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On April 3, 2019, Finhub, the SEC’s Strategic Hub for Innovation and Financial Technology, released the “Framework for ‘Investment Contract’ analysis of digital assets” (the “Framework”) providing principles for analyzing whether a digital asset constitutes an investment contract, and thus a security. The same day, the SEC’s Division of Corporation Finance (the “Division”) published its first No-Action Letter on digital tokens. The No-Action Letter applies the Framework to a digital asset created by Turnkey Jet, Inc. (“Turnkey Jet”), a company that provides interstate air charter services.
By Ben Stone
As societies and markets increasingly insist that corporations generate positive social impact alongside profit, investors have taken notice. The global impact investing market alone, for instance, doubled from $114 billion in 2017 to $228 billion in 2018, and will almost certainly continue to accelerate.
Founders choosing a structure for their business are often drawn to the limited liability company, or LLC, for its overall flexibility in both taxation and governance matters. And founders seeking access to early capital, not to mention seed investors themselves, are often drawn to the convertible note as a simple, less expensive means to raise funds. But LLCs and convertible debt don’t always mix.
What are the similarities between a one dollar bill, a share of a company, and a pre-paid gift card? The answer is……..not so much! The same is true of the similarities between virtual currencies, security tokens, and utility tokens; in truth, not so much. Yet, if you follow the world of digital tokens in the media and popular press, you would think that virtual currencies, security tokens, and utility tokens are all very similar because they are often concurrently and interchangeably discussed under the topic of “cryptocurrency.”
There has been a marked increase in the amount of money being invested by Chinese investors into U.S. early stage biotechnology companies since 2017, spurred on by direct encouragement from Beijing through its Made in China 2025 industrial policy, which specifically targets biotech as a strategic industry eligible for greater government backing. In the first half of 2018, Chinese venture capital funds and high net worth family offices invested $5.1 billion in US biotech companies, exceeding the $4 billion invested by Chinese investors in all of 2017.
Small venture capital funds and special purpose vehicles, which otherwise qualify as “venture capital funds,” can now raise money from up to 250 beneficial owners and remain within the 3(c)(1) exemption of the Investment Company Act of 1940 (the “Investment Company Act”).
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.”
Jeremy Glaser and Patrick Henry discuss some key considerations, other than cash, in selecting investors for your startup.
Watch Jeremy Glaser discuss how term sheets change the entire balance of power and negotiations. Find out why your singular focus should be on getting a term sheet, whatever its terms.
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.
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.
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.
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.
There is little doubt that activity in the trading of secondary shares of private companies remains robust. Private companies are staying private longer and there seems to be an unlimited demand to buy into the newest “Unicorn” anointed each week.
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.
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 is my company worth? What should I tell the investors my valuation is for the next round of financing? The easy answer is that your valuation is what the market says it is and don’t tell investors anything!
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.
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.
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.
You have raised your friends and family/angel round, built out the beta of your product and have a few early paying customers. Now it is time to raise the money you need to grow from institutional investors. How do you get their attention when so many companies are in the same boat as you? Your executive summary – a one to two page teaser – is the crucial document you need to stand out among the noise and get noticed.
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.
Bill Whelan describes the proactive approach VCs are taking in making investments.
Enacted in June 2015, Regulation A+ allows private companies in Canada and the United States to raise money through general solicitation. Pamela Greene, a Member of Mintz Levin's Corporate & Securities Practice, explains the benefits of a Reg A+ offering over an IPO.
Early-stage technology company valuations are generally a crap-shoot. Bill Payne did a great post about this in October 2011. This post builds on top of his work, and attempts to shed additional light on the valuation process.