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
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Earlier this month the Cayman Islands passed new legislation revising its existing Exempted Limited Partnership Law.  The new legislation, the Exempted Limited Partnership Law 2014, replaces the existing legislation in its entirety and has a primary objective of providing Cayman Islands partnerships with more flexibility in a number of areas and generally bringing Cayman Islands law into closer conformity with existing laws in more familiar jursidictions such as Delaware.  This is welcome news to both private fund investors and sponsors.  A detailed review of the changes enacted by the new legislation will follow in a future post on The Venture Alley, but here is a quick summary of some of the more material changes contained in the new legislation:

  • Allows foreign limited partnerships to serve as general partners of Cayman Islands exempted limited partnerships (previously funds typically had to set up either a Cayman Islands exempted limited partnership or Cayman Islands exempted company to serve as the general partner);
  • No longer requires an exempted limited partnership’s register of limited partners to reflect contributions by and distributions to limited partners, but rather only the names and addresses of limited partners (which will serve to increase the privacy of limited partners who are invested in Cayman Island investment funds);
  • No longer requires the limited partnership agreement to be executed as a deed and witnessed in order to make valid a power of attorney granted therein (with this change being retroactive so as to validate any power of attorney granted prior to the passage of the new legislation); and
  • Simplifies the admission process for new limited partners in connection with a transfer of interest in an exempted limited partnership.
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As we’ve previously blogged, in July 2013 the SEC adopted rules that permit general solicitation and general advertising in connection with certain offerings of securities to accredited investors.  Yesterday, to help the markets understand some common interpretative questions associated with these new rules, the SEC issued several new Compliance and Disclosure Interpretations.  The new interpretations mainly address:

  • when and how companies may switch between “old” Rule 506(b) (no general solicitation) and new 506(c) (general solicitation permitted),
  • the need to amend Form D if such changes are made,
  • the


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Megan Muir.jpgCONTRIBUTED BY
Megan Muir

Earlier this summer, together with some of my partners within DLA Piper (Christopher Paci, Jason Harmon, Darryl Steinhause and Wesley Nissen), I wrote an article about new SEC regulations concerning private offerings. The final rules issued in July 2013 by the SEC go into effect on September 23, 2013. Below is a summary of the changes with respect to the disqualification of certain “bad actors” in connection with private offerings.  Also, attached is a sample Rule 506 Covered Person Questionnaire seeking information about potentially disqualified individuals and entities. The full article also contains a discussion of new rules allowing general solicitation in certain private fundraising as well as a discussion of certain proposed private offering rule changes that are not yet final. That piece may be found here.

The Dodd-Frank Act, enacted in 2010, required the SEC to adopt rules to prohibit use of the Rule 506 exemptions under Regulation D for securities offerings in which certain “bad actors” are involved, whether or not general solicitation or general advertising are used in the offering. Rule 506 is the exemption from registration requirements used in many private offerings, including most startup financings. To fulfill this Dodd-Frank requirement, the SEC has adopted rules that disqualify an issuer from selling securities in reliance upon the Rule 506 exemption if the issuer, its board members, certain of its officers and its large shareholders, among others covered by the rule, have experienced a “disqualifying event.” This is similar to existing bad actor rules, such as those found in Rule 505 of Regulation D, which relies on the disqualification provisions set forth in Rule 262 of Regulation A.

Disqualifying events include criminal convictions in connection with sales of securities, certain SEC civil and administrative actions and certain other orders from financial service industry regulatory authorities. If the issuer or other covered person is deemed a bad actor under this rule, the Rule 506 exemption will not be available to the issuer.


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Megan Muir.jpgCONTRIBUTED BY
Megan Muir

Earlier this summer, together with some of my partners within DLA Piper (Christopher Paci, Jason Harmon, Darryl Steinhause and Wesley Nissen), I wrote an article about new SEC regulations concerning private offerings. The final rules issued in July 2013 by the SEC go into effect on September 23, 2013. Below is a summary of the changes with respect to general solicitation in such rules. The full article contains a discussion of other regulatory issues that should be considered and new “bad actor” rules, as well as a discussion of certain proposed private offering rule changes that are not yet final. That piece may be found here.

On July 10, 2013 the US Securities and Exchange Commission adopted much-anticipated amendments to its regulations on private offerings under Rule 506 of Regulation D of the Securities Act of 1933, as amended, that lift the more than 80-year ban on general solicitation and advertising for certain purchasers, as mandated by Section 201(a) of the Jumpstart Our Business Startups Act (popularly called the JOBS Act).

Beginning September 23, 2013, these changes will permit issuers to use advertising and other forms of mass communication to sell securities solely to “accredited investors” under Rule 506 of Regulation D. However, these amendments also include several new requirements and procedures. You will want to be aware of these changes before you launch a general solicitation campaign.


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Interesting tax update courtesy of Bruce Thompson, a Senior Policy Advisor with DLA Piper.  He continues to see momentum for comprehensive tax reform and wrote the following summary of what that might mean for fund managers and partnerships:

“The Chairmen of the Tax Committees in the House and Senate—Rep. Dave Camp and Sen. Max Baucus—are committed to moving a major tax reform bill, and the House leadership has reserved HR 1 for the tax reform bill.


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This article is appearing simultaneously on The Venture Alley and on Startup Law Blog

The below flowchart may be helpful to you in answering the question whether you qualify for the exemption for “venture capital funds” under Section 203(l) of the Investment Adviser’s Act of 1940 ( the “Advisers Act”), pursuant to the final rules promulgated by the SEC.1  In all cases you should consult with an attorney.  For more detailed information regarding the federal exemption, check here.  Note that the Washington State Department of Financial Institutions (DFI) has proposed rules that are going to require many fund managers to register with the State as investment advisors.  We plan to prepare a separate flowchart to help you understand those rules once they are finalized.


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As readers of this blog know, Washington State is proposing new rules that will require more fund managers to become registered investment advisers.  These rules were originally proposed in the second half of last year and, in response to preliminary comments, the Securities Division of the Washington State Department of Financial Institutions (DFI) proposed new rules for comment by May 21, 2013.  Quoting from the DFI’s Notice to Interested Parties dated March 27, 2013:

In August 2012, the Securities Division circulated an early draft of rule amendments to the interested parties list. We also conducted a small business economic impact survey. In response to comments received from interested persons, and in response to the results of the small business economic impact survey, the Securities Division made certain changes to the proposed rules compared to the earlier draft…

The Securities Law Committee of the Business Law Section of the Washington State Bar Association, representing attorneys practicing in this area throughout Washington State, submitted formal comments to the DFI’s request.  Their comment letter is included below.  Full disclosure, I’m not a member of the Committee, but they asked me to help them in drafting their formal response with respect to how the rules relate to private fund advisers.


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This article is appearing simultaneously on The Venture Alley and on Startup Law Blog. Readers may feel free to re-post this content elsewhere as well.

The world is changing for venture funds and similar funds in Washington State, and not necessarily for the better.  It used to be the case that managers of venture or other private funds did not need to file anything with the SEC or state securities regulators (other than Forms D incident to their fundraisings).  Dodd-Frank changed all that – but provided that investment advisers solely to venture capital or other small private funds may be exempt (based on Congress’ belief that these funds posed no systemic risk to the nationwide financial system).

There are now SEC regulations that define the new exemptions for the managers of venture funds (discussed in more detail here) and for the managers of private funds with less than $150M management (discussed in more detail here).  Even if exempt, however, managers of venture funds and private funds with AUM of less than $150M now must publicly report certain high-level information, which becomes publicly available.  For example, here is the exempt reporting adviser Form ADV for Union Square Ventures.

These rules settled out a few years ago.  Right now, the bigger issue is with state regulators.  State regulatory regimes need to be updated in order to conform to Dodd-Frank.  The North American Securities Administrators Association (NASAA) created model rules for state regulators to follow, which adopted the same venture capital and private fund exemptions.  Many states, including California, have now adopted the NASAA model rules.


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A friend of mine at a major investment bank sent me their market outlook for 2013.  In 2012, the world markets were up 16%.  For 2013, they are projecting:

  1. Interest rates are likely to remain low for a few years,
  2. investors should lower their return expectations, and
  3. “policy” will remain incremental in key developed and emerging markets economies.

Fom an asset class return perspective, there were six key projections:

  1. Bonds will have virtually no nominal returns for the foreseeable future.
  2. High yield and emerging market local debt will provide attractive


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