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.

Background

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.
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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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PitchBook just released its recap of 2014 venture capital trends by region, focusing on the most active regions and presenting the information in infographic form. Each infographic can be found here: Bay Area, Pacific Northwest, New York metro and Europe. Below is also a quick summary of the highlights by region:

Bay Area:

  • The median pre-money valuation for 2014 was $28.2m (up from $18.3m for 2013).
  • The most active sector (by both deal count and capital invested), by a wide margin, was information technology.
  • The region


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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
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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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Bill Carleton has a good post regarding the recent comments from Keith Higgins, the Director of the Division of Corporation Finance, who spoke at the 2014 Angel Capital Association Summit.  Higgins discussed the SEC’s principles-based approach with respect to meeting the requirements of new Rule 506(c). 

Since the SEC’s adoption of new Rule 506(c) in September 2013 allowing general solicitation by issuing companies in certain circumstances, angel investors have been concerned about the accredited investor verification standards set forth in those new rules.  The debate has centered around what actions
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CB Insights has published summary data regarding Q2 2013 corporate venture capital investing, showing CVC investment in 126 deals with total funding of US$1.7 billion. This marks a large increase over the past two quarters (both at US$1.4B) and an even larger increase year-over-year (with Q2 2012 at US$1.2B).  The five most active CVC investors listed are: Google Ventures, Intel Capital, Qualcomm Ventures, In-Q-Tel and Novartis Venture Funds.  A full report is available to paid subscribers.

CVC Q2 2013 - CB Insights sm.jpg
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The Q1 2013 Halo Report report has been released by The Angel Resource Institute (ARI), Silicon Valley Bank (SVB) and CB Insights.  The report, available for download here, is a a national survey of angel group investment activity.

Highlights of the Q113 report include the following:

  • Round sizes trended up to a median of $680K per deal, a 5 quarter high;
  • Pre-money valuations remained at $2.5 million; and
  • Internet, healthcare and mobile deals attracted the most angel interest (72% of Q1 deals, obtaining 64% of the angel


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CB Insights has published summary data regarding recent venture capital trends, together with a full report available to paid subscribers.  In terms of investments by VCs, the report indicates that US$7.0B was invested in 807 deals in the second quarter of 2013, representing a small increase in dollars invested (versus US$6.9B in first quarter) but a decrease in the number of deals of approximately 4%. The chart below shows quarterly dollars invested and deal volume going back to fourth quarter of 2010.  See the full release by CB Insights
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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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