Understanding Private Placements

You may be looking to raise capital for your company by offering equity to a certain group of investors (can be friends, family, associates etc) as opposed to a public offering. If so, this type of securities offering is considered a private placement exempt from SEC registration if the issuance conforms to one of the exemptions set forth in the Securities Act of 1933 and discussed below.

Private offerings are issued under Regulation D of the Securities Act of 1933, the SEC requires stock offerings to be registered unless offered in compliance with a Regulation D exemption. Reg D has three exemption levels known as Rules 504, 505 and 506. They primarily apply to the amount of the offering. Most private offerings are made under Rule 506. These exempt offerings or private placements are used to raise capital for startups, real estate syndications, and film production projects to name a few. 

What is the Regulation D exemption for private placements? 

Reg D requires that you receive a private placement memorandum disclosing the company business and potential risks associated with the company and the value of the investment. Also required is a subscription agreement and an accredited investor questionnaire.

Companies conducting an private placement offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors. An private offering under Rule 506(b) is subject to to the following requirements as stated on SEC's website:

(i) no general solicitation or advertising to market the securities; 
​(ii) cannot sell securities to more than 35 non-accredited investors; 
(ii) give non-accredited investors specified disclosure documents that generally contain the same information as provided in registered offerings (the company is not required to provide specified disclosure documents to accredited investors, but, if it does provide information to accredited investors, it must also make this information available to the non-accredited investors as well); 
(iii) be available to answer questions from prospective purchasers who are non-accredited investors; and;
 (iv) provide financial statement information

Under Rule 506(c), issuers may offer securities through means of general solicitation, provided that: (i) all purchasers in the offering are accredited investors, (ii) the issuer takes reasonable steps to verify their accredited investor status, and (iii) certain other conditions in Regulation D are satisfied.
 
In addition to Reg D private placements, Regulation Crowdfunding created by the JOBS Act is becoming more popular. If you want to know more about making an offering to raise capital for your real estate syndication, startup, or project, contact us!

​Some of the biggest concerns for seed and early-stage startups revolve around money. How to get it and where to get it. Even the greatest and most innovative ideas require capital to get off the ground. Listed below are different ways startups can get the funding needed to be successful in the early seed stages and some of their legal requirements.
 
 
Bootstrapping
Many startup founders invest their own capital into the business. If you are able to do so, this is a great way to show investors that you are serious by “putting your money where your mouth is” so to speak. By investing in yourself and your business until you are ready for a round of funding, you accomplish three goals: 1) getting your startup rolling, 2) attracting other investors, and 3) not having to give away equity early on.

Legal Requirements: None
 
Angel Investors
Entrepreneur.com describes Angel Investors as “wealthy and willing to invest hundreds and thousands of dollars in your business in return for a piece of the action”. These investors are usually professionals and seasoned entrepreneurs who are defined as “Accredited Investors” by the SEC. The SEC defines an accredited investor as an individual with a net worth of at least $1 million and makes at least $200,000 a year.
 
Legal Requirements: May require legal documentation for the Private Placement according to SEC Regulation D, such as a Private Placement Memorandum (Offering Memorandum) and must file the raise with the SEC.
 
Venture Capital
 Provide funding to emerging small businesses in early stage that have established a high growth potential. One of the perks of venture capital funding is that it will usually come with advisors and mentorship designed to ensure your company’s successful growth. The downside is that you will have to likely have to give away a significant amount of your ownership equity and control in your company. Venture Capital can fund anywhere from $500,000 to $5 million in early and seed stage startups. In exchange, your investors become limited partners in the startup.
 
Legal Requirements: Venture Funds will want to conduct due diligence on all company legal documents such as Operating Agreements, Shareholder Agreements, and written contracts to understand how the equity is shared and ensure corporate governance is in place. Also, Private Placement legal documentation and SEC filing may be necessary.
 
Grants & Loans
The Small Business Administration offers grants and loans that startups can benefit from if they meet the specific qualifications. For many small businesses with an interest in SBA loans for working capital in the amount of $500-$5.5 million, you can go to your local community bank and apply. To find a lender near you go to: https://www.sba.gov/funding-programs/loans
 
There are also many different grants that your startup or small business may qualify for that do not require repayment but do have restrictions on how the funds can be spent. To explore the different types of SBA grants you can go here: https://www.sba.gov/funding-programs/grants
 
There are many other grants from private sponsors and corporations that you can find online as well.
 
Legal Requirements: May require an attorney to assist with grant and loan applications and also to review and prepare loan documents and security agreements if any are applicable.

In the early stages of startups many entrepreneurs are so focused on their product or raising capital, that they bypass the legal aspects of starting and running a business. While the legal portion of starting a business may seem tedious and daunting for new startups, the legal steps are imperative to the success and profitability of the business. If not addressed early on, the following legal checklist items, as reflected in this Forbes article, will inevitability be very painful and costly later down the line.

1. Partnership or Founders Agreement

This will likely be the very first and most important legal document for startups if there are multiple founders. Here are some of the legal questions the Partnership Agreement will address to ensure all founders are on the same page regarding the business and their positions to prevent costly litigation down the line:​

• How will the equity be split among the founders?
• Is each founder’s percentage ownership in the company subject to vesting based on continued participation in the business?
• What are the roles and responsibilities of the founders?
• If one founder leaves, does the company or the remaining founders have the right to buy back the departing founder’s shares? If so, at what price?
• How will key decisions and day-to-day decisions of the business be made? (by majority vote, unanimous vote, or are certain decisions solely in the hands of the CEO?)
• What assets or cash does each founder contribute or invest into the business?
• How will a sale of the business be decided?
• What happens if one founder isn’t living up to expectations under the founder agreement?

​2. Incorporation

Deciding whether you should form your startup as an LLC or a C Corp is a very important legal decision that comes with serious financial and other implications. For instance, most venture capitalist require startups to be formed as c-corps. You can see more about organization structure and documents here.

C Corporations are governed by state law and most are incorporated in Delaware. This type of business entity is favorable for investors because the structure supports investment protection through shareholder agreements, board of directors, and stock options. 

Limited liability companies are also governed by state law and have more favorable tax implications. Unlike, C corporations, LLCs offer flow-through taxation and protection to its members but its structure does not support investments.

3. Confidentiality Agreement or Non-Disclosure Agreement

Before disclosing your startup's product or business idea to other parties you should make sure they sign a confidentiality agreement also known as a non-disclosure agreement. By signing this agreement the party receiving the information agrees not to further disclose the protected product or idea to another party. In its early stages, you want to make sure you implement the necessary protocols to keep your information secret.

4. Intellectual Property Assignment Agreement

When individuals or companies are hired to create a product for your startup you want to make sure they assign all trademark or inventor rights to the product and designs to you. This will ensure your startup owns the rights to the  intellectual property and has the exclusive right to its use.

5. Intellectual Property Protections

In the early stages it's important to secure intellectual property rights to your startup's product and brand. These rights prevent others from taking your idea or product and brand and copying it. Securing IP rights also allow you to monetize through licensing later down the line once your product enters commerce. For information on federal trademark registration you can refer to our services here.

​If your startup has not crossed out items on this list, you can contact us here to schedule a consultation. We are here to serve.


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