Contributed by Jeffrey A. Showalter
Most large venture deals require that the Company’s outside legal counsel issue a customary legal opinion, addressed to the investors in the financing, in order to give the investors comfort that the company’s legal affairs are in order. For companies that have been represented since formation by large regional or national counsel with venture capital experience, this requirement generally is not overly burdensome. However, where counsel has not represented the company since formation or is unfamiliar with VC deals, the legal opinion can become an expensive part of the process and a potential delay in the timing of the financing. Below is a short primer on why VCs require legal opinions and the process and cost typically required for a law firm to issue such an opinion.
Purpose—what is the purpose of a legal opinion?
As noted above, in a venture financing, the legal opinion is primarily intended to provide the investors with comfort that the records and procedures relating to the company’s formation, corporate governance and capitalization are in order and that the company has properly approved, and has the legal authority to enter into, the subject venture financing transaction without burdensome registration with the SEC. Although the company also makes representations and warranties to the investors with respect to these issues, unlike other representations and warranties made by the company that relate primarily to business issues (i.e., intellectual property, material contracts, employment matters, etc.), the company’s outside legal counsel is often in a better position than the company to provide reassurance on the matters covered by a legal opinion.
Process and Cost—what does it typically cost for a law firm to issue a legal opinion?
In order to provide a typical legal opinion, a law firm must review all of the company’s corporate and capitalization records since formation, the transaction documents and various other material contracts and relevant statutes. Where the law firm has represented a company since formation, this “review” has largely already taken place prior to the financing, by virtue of the firm having prepared the relevant corporate and capitalization records. However, where the law firm is new to representing the company, this review of records can require substantial investment of time (particularly if the company has been in existence for a long period of time and has a complicated capitalization table) and often results in the identification of issues that the company needs to remediate, or “clean-up,” in order for the law firm to issue a “clean” opinion. Given this variability in required work, the cost of rendering a legal opinion in a venture financing typically ranges from $5,000 to $20,000 or more. In understanding why these costs can become so large relative to the other legal costs of the deal, it is also important for companies to appreciate that a law firm’s professional liability insurance coverage is used to back-stop any inaccuracies in the firm’s legal opinions. Accordingly, when issuing legal opinions, law firms must implement conservative procedures to ensure absolute accuracy.
Thank you to all who participated in the Technology Leaders Forecast Survey that we posted last month. As posted earlier, on October 7, DLA Piper hosted its 2014 Global Technology Leaders Summit, where technology leaders, influential innovators and policymakers convened to discuss the future of innovation. In connection with the Summit, DLA Piper released the results of the survey, which was developed with PitchBook. The results concluded that: “With a thriving tech economy, ballooning valuations and an IPO market humming at a level unseen since the dot-com boom of the late 1990s, headlines have lately, inevitably been raising the specter of another tech bubble — and asking whether a corresponding collapse is at hand. The answer, according to technology leaders, is a resounding no.”
Other key takeaways from the survey results included:
- 83% of respondents expected moderate economic growth over the next 12 months.
- Many respondents were bullish about their own business prospects, with more than a quarter reporting that they expect significant growth in the next year. Another 69% believe sales will grow at a moderate pace.
- 67% of respondents believe that China will be a major source of innovation in the near-term, a drastic change from the 2012 survey results when 9 out of 10 respondents didn’t view China as a serious contributor to global technology development.
- Attracting and retaining talent continues to be a major concern among technology leaders.
- Another primary concern among technology leaders is protecting their intellectual property and proprietary data, specifically data security.
- Executives eye mobile, big data and cloud computing as the three most promising sectors of the technology economy. Respondents were less bullish on social media and digital currencies such as Bitcoin.
If you are interested in more detail, a copy of the full survey results can be found here.
The SEC has recently issued interpretations regarding Rule 147. This rule provides a safe harbor under Section 3(a)(11) of the Securities Act of 1933, as amended, which exempts from federal registration securities offered and sold only to persons resident within a single state or territory, in which the issuer is also resident. While the exemption is a relatively simple idea at a high level, there can often be challenges in applying it, such as determining where a company resides or where an offer occurs. Rule 147 provides bright line tests that can be critical when structuring an intrastate offering.
The recent SEC interpretations are specifically useful if attempting to structure a crowdfunding transactions solely within a state. The interpretations clarify that an issuer would not violate Rule 147 by:
- engaging in general advertising or general solicitation, provided that offers of securities are made only to persons resident within the state of which the issuer is a resident;
- using an third-party Internet portal to promote an offering to residents of a single state, if the portal implements adequate measures so that offers of securities are made only to persons resident in the relevant state;
- using its own website or social media presence to offer securities, if it implements technological measures to limit communications that are offers only to those persons whose Internet Protocol, or IP, address originates from a particular state and prevent any offers to be made to persons whose IP address originates in other states.
In addressing the challenges of limiting offers of securities to residents of the issuer’s state, the SEC strongly encouraged:
- using disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state; and
- limiting access to information about specific investment opportunities to persons who confirm they are residents of the relevant state (for example, by providing a representation as to residence or in-state residence information, such as a zip code or residence address).
It is important to recall that Rule 147 only provides a federal securities registration exemption. An issuer using it must still comply with state securities registration requirements. With the recent crowdfunding rules adopted in Washington (and a few other states), conducting an intrastate crowdfunded securities offering will be possible.
The SEC’s recent interpretations give issuers comfort that, when attempting to use such state crowdfunding exemptions, they will not inadvertently step outside of the federal exemption for intrastate securities offerings.
On October 7, DLA Piper will host the Technology Leaders Summit, where technology leaders, influential innovators and policymakers convene to discuss the future of innovation. At the Summit, DLA Piper will release the results of its fourth, semi-annual Technology Leaders Forecast Survey, which will gauge the perspectives of leading technology and venture capital executives regarding the business climate and operating environment for technology companies.
We invite you to participate in the survey (on or before September 22). In appreciation, respondents will receive a copy of the final report and survey results.
Over the past few years, a new funding source for seed stage startups has developed and quickly become an integral part of the startup ecosystem. This newer brand of investor is typically labeled a seed venture or micro-venture capital fund (a Micro-VC).
Micro-VCs are smaller venture firms that primarily invest in seed stage emerging growth companies, often have a fund size of <$50M and typically invest between $25K to $500K in a given company. While many Micro-VCs are managed by former venture capitalists, former entrepreneurs and/or super angels, many larger venture firms also have Micro-VC equivalent funds used (or have earmarked a small portion of their fund) to target the same seed stage startups and prospect later opportunities for their larger venture funds (or investments).
Samir Kaji, Managing Director at First Republic Bank, provides an excellent overview of the Micro-VC market and his observations and predictions regarding the prevalence of Micro-VCs going forward on the CB Insights blog (entitled Where is the Micro-VC Market Going?).
As Samir notes, the Micro-VC investor has developed to fill a necessary gap in startup funding, namely the window prior to a traditional venture capital round. From my experience, Micro-VCs are much more tolerant to the risk of the unknown that all startups face as they develop new technology or attempt to enter or create a new market. Given the ever decreasing cost of getting a startup off the ground (due to technology innovations and efficiencies such as cloud, SaaS, digital distribution channels, etc.), startups need less money to sanity check their business concepts – and Micro-VCs have provided much needed capital to the startup world (especially considering the reduction in the number of traditional venture capital funds over the past several years) and have reaped the rewards of getting in early on the next big ideas.
CB Insights estimates that there are 135 Micro-VC firms actively investing at this time. Here is the list from CB Insights of the funds it identified, together with a list of the most active Micro-VC funds between Q1 2011 and Q1 2014. However, the actual number is likely higher than 135 given that a few Seattle-based Micro-VCs (that are not listed) also come to mind. The good news for entrepreneurs and startups is that Samir estimates there may be an additional 40 to 50 new funds entering the market.
The Q1 2014 Halo Report has been released by the Angel Resource Institute, Silicon Valley Bank and CB Insights. The Halo Report analyzes angel investment activity and trends in the United States. Here are a couple interesting Q1 2014 highlights:
- The median angel round size jump to $980K (up from $750K in each of Q1 and Q4 2013);
- The median round size was $1.65M when angel groups co-invest with other types of investors;
- The median seed stage pre-money valuation increased slightly to $2.7M;
- Angel groups continue to primarily invest within their home state, with 75% of angel group investments made intrastate;
- California was the most active region for angel deals completed (at 17.7% of the total deals), however, the Great Lakes region accounted for the most total dollars invested (at 24.6% of total dollars invested); and
- The top three industry sectors attracting angel investment were Internet, healthcare and mobile, both in number of deals and total dollars invested – with the Internet sector accounting for the most deals and total dollars by a significant margin.
A copy of the full report can be found here and the infographic can be found here.
Rachel M. Perkins
Startups and public companies alike often use equity to help attract, retain and incentivize talented employees and other service providers. The different forms of awards have proliferated in the past several years, though, leading to a confusing “alphabet soup” of jargon that often frustrates both the recipients of grants and the company itself. Many angel and venture capital investors continue to prefer seeing stock options and restricted stock awards in their portfolio private companies, as these are the most common and simplest to administer. Other forms of awards can also be challenging for startups because there is no public market to easily set a contemporaneous per share stock price or provide liquidity for the award recipients. However, while stock options—both nonstatutory (NSO) and incentive (ISO)—and restricted stock awards (RSAs) remain the most popular and most recommended form of equity compensation, other forms—such as restricted stock units (RSUs) and stock appreciation rights (SARs)—are gaining popularity in certain markets, and we are being asked more and more frequently about these alternatives.
Adding to our previous discussions of adopting your first equity incentive plan, NSOs vs. ISOs and options for issuing employee equity in LLCs, we have put together the below quick reference charts, which are intended as high-level summaries of the most common equity incentive awards as well as some of the other less common awards available. The following charts highlight some of the key features and tax consequences of each type of award, as well as some of the potential drawbacks associated with each: Continue Reading
Compliments of Jason Smith of Kidder Mathews, attached is a Seattle-area office real estate market review for Q2 2014. As the report notes, so far in 2014, the only major surprise in the office market was Boeing expanding into over 600,000 s.f. of space in Bothell and the I-90 Corridor, single-handedly dropping the vacancy rates in those submarkets by 300-400 basis points (bps) each. The rest of the market trends are holding steady; leasing activity is improving across the region and the lack of large contiguous spaces in the Seattle and Bellevue central business districts (CBDs) have emboldened developers. Rental rates for Class A space in the CBD hotspots have moved up significantly, and with the economy continuing to improve, the forecast is for rental rates to continue their upwards trend over the next year.
The second quarter saw positive absorption in all five markets (Seattle, East King County, South King County, Snohomish County and Pierce County) for the first time in over six years. As a result of this activity, the region’s vacancy rate dropped to 9.5%, a full 50 bps lower than the first quarter. The forecast is for the vacancy rate to continue to decrease, perhaps at an even quicker pace, as tenants see their options narrowing and rental rates still not fully back to pre-recession levels.
The full Q2 2014 market review can be found here.
CB Insights recently released its Pacific Northwest Investment and Exit Report, which analyzed private company investment and exit activity over the past five years. The report collected data from all activity sources, including venture capital, private equity, strategic corporate investments, corporate venture investors, angels, incubators and accelerators. Here are a few highlights from the report:
- Since 2009, the number of deals closed per year has increased 144% (195 deals in 2009 vs. 475 deals in 2013), with the total annual investment amount increasing 81% ($780 million dollars invested in 2009 vs. $1.41 billion dollars invested in 2013).
- In 2013, Series A funding activity accounted for 29% of the total funding activity, a five-year high for the category.
- In 2013, seed/angel funding activity accounted for 7% of total funding activity, up from only 1% in 2009.
- By sector, 35% of all dollars invested went to Internet-related companies, a five-year high for the category.
- CB Insights ranked Madrona Venture Group as the most active early-stage investor in the region since 2009, followed by Founders Co-op.
- CB Insights also ranked Madrona Venture Group as the most active mid-stage investor (Series B and C rounds) in the region since 2009, followed by Ignition Partners.
- CB Insights ranked Ignition Partners as the most active late-stage investor in the region since 2009, followed by Madrona Venture Group.
- Over the last couple years, the number of exits per year has remained relatively constant (at 140 exits in 2013), with M&A accounting for 97% of the deals and IPOs accounting for 3%.
- Google was the top acquirer in the Pac-NW, with seven acquisitions since 2009.
A copy of the full report can be found here.
Article prepared by and republished courtesy of our colleagues Steven Levitsky and Paolo Morante; originally published here: http://www.dlapiper.com/en/us/insights/publications/2014/05/merger-enforcement-actions-below-the-hsr-threshold/.
“Less is more” may be true in architecture, but in merger clearance law, “less” is still enough to trigger antitrust investigations and litigation and rescission of the whole transaction. By “less,” we mean less than the Hart-Scott-Rodino $75.9 million threshold.
The big case currently in the news underscoring this point is FTC v. St. Luke’s Health System. In January 2014, the Federal Trade Commission obtained a decision from the US District Court for Idaho ordering full divestiture of a non-reportable deal more than two years after the merger had been consummated.
But that result is actually old news. Contrary to popular opinion, the antitrust agencies have a long history of challenging deals well below the Hart-Scott-Rodino thresholds, even when the deals have already closed. And with the St. Luke’s case, they are warning again that no anti-competitive deal is immune from challenge, even if it is small.
What issues should you keep in mind to prevent a future disastrous challenge from the regulators? In this post, we briefly discuss the highlights of St. Luke’s and then close with 10 important points to keep in mind in upcoming M&A transactions. Continue Reading