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The Venture Alley

A blog about business and legal issues important to entrepreneurs, startups, venture capitalists and angel investors.

SEC Proposes “Pay-Versus-Performance” Rules

Posted in IPOs & M&A, SEC

Andrew Ledbetter


Yesterday the SEC issued its long-awaited “pay-versus-performance” rule proposal. The rules would add a new paragraph (v) to Item 402 of Regulation S-K. In short, the proposed rules would require a new table comparing “executive compensation actually paid” to the “total shareholder return” (TSR) of the company and its peers, as well as a discussion of the relationship between these amounts.

Here is a quick summary of the main requirements of the proposal:

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Carefully Draft NDAs to Avoid Whistleblower Concerns

Posted in For Entrepreneurs and Companies, SEC

Andrew Ledbetter

In light of the SEC’s first enforcement action against a company for impeding whistleblower activity in violation of Rule 21F-17, employers may wish to consider clarifying in their agreements, policies and practices that involve confidentiality obligations that employees may provide truthful information to the SEC or other governmental agencies concerning potential violations of law.

Rule 21F-17, adopted pursuant to the Dodd-Frank Act, provides in relevant part:

(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.

KBR, a Houston-based global technology and engineering firm, had a practice of conducting internal investigations in response to complaints regarding potential illegal or unethical conduct, which included interviewing employees (including those who had lodged a complaint). KBR required witnesses in these internal investigations to sign a confidentiality statement that included the following language:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

The SEC acknowledged that it was not aware of any employee in fact being prevented from communicating directly with SEC staff, or of KBR taking any action to enforce these confidentiality statements. Nevertheless, the SEC concluded that that the language in the confidentiality statement impeded communications with the SEC staff about potential securities violations by requiring permission from KBR’s legal department or face the prospect of discipline. Continue Reading

Factors the SEC Considers in “Bad Actor” Waivers

Posted in Fundraising, News and Recent Events, SEC, Startups, VC & Private Equity

Andrew Ledbetter


We have previously blogged about the SEC’s July 2013 rule change that disqualifies certain “bad actors” from using Rule 506. Thankfully, Rule 506 permits the SEC to determine, upon a showing of good cause, that it is not necessary under the circumstances to deny availability of Rule 506. The SEC has recently issued a policy statement explaining how it will evaluate whether a party seeking a waiver has shown good cause that it is not necessary under the circumstances that the exemptions be denied.


Other securities offering exemptions, including Rule 505 and Regulation A, have had bad actor disqualifications for many years, and the SEC has also had the authority to grant waivers under these exemptions using a similar “good cause” standard. In fact, based on this interesting article from Urska Velikonja, the SEC granted waivers nearly 200 times between July 2003 and December 2014. However, because Rule 506 is so much more widely used in mainstream private securities offerings, significant attention to waivers of bad actor disqualifications emerged as the first waivers were granted under Rule 506 (such as those granted to Oppenheimer and H.D. Vest). The attention to the issue culminated in several SEC commissioners publicly expressing diverging views about the proper use of waivers, including in speeches by SEC Commissioners Daniel Gallagher, Kara Stein and Michael Piwowar and SEC Chair Mary Jo White. This ultimately led to the SEC issuing its recent policy statement to bring consistency to how such waivers are granted, whether under Regulation A, Rule 505 or Rule 506. Continue Reading

IMHO, Omnicare Doesn’t Materially Change Opinion Disclosure

Posted in For Entrepreneurs and Companies, IPOs & M&A, News and Recent Events, SEC

Andrew Ledbetter


Today, the U.S. Supreme Court issued its anticipated Omnicare decision, which addresses the standard of liability applied to expressions of opinion in a registration statement for a public offering. While there will be clamoring about Omnicare (it is somewhat rare for the Supreme Court to issue securities law decisions), in my opinion the case does not involve a fundamental shift in how disclosure is drafted, although it does invite a few drafting and diligence strategies.

Statutory Backdrop

Section 11 of the Securities Act of 1933 permits purchasers of securities to sue for damages if a registration statement, at the time it became effective:

  • contained an untrue statement of a material fact; or
  • omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

In contrast with other types of securities liability, neither the untrue statements prong nor the omissions prong of Section 11 requires showing that a defendant acted with any intent to deceive or defraud.

Omnicare’s Opinions

Omnicare, the nation’s largest provider of pharmacy services for residents of nursing homes, filed a registration statement for a public offering of its common stock. In discussing the effects of various laws on its business model, including its acceptance of rebates from pharmaceutical manufacturers, the registration statement contained the following statements of opinion:

  • “We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws.”
  • “We believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve.”

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Series Seed is the new Series A; VC-backed company valuations continue to rise

Posted in For Entrepreneurs and Companies, For Investors and Fund Managers, Fundraising

pic-trent.jpgCONTRIBUTED BY
Trent Dykes

PitchBook recently released its 1H 2015 VC Valuations and Trends Report that breaks down over 20,000 valuations of private company financings and exits over the past 10 years. The report shows continued increase in median U.S. venture-backed company valuation across stage of investment. Not surprising, PitchBook’s conclusion is that Series Seed is the new Series A, Series A is the new Series B, and Series B is the new Series C – noting that while this is not a new finding by any means, PitchBook has more data to support it. Here are a few key findings:

  • PitchBook determined that the average age of U.S. venture-backed startups by stage in 2014 was as follows: Series Seed at 1.5 years; Series A at 3.3 years; Series B at 5.2 years; Series C at 6.6 years; and Series D+ at 8.5 years. These ages have been on a steady increase for the past decade. For example, in 2010 the average age for Series Seed was 0.8 years and for Series A was 2.9 years.
  • The median Series Seed pre-money valuation for 2014 was $5.9M (an increase from 3.2M in 2010).
  • The median Series A pre-money valuation for 2014 was $13.1M in 2014 (an increase from $6.5M in 2010).
  • The largest spike in valuation appears to be as leaders move towards their Series B valuations.
  • The median Series B pre-money valuation for 2014 was $36.9M in 2014 (an increase from $19.3M in 2010).
  • The Series B valuation range also experienced a large spike in the number of $100M+ valuations relative to other size ranges.
  • The stratification of lead, middle and bottom pack company valuations is further reinforced in the Series C round, with the median Series C pre-money valuation for 2014 at $70.5M (an increase from $38.6M in 2010).

You can find the full PitchBook report here.

Interactive 2015 Data Protection Laws of the World Handbook

Posted in For Entrepreneurs and Companies, IP/Privacy/Social Media

Compliments of our DLA Piper colleagues in the data protection and privacy practice, and co-editors Kate Lucente and John Townsend, here is the DLA Piper 2015 Data Protection Laws of the World Handbook. This updated 2015 online edition of the handbook offers a high-level snapshot of selected features of international laws as they currently stand in 77 jurisdictions across the world. For example, here is a heat map that provides a visual representation of the privacy challenges faced in certain jurisdictions.

Here is a .pdf of the full 421-page handbook.

Three Trends in 2014 Venture Capital Funding

Posted in For Entrepreneurs and Companies, For Investors and Fund Managers, Fund Managers, Fundraising, VC & Private Equity

Contributed by our colleague Mark Radcliffe

2014 was a great year for startups seeking funding.  Two of the leading reporting companies, PitchBook and CB Insights, report similar trends (both of these reports focus on funding by traditional financial venture capitalists and corporate venture capitalists, but the numbers differ because PitchBook also includes some angel investments). The key points are:

1.  Significant Increase in the Amount of Funding:  The funding in 2014 increased dramatically from 2013: according to PitchBook,  funding increased almost $20 billion from $39.4 billion to $59 billion http://blog.pitchbook.com/5-takeaways-from-pitchbooks-2015-u-s-venture-industry-report/ (see chart below).  This total is the largest since 2000. CB Insights has slightly lower numbers $47.2 billion but the trends are the same, with a sixty two percent (62%) increase over 2013 https://www.cbinsights.com/venture-capital-2014.

*Chart from PitchBook

2.  Larger Deals:  According to PitchBook, the number of deals declined from 6,124 to 5,160, a drop of 16%. On the other hand, CB Insights shows a slight increase in the number of deals (8%) to 3617.  According to PitchBook, this drop reflects a significant increase in the size of later stage financing: the proportion of capital invested in rounds that raised more than $25 million was sixty four percent (64%). These deals also reflect a trend to delay exits and the rise of “unicorns” (private companies worth more than $1 billion). According to Fortune, over 80 technology startups are unicorns and we are beginning to see the rise of “decacorns” (companies worth $10 billion). Fortune now counts eight decacorns.  The reason for the difference in the numbers is difficult to determine (I have talked with both PitchBook and CB Insights), but is probably due to the angel deals counted by PitchBook.

3.  California Retains Its Lead:  According to CB Insights, California widened its lead over other states in 2014.   California based companies raised $6 billion more of venture capital funding than all 49 other states and Washington D.C. California-based companies raised $26.84 billion across 1631 deals while companies based outside of the California raised $20.46 billion across 1986 deals. https://www.cbinsights.com/blog/california-venture-capital/.  PitchBook’s most recent infographic on the geography of venture investments is focused only on the Bay Area, but suggests a similar continued dominance with the Bay Area taking 29% of venture funding  http://blog.pitchbook.com/vc-by-region-in-2014-bay-area-nyc-pnw-europe/.

These numbers reflect the fundamental nature of the changes taking place in economy: business is becoming more digital, driven by software, big data and mobile platforms.

What Exactly Do You Mean By “Reseller” Agreement?

Posted in For Entrepreneurs and Companies, IP/Privacy/Social Media, Startups

A useful note from our colleague Sanjay Beri, originally posted at Technology’s Legal Edge.

I was recently reminded that the term “reseller” agreement can often mean different things to different people.  Misunderstandings about these types of relationships creates the potential for miscommunication and wasted time drafting the wrong terms.

A client recently asked me for a form of reseller agreement to engage resellers to help distribute the client’s software based product.  “You know, just grab something off the shelf that will work” went the common refrain.  As I talked to the client about the type of arrangement he was seeking, however, it became clear that the client was still in the process of making a number of business decisions that would greatly impact pulling the right “form” or, more likely, drafting the right terms.  Given this discussion, I thought it might be useful to impart a few high level questions that I found useful in guiding the conversation.  For ease, I’ll simply refer to my client from the conversation above as the “licensor” and the ultimate user of the product as the “end customer”:

(i) What type of relationship will the reseller have with the end customer (for example, will the reseller be entering a negotiation with the end customer or merely be passing through terms dictated by the licensor)?

(ii) Will the licensor need a direct contractual relationship with the end customer or need rights to prevent the end customer from taking particular actions with respect to the licensor’s product?

(iii) Will the reseller be modifying or bundling licensor’s product in any way for redistribution?

(iv) Will the reseller or licensor have direct support obligations with the end customer?

Having precise discussions and clarity around these points is crucial for both the lawyer and the client.  By having these basic discussions, the parties can save lots of drafting time, and unintended delays in ensuring that the terms provided match up with the business objectives of the client.


Posted in For Entrepreneurs and Companies, For Investors and Fund Managers, IPOs & M&A, News and Recent Events

Megan Muir

From our colleagues Paolo Morante, Steven E. Levitsky, and Laura Kam

In accordance with the 2000 amendments to the HSR Act, the Federal Trade Commission has announced its annual revision to the jurisdictional thresholds under the Act. The new thresholds will go into effect 30 days after publication in the Federal Register, which is expected in the next few business days.

Under the new thresholds, no transaction will be reportable unless, as a result of it, the acquiring person will hold voting securities, assets, or noncorporate interests of the acquired person valued above $76.3 million.

Find out more.

New student data privacy laws: top points for school contractors and K-12 education sites, apps and online services

Posted in For Entrepreneurs and Companies, IP/Privacy/Social Media, Uncategorized

Megan Muir

From our colleagues, Michelle J. Anderson and Jim Halpert, originally published as a Data Protection, Privacy and Security Alert (US)

According to the Data Quality Campaign, 36 states considered 110 student data privacy bills in 2014, and 20 states enacted 28 such bills into law.  At least eight of these new laws may have significant implications for businesses that provide services involving student data to schools, and most of these laws have already taken effect.

IMPLICATIONS FOR VENDORS: Some of the new state student privacy laws specifically require that contracts with vendors include clauses that address the requirements of the new state law.  In most cases, the new state law will be directly applicable to vendors whether or not the contract warns them of the new requirements.

IMPLICATIONS FOR OPERATORS OF K-12 EDUCATIONAL WEBSITES, ONLINE SERVICES AND MOBILE APPS: In addition to new vendor contractor requirements , K-12 educational websites, online services and apps will be subject to various requirements regardless of whether they have a contract with a school.

See the full article (Data Protection, Privacy and Security Alert (US)) for information on steps to take and things to watch out for.