital firm would be willing to invest.

What Makes a Good Business Plan?

By Daniel DeWolf

The way most businesses are initially funded is by the three Fs. That is, by "friends, family, and fools." After all, who else would provide the initial seed capital to start a new enterprise? But self-funding (or relying on friends and families) will only take you so far in building out your new business.

IRS Tax Section 1202: Excluding Your Gains on Small Business Investments

By Daniel DeWolf and Rachel Gholston

2016 promises to be another very good year to invest in start-ups because of the extension of significant tax breaks for investors who invest in early stage companies. Investors who invest in small businesses can realize exclusions on capital gains if they choose the right type of company.

The New Section 4(a)(7): More Than a Codification of Section “4(a)(1½)”

By Samual Effron and Cliff M. Silverman 

On December 4, 2015, the Fixing America’s Surface Transportation Act (the “FAST Act”) was signed into law by President Obama. Although the FAST Act is primarily a transportation bill, buried in this legislation is a new statutory exemption under Section 4(a)(7) of the Securities Act of 1933 (the “Securities Act”) that explicitly permits private resales of restricted securities. This new exemption may increase investor liquidity by facilitating the development of secondary markets in private securities.

Why Does a Company Issue Stock Options?

By Daniel DeWolf

One of the critical keys to a successful venture is aligning the interests of the employees and management with the interests of the shareholders/investors. After all, perhaps the greatest asset of a company is its people. Without a competent and motivated workforce, a venture is unlikely to succeed no matter how great an idea or business concept is involved.

What Are the Typical Exit Strategies for a Start-Up?

By Daniel DeWolf

One of the underlying tensions within a venture-backed enterprise is that the management and the venture capital firm may have divergent exit goals. For the venture capital firm, the primary goal is a return on its investment. The venture capital firm has a fiduciary duty to its own investors to maximize its returns and the manner in which a venture capital firm achieves this goal is by a liquidity event or an exit from the investment. In contrast, management's goals may include issues beyond monetary rewards. An executive may be seeking to make his or her mark as a "captain of industry" or "leader of men" or perhaps something as mundane as having a steady job.