Venture Law Blog - Legal Issues Regarding Venture Capital and Emerging Growth Companies

By Lauren Lewis and William Manierre

There has been a lot of talk recently about a phenomenon called crowdfunding, a new type of fundraising that relies on social media and the Internet to raise small amounts of capital from large numbers of individuals. Despite the talk, crowdfunding remains impermissible under the securities laws absent a costly registration with the SEC and with state securities administrators. Last year, two people created a website, a Facebook page, and a Twitter account to solicit funds to be used to purchase Pabst Brewing Company. They received over $200 million in pledges from more than five million individuals, but were later subjected to cease-and-desist proceedings initiated by the SEC. Crowdfunding would seem to be a viable approach to small company capital formation, if only it were legal.

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By Riaz Karamali and Camille Formosa

One of the most common agreements entered into by an emerging company is the confidentiality agreement, also known as a non-disclosure agreement (“NDA”).  You are likely to routinely be involved in discussions with third parties about possible collaboration or partnering, and in these situations it is customary (and recommended) to enter into an NDA before proceeding with substantive discussions involving the disclosure of confidential information.  Whenever possible, you should try to use your own form of NDA which has been provided by your attorney.  However, as a startup you are likely to often be in the position of reviewing the other party’s form NDA, and if you are dealing with a much larger company, you may not have much, if any, negotiating leverage.  In an effort to help you help yourself, this blog post focuses on ten key issues to consider when reviewing another party’s form NDA.

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By Riaz Karamali

This blog post picks up where the last post in this start-up series left off, with the assumption that the start-up has been in incorporated, completed its founders' round of financing, created an executive summary and pitch deck and is ready to begin the hunt for "angel" investors (as used in this post, the term angel investors will include all types of potential investors in a company's initial or seed round of funding, including founders' friends and family, "super-angels" and early stage funds). There are several different structures an angel or "seed round" can take -- among them, sale of common stock, sale of convertible notes, and sale of a "light" preferred stock. While ultimately, the investor group may have the final say over the structure of the financing, it makes sense to understand the alternatives in advance and approach investors with a clear plan in mind.

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By Stephen LaSala and Courtney Mathes

On January 14, 2011, the Delaware Chancery Court issued an opinion in In re John Q. Hammons Hotels Shareholder Litigation that a merger transaction in which a controlling stockholder received consideration different than that received by the minority stockholders met the “entire fairness” standard. This opinion followed the Court’s determination in October 2009 that “entire fairness,” was the appropriate standard of review in this case.

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On January 25, 2011, the SEC proposed new amendments to conform the definition of “accredited investor” under Rule 215 of the Securities Act of 1933 and Rule 501 of Regulation D to requirements imposed by Congress under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Various exemptions for private or other limited offerings of securities under the Securities Act of 1933 and state “blue sky” laws depend on whether participants are “accredited investors.” Non-accredited investors who participate in private offerings under Rule 505 or Rule 506 of Regulation D must receive financial and other information that is not required to be given to accredited investors.

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