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GROW SMART
Jeffery K. MitchellBlacksburg, Virginia Office
The Grow Smart Series
5-part series Practical Strategies
• Raising Capital• Corporate Governance• Employee Strategies• Employee Incentives• Protecting IP
Sponsoring Organizations
Raising Capital . . . Avoid the Mistakes
What are the rules? What do you really need for
growth? What is the deal?
• Document. • Document. • Document.
What is the future?
Raising Capital…Heavily Regulated Activity
The federal and state securities laws are triggered when 1 share of stock is offered or sold to 1 investor.
Raising Capital...Why worry?
Rescission rights (unwind investment) Penalties Cost of Clean-Up Future ability to raise capital Market “black eye” Impact on sale of company Ability to finance future companies
What is a security?
Stock (Membership Interest) Treasury Stock Security Future Note, Bond, Debenture, evidence of indebt Pre-organization certificate Put, call, option Right to acquire any of the above
Raising Capital . . . No Good Excuses
“It’s a good deal.”
“Everybody does it this way.” “I didn’t mean to break the law.”
“It was a private deal”
“It’s only one investor.” “They agreed.”
“We wanted to keep it simple.”
“It’s only me and my cousins.”
Raising Capital . . . SEC
Purpose: Protect the small investor Securities Act of 1933
• Section 5(a) provides that unless a registration statement is in effect as to a security, it shall be unlawful for any person (directly or indirectly)
– To use any means of interstate commerce to sell such security; or
– To “carry or cause to be carried” through the mails or interstate commerce…any such security for the purpose of sale or delivery after sale
Raising Capital . . . Private Offering
Securities Act of 1933• Section 4(2) “Transactions by an issuer not involving any public offering….”
Does the investor need protection? Company bears the burden
• Quality of investor• Sophisticated versus “accredited”• Access to material information
– Material– Fraud– Forward looking statements
No General Solicitation• Radio, Newspaper, mail• No general solicitation at public meetings
Attract investors • Relationships• Finders (know the rules)• Registered broker/dealers• VC conferences• Angel presentations
Raising Capital . . . State Oversight
Purpose: • Protect investors in their state• Regulate securities transactions in their state
Virginia Code § 13.1-502
§ 13.1-502. Unlawful offers and sales. It shall be unlawful for any person in the offer or sale of any securities, directly or indirectly,
(1) To employ any device, scheme or artifice to defraud, or (2) To obtain money or property by means of any untrue
statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) To engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit upon the purchaser.
(1956, c. 428.)
Raising Capital . . . The Basic Rule
Every Sale Must Be Registered. . .unless . . . Exempt From Registration
• Security exemption – Type of security: government, banks, nonprofits (IDAs, etc.)– Existing holders w/out new $ (recap)
• Transaction exemption – Parameters of transaction– Private offerings
Raising Capital . . . Rule 506
“Safe Harbor”• Pre-empts state law for “covered securities” • Unlimited “accredited” investors• Up to 35 non-accredited investors• No dollar limitation• No general solicitation• No advertising• No specified disclosures to “accredited” investors• File Form D
Raising Capital . . . Exemptions
Transaction exemption • Number of investors• Sophistication of investors (“Accredited”)• Relationship to issuing company• Value of securities issued• Type of disclosure contemplated• Solicitation manner (broker)• Contemplated additional offerings
Raising Capital . . . Step One: Need
How much money is needed and why? Do needs other than money exist?
• General business advice• Access to other investors• Strategic relationships
Non-Ownership (equity) Sources• Loan• Grant• Contractual relationship
– Vendor– Joint Venture
Raising Capital . . . Sources of $
Personal Resources- Founders and Owners Family and Friends Angels, Angel Networks Venture Capital Commercial Banks Strategic Investors (customer, supplier, competitor) Government (SBA, SBIR, STTR) Foundations/Incubators/Accelerators
Raising Capital . . . Subscribe For Sales
Written agreement Regardless of size Identify investor/consideration Document representations of investor Document status of information Address deal points (stockholders’ agreement issues)
Raising Capital . . . The PPM
Private Placement Memorandum Elements• Cover• Securities Disclaimers• Risk Factors• Business Plan• Management Bios• Use of Proceeds• Dilution Explanation• Financial Information• Legal and Accounting Issues
Raising Capital ... Disclose the Risks
Private Placement Memorandum –Risk Factors• Stage of company• Importance of key individuals• Nature of business• Customers/Concentration• Competition• Need for future $$• Illiquid security• Technology
Raising Capital . . . Set the Terms
Two sets of issues• Economic
– Investment issues– Return issues– Dividend issues
• Governance– Control– Information– Risk Management
Raising Capital . . . Economic Terms
Valuation• Pre-money
Use of Offering Proceeds• Use of Proceeds Statement• Milestones
Return issues• % of stock (profit split)• Dividend (accrual, cumulative)• Anti-Dilution• Tag-along; Drag-along• Pre-emptive rights• Transfer issues• Tax Distributions
Exit Strategy• Put Right/Call Right
Raising Capital . . . Governance Terms
Board of Directors• Number of seats• Veto control• Chairmanship
Decision Requirements• Major transactions
– New offerings– Sale of company– Budget
• Certain $ size agreements• Debt• Key hires
Day-to-Day management issues Dispute resolution process
Raising Capital . . . New Dynamics
Addition of outside “voices” Addition of new owners Heightened duties
• Fiduciary duties• Corporate protocols• Investor relations
Information Expectations Don’t “pierce the corporate veil”
Raising Capital . . . Steps to Success
Conduct a corporate clean-Up Set realistic time expectations Prepare and “vet” a written business plan Establish an initial a term sheet Document. Document. Document. Over-Disclose Risks Avoid unregistered broker issues ($ for the raise) Celebrate the Closing!
Conclusion . . .
Watch for future events• March 10: Corporate Governance• March 24: Smart Employee Strategies• April 7: Employee Incentive Plans• April 21: Ten Strategies for Protecting Your IP
Email contact for LeClairRyan:• Jeff Mitchell [email protected]
Email contact for SWVTC:• Shannon Blevins [email protected] • Esther Bolling [email protected]
Questions & Answers
Thank You!
