Corporate Finance & Securities

When is an Entity an Accredited Investor?

It is common for investors to invest in startups and other offerings using some form of limited liability entity rather than investing as an individual. When you invest as an entity, e.g. XYZ LLC, it is important to understand the SEC’s definition of accredited investors in order to determine whether your entity is considered an accredited investor under Rule 501. Many investors prefer to invest behind the limited liability shield of an entity rather than investing individually, and many investment opportunities are only available to accredited investors. Knowing when an entity is considered an accredited investor can benefit both the investor and the company raising capital.

SEC Rule 501

Under SEC Rule 501 under Regulation D of the Securities Act of 1933,...

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Corporate Finance & Securities

Issuing Restricted Stock and Stock Options under SEC Rule 701

It’s time to grow your startup company, and because you’d prefer to retain the limited cash flow you have, you’ve decided to compensate new employees with stock in order to incentivize joining your team and working hard to create a valuable company. You’re not alone. It’s very common for startups to issue equity compensation in form of stock options or restricted stock to employees. And luckily for you, there’s a federal securities law exemption for issuing equity to employees. Today’s post highlights the exemption under Rule 701, and what you need to know in order to make sure your securities offering complies with the rule.

SEC Rule 701

As we’ve discussed in previous posts, anytime you issue securities in your company you...

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Corporate Finance & Securities

Basics of Broker-Dealer Regulation

Generally speaking, broker-dealers are people that are in the business of buying and selling securities or in the business of helping others buy and sell securities. Brokers and dealers are subject to extensive regulation by the Securities Exchange Commission and state regulators.

The broker-dealer regulations are designed to make sure that people in the business of buying and selling securities meet professional standards, have adequate capital, and provide adequate disclosures to investors.

What is a broker?

The Exchange Act, in Section 3(a)(4)(A), defines a broker as any person or company that is engaged in the business of effecting transactions in securities for the account of others. This definition is analyzed in three parts. A broker must:

be “engaged in the business,” of “effecting transactions in...

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Corporate Finance & Securities

SEC Issues No-Action Letter for M&A Brokers

The SEC recently issued a no-action letter that provides relief for mergers and acquisitions brokers from certain federal registration requirements. Now, subject to certain restrictions, brokers can facilitate transactions without needing to register as a broker-dealer under Section 15(b) of the Exchange Act.

Background on Broker-Dealer Registration

Under federal law, a broker is “any person engaged in the business of effecting transactions in securities for the account of others.” So, if you receive compensation for connecting the buyer of business with the business it ends up acquiring, and the transaction is a purchase of company stock, you’re a broker. The SEC Guide to Broker-Dealer Registration provides the following examples of activities (assuming that compensation was received for these activities) that would qualify...

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Business Startup

iVLG News Roundup Week 6 2014: Secret Apps and Insider Trading; Microsoft’s Path Forward; Paper and the Importance of Registering Trademarks

Rising “Secret” Apps Could Affect Securities Laws Regarding Insider Trading

Apps that allow users to send anonymous and semi-anonymous messages may cause trouble for securities regulators looking to avoid the type of insider trading that has recently been in the news with the SAC saga. The app “Secret” was launched recently, and Silicon Valley startup rumors and more than occasional passive-aggressiveness seem to be among the most shared “secrets”. While some of the rumors were debunked, including the rumor that Evernote was going to be acquired, others, including that Google is planning to buy Squarespace, have yet to be debunked.

These anonymous sharing apps, including Snapchat, Whisper, Secret, among others, have varying degrees of anonymity, especially given recent data breaches, but the potential...

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Corporate Finance & Securities

Series | Understanding Hedge Funds

In this iVLG blog series, we discuss setting up and managing a hedge fund. We know that forming a hedge fund can be a complex and difficult task, especially with the number of regulations affecting hedge funds, their managers, and their investors. Our goal is to help you understand what it takes to set up a hedge fund, the key provisions contained in the securities documents typically associated with a hedge fund, and how to properly vet your investors.

The hedge fund series will breakdown the following:

Accredited Investor v. Qualified Client Requirement Entity Structure Performance Fees Side Pocket Accounts

We will update this page with the link to the post as the posts are completed. Please feel free to comment below if you’re looking for additional information...

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Corporate Finance & Securities

What is a Security and Why Does it Matter to Your Business?

When a company sells stock to raise money, the stock is called a “security.” But “security” is not just another word for stock. The term “security” can be many different things. And unfortunately there are scammers who try to sell phony company stock and other securities to raise money and give nothing in return. Consequently, securities are one of the more heavily regulated business practices. There are all sorts of restrictions on who and how and when and where you can sell securities. If you violate these restrictions you may face financial ruin or jail or both (see: Madoff, Bernie). Because securities are so heavily regulated, it is important to know whether something you sell or purchase is a...

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Corporate Finance & Securities

SEC Issues Guidance on Securities Offerings Under Rule 506(b) and Rule 506(c)

Last Thursday, the SEC issued Compliance and Disclosure Interpretations (C&DIs) related to securities offerings under Rule 506. Specifically, the C&DIs address the issue of Rule 506 offerings that began prior to September 23, 2013, which was when the new Rule 506(c) exemption became effective.

As we’ve discussed in prior articles, as of September 23, 2013, companies can now use general solicitation to raise funds from investors under the new Rule 506(c). The new Rule 506(c) was detailed in the Securities Act Release No. 9415. In the release, the SEC pointed out that for offerings that had already commenced under Rule 506(b) (the classic Rule 506 that does not allow general solicitation), an issuer could choose to continue the offering under Rule...

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Corporate Finance & Securities

Issuing Restricted Stock to Founders

One of the common questions we hear from startups is whether the stock issued to the founders should be restricted. There are some important issues to consider when deciding whether to create a vesting schedule for founders. Today’s post highlights some of these issues and the main reasons for issuing restricted stock.

What is restricted stock? First things first, let’s explore what exactly restricted stock is. Restricted stock is stock that is subject to forfeiture to the company, either for compensation or for no additional compensation. Restricted stock is generally subject to forfeiture until the stock “vests” (see below for a discussion of vesting). For example, an early stage company may issue stock to its founders, but the founders are only entitled...

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Corporate Finance & Securities

SBA Offers Entrepreneurs an Intro to Crowdfunding Course

The U.S. Small Business Administration has created a self-paced online course that provides an overview of crowdfunding. The course takes 30 minutes to complete and gives entrepreneurs the basic knowledge that is necessary to engage in the process of crowdfunding.

The SBA has identified three objectives for the course:

Discover what crowdfunding is and how it can help entrepreneurs Define and describe components involved in crowdfunding Sharing resources to help your new business succeed

You can access the course here, or you can review the text of the course here.

Keep in mind, this is just an overview of crowdfunding, i.e. a very high level view. If you’re interested in pursuing this type of fundraising in the future, we urge you to consult with an attorney...

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