Nutter McClennen & Fish LLPAttorneys at Law

Seaport West, 155 Seaport Boulevard, Boston MA 02210 www.nutter.com

Fundraising with AngelsImpact of the JOBS Act and New Advertising/Solicitation Rules

August 12, 2014

Jeremy HalpernPartner, Nutter McClennen & Fish LLP

Thomas V. PowersAssociate, Nutter McClennen & Fish LLP

› Nutter McClennen & Fish LLP - Partner; Director of Biz Dev, ECG

• Top 10 Boston law firm• Represent clients in technology, hardware, software, mobile, medtech

health IT, biotechnology, cleantech CPG, consumer electronics

› MassVentures – Director & Investment Committee Member

• The Venture Arm of the Commonwealth: providing seed and early stage venture funding to high growth technology startups

› Angel Investor – Private investor in multiple technology and consumer products companies

› The Capital Network – Director; Past Executive Chairman

• Providing education, resources and community to high growth entrepreneurs and angel investors as they navigate the early stage capital process

› Previously: Co-Founder/VP Biz Dev MobileTek Corporation

› UC Berkeley, B.A. (Go Bears!); UCLA School of Law, J.D.; Admitted to practice, CA and MA

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Jeremy HalpernBiography

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Thomas V. Powers Biography

Thomas V. Powers is an associate in the Business Department at Nutter McClennen & Fish LLP and is a member of the firm’s Banking and Financial Services and Emerging Companies practice groups. He works with a broad range of institutional and early-stage clients on corporate law matters, including entity formation, corporate governance, equity financings, securities laws and mergers and acquisitions. 

Thomas gained previous legal experience working as an intern in the Boston office of the U.S. Securities and Exchange Commission and as a judicial intern for the Honorable Robert J. Kane of the Massachusetts Superior Court.  During law school, Thomas served as an articles editor for the Review of Banking & Financial Law.

Thomas has written extensively on JOBS Act implementation, including issues relating to private placements under Rule 506(c) and the impact of proposed crowdfunding rules on issuers and financial intermediaries. He has participated in previous TCN events on JOBS Act implications for startups.

EducationBoston University School of Law, J.D. cum laude

The Catholic University of America, B.A. magna cum laude

Bar AdmissionsMassachusetts New York

Nutter’s Emerging Companies Group

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As a full service firm with a dedicated team of lawyers in the Emerging Companies Group, Nutter supports ventures across the innovation economy:

• Biomedical Devices• Biotechnology• Pharmaceuticals• Life sciences • Software• Hardware• Information Technology

• Cleantech• Mobile• Consumer Products• Analytics• New Media • Robotics

We provide entrepreneurs with the full spectrum of support that they need to build their businesses and realize their visions:

• Entity Formation• Founders Agreements• Financing Strategy and Key Introductions• Angel & Venture Capital • Debt Financing• Private Equity• Initial Public Offerings• Private Placements• Strategic Partnering• Mergers & Acquisitions

• Employment support• Equity Compensation• Tax Strategy• Litigation• Licensing• Distribution• Manufacturing• Supply Agreements• Electronic Commerce• Patent and Trademark Strategy & Prosecution

Fundraising with AngelsImpact of the JOBS Act and New Advertising/Solicitation Rules• Overview of U.S. Securities Law

Regulatory Scheme for Startups What is a “Security”? Registration or Exemption Liability

• Fundraising with Angels Private Placements under Rules 506(b)/(c) Pros and Cons of Rule 506(b) vs. Rule 506(c) Offerings What is General Solicitation?

• Rule 506: Rules of the Road

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Overview of U.S. Securities Law

Regulatory Scheme for Startups

• Regulators:– U.S. Securities & Exchange Commission– State Regulatory Agencies

• Securities Laws:– Federal Law (Primary)

• Securities Act of 1933• Securities Exchange Act of 1934

– SEC Rules and Regulations– State Securities Laws

• Scope of Regulation: Companies that offer and sell “securities”

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Federal securities law defines the term “security” very broadly to include, among many other things:

– Stock (including Options and Warrants)

– Convertible Debt

– Membership Interests/Profit Sharing

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Overview of U.S. Securities Law

What is a "Security"?

• A Company that is offering or selling securities must either:

1.Register those Securities with the SEC (i.e. engage in an Initial Public Offering (IPO)); or

2.Find a Registration Exemption • Most Frequent: Rule 506 of Regulation

D

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Overview of U.S. Securities Law

Registration or Exemption

Failure to Register or Find an Exemption: Civil Liability

(a)SEC Entitled to:– Disgorgement of proceeds– Civil penalties– Prejudgment interest

(b)Investors Entitled to:– Rescission of transaction– Payment for any losses associated with the

transaction

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Overview of U.S. Securities Law

Liability

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Fundraising with Angels

Private Placements Under Rules 506(b)/(c) Rule 506 of Regulation D – Two Exemptions:

1. Rule 506(b): Pre-JOBS Act Exemption(a)No limit on maximum offering amount(b)General solicitation and advertising prohibited(c)Permits sales to unlimited number of accredited

investors and up to 35 non-accredited investors• “Accredited Investor” includes:

1) Individuals with $1 million net worth or $200,000 annual income

2) Private Equity, Venture Capital, and Angel Firms

• Self-certification permitted

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2. Rule 506(c): JOBS Act-Created Exemption

(a)No limit on maximum offering amount(b)General solicitation and advertising permitted(c)Permits sales to accredited investors only (unlimited number)

and issuer must take reasonable steps to verify each purchaser’s accredited investor status

• “Principles-based” method of verification – look to facts and circumstances

• Non-Exclusive Safe Harbors for Natural Persons: o Reviewing copies of IRS forms that report income;oObtaining written confirmation of accredited investor

status from a licensed broker, investment adviser, accountant or attorney

• Self-certification not permitted (unless investor participated in previous 506(b)/(c) offering)

Fundraising with Angels

Private Placements Under Rules 506(b)/(c)

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Fundraising with Angels

Pros and Cons of Rule 506(b) vs. 506(c) Offerings

Rule 506(b) Rule 506(c)

Pros Cons Pros ConsSelf-Certification of Accredited Investors

No general solicitation or

advertising

General solicitation and advertising

permitted

Reasonable verification burden on

issuer; no self-certification

Angel investors may be more comfortable with 506(b) (e.g., no

reasonable verification

requirement)

Reasonable verification burden

may chill investment by angel groups and

other private investors

Can sell to non-accredited investors

(but: significant additional disclosure

requirements)

Proposed SEC rules may require

additional hoops (e.g., pre-use

disclosure of ads to SEC; Form D pre-

filing)

Can change from 506(b) to 506(c)

offering

Generally cannot change from 506(c) to

506(b) offering

Section 4(a)(2) fallback exemption

available

No Section 4(a)(2) fallback exemption

No sales to non-accredited investors

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Fundraising with Angels

What is General Solicitation?

What is “General Solicitation”? Congress and the SEC have not defined general solicitation.

Less Likely More Likely UnknownOffering to individual

investors with whom you have a substantive pre-

existing relationship

Television, radio, print media or social media

advertisements

Demo Days, pitch events and venture fairs

Meeting individual investors through

personal introductions

Blast emails to distribution lists regarding offering

Crowdfunding websites and fundraising-oriented

social networks (e.g., Angellist, WeFunder,

Gust)

Offering to close friends and family

Discussing offering with press/bloggers

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Rule 506: Rules of the Road Key Initial Considerations:

• Who are my existing investors?• When was my last offering and on which exemption did I rely?• Will the angel groups I am targeting invest in issuers that conduct

a Rule 506(c) offering?• Have I participated in any activities in the past six months that

might constitute an advertisement of my securities offering or a general solicitation to potential investors?

Do:• Keep track of Company marketing activities• Determine whether angel groups will invest in Rule 506(c) raises• Stay up-to-date on rule changes to Rule 506(b) and (c) offerings

Do Not:• Advertise your offering or generally solicit investors without first

speaking to a qualified securities lawyer• Advertise your offering or generally solicit investors unless you

are certain about conducting a Rule 506(c) (there is no going back to 506(b))

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Elizabeth Morrow, Yoga by Numbers@Yoga_By_Numbers

Mandie Holmes, Launch Angels@Launch_Angels

Jeremy Halpern, Nutter McClennen & Fish@StartupBoston

@TCNupdate#tcnLIVE