Corporate Finance & Securities

The Definition of “Accredited Investor” and Why It Matters

The definition of accredited investor is a topic we’ve touched on briefly in several posts throughout the years, but today’s post dives specifically into the definition of “accredited investor” as defined in Rule 501 of Regulation D of the Securities Act of 1933. We’ll also point out why it’s important for you to understand who is considered an accredited investor.

Definition under Rule 501

The SEC states that the definition of accredited investor is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary.” The definition of accredited investor under Rule 501 includes several types of individuals and...

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Corporate Finance & Securities

What is a Cap Table?

A cap table (or capitalization table) is a spreadsheet listing all of your company’s securities (stock, options, etc.) and who owns those securities. Cap tables provide a basic look into the “total pie” and each shareholder and option holder’s piece of that pie (basically who owns what). More detailed cap tables will include formulas that allow the company to model future transactions. 

There’s no one-size-fits-all way to structure your cap table. Some provide only a general summary of the breakdown of ownership in a company, while others include extensive details about the individual holder, the type of securities held, issue dates, ownership percentages on a fully diluted basis, and other granular details.

When’s the Right Time to Build a Cap Table?

It’s relatively...

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Corporate Finance & Securities

When is a loan subject to securities regulations?

Background

What is a security? Securities are contracts for an interest in a company, sometimes called an “investment contract.” A typical example of a security transaction is the sale of company stock in exchange for cash. The SEC’s definition of “security” includes a 30-item list that stocks, notes, bonds, and investment contracts, among others. We recently discussed the Howey case, which provides the test courts use when determining whether something is an investment contract. Today’s post looks into the circumstances under which a note or loan would fall within the SEC’s definition of a security.

To start: Why does it matter if something’s a security? Securities are extensively regulated because of the real risk that individuals and the companies they control could swindle unwitting...

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Corporate Finance & Securities

What You Should Know About Reselling Private Stock

If you purchased stock from a startup in a “friends and family” round, can you sell it to someone else without violating securities laws? The answer to that question probably depends on whether you’re in compliance with Rule 144, which provides requirements that if satisfied, allow people to re-sell privately issued stock.

Background

There’s a general rule in the Securities Act of 1933 that if you sell a non-exempt security to another person, the sale must be registered unless an exemption from registration applies.

There’s a few things to unpack here. First, what is a non-exempt security? Second, what does it mean for the sale to be registered? Third what are the exemptions from registering the sale?

Exempt Securities Section 3 of the Securities Act...

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Corporate Finance & Securities

Raising Capital from Foreign Investors—Regulation S

If you’re a founder of a U.S. company thinking about raising capital from foreign investors, chances are good that you’ll want to utilize Regulation S.

There’s a general rule in the United States that if you want to sell stock in your business, you have to register the stock offering with the SEC. The registration process is cost-prohibitive for startups. Luckily, there are a number of commonly used exemptions. If you’re offering stock to US residents, you’ll likely be relying on a Regulation D exemption like Rule 506. Regulation S is a commonly used exemption for US companies that want to sell their stock to foreign investors.

There are two key parts to the Regulation S exemption:

The sale of securities must be an offshore transaction. There...

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Corporate Finance & Securities

Hedge Fund Side Pocket Accounts

This is our fourth post in our series on understanding hedge funds. Today, we will be discussing hedge fund “side pocket accounts.”

Generally, a side pocket is an account that is established by a hedge fund to segregate certain assets or investments from the fund’s general portfolio. Often, side pockets are used to hold less liquid securities such as real estate and private equity investments. Hedge fund formation documents may specifically permit the use of side pockets, which are used by fund managers to isolate investments often until market conditions improve and the assets can be sold at prices that better reflect their intrinsic value.

The side pocket account is simply an entry on the hedge fund’s books that is tracked separate...

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Corporate Finance & Securities

SEC Advisory Committee Issues Accredited Investor Recommendations

The SEC recently release advisory committee recommendations for updates to the definition of “accredited investor,” other issues related to accredited investors, and recent updates to the securities laws. For years, there has been concern over the definition of accredited investor—specifically whether the financial thresholds are outdated—and whether changes to the definition would narrow the number of accredited investors, which could significantly reduce access to capital for startups and established private companies. The committee’s most recent recommendations do not include a higher financial threshold, but they do include a number of other recommendations and propose analysis of whether the threshold should be increased.

Highlights from the Committee’s Recommendations: Does the definition of accredited investor accomplish its goal?

The first recommendation looks at whether the...

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