Category Archives: venture capital

HAPPY 17th ANNIVERSARY to ASSOULINE & BERLOWE!

MIAMI – Assouline & Berlowe, P.A., The Business Law Firm, is pleased to announce that today it is celebrating its 17th Anniversary.

Started on February 10, 2003, through humble beginnings, in a small subleased space in Coral Gables, Assouline & Berlowe has weathered the many business climate changes and challenges of the past two decades.

Assouline & Berlowe is proud of its contributions to its communities in the tri-county area, as part of its presence with offices in Miami, Ft. Lauderdale/Dania Beach, and Boca Raton.  Assouline & Berlowe regularly supports both its legal community and numerous charitable organizations alike.

Assouline & Berlowe is strategically positioned to continue its expansion as a strong player in South Florida’s international business environment.

To all those that we have worked with in the past and to those we hope to work with in the future, we say thank you.

Layout 1Circa. Feb.10,2003

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VENTURE FINANCING: WHAT LEGAL INSTRUMENT?

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Start-up and Emerging Growth Companies often struggle with structuring a Private Securities Offering. Without “giving away the store,” Founders want to maximize realized funding and maintain management control. Potential investors want a reliable exit strategy and realistic profit multiples; capital enhancement with “belt and suspenders” safeguards. Structuring a Financing Package that includes a legal instrument with terms and conditions that balance these conflicting interests is no easy task.

A Company’s business life-cycle position is critical in attracting potential investors, and in successfully negotiating reasonable financing terms and conditions. When competing for funds, a technology start-up with no “proof of concept,” a weak management team, and no revenue stream is certainly disadvantaged. A more mature firm, with strong management and a product near commercialization, will be more attractive. Also, many entrepreneurs fail to create an “alignment of interests” construct; an investor universe with a risk–reward strategy compatible their operational and financial growth horizon.

There is no perfect financing instrument template for all financing deals. Creating an attractive Financing Package, that establishes a solid co-owner relationship (without possible future “buyers’ remorse”), requires careful analysis by a Deal Team that includes business, financial, and legal counsel. The relationship’s “mortar” is the financing instrument’s legal architecture.

Stand-alone Convertible Notes, in many early-Seed rounds, have terms and conditions more easily explained to less-sophisticated investors. Debt instruments, they have no impact on valuation. The drawback; they must carry interest (at least, the Federal rate), and a maturity date. From an investor’s perspective, the conversion features are positive add-ons to the Notes’ purchase price.

Introduced in 2013, by YCombinator, a Silicon Valley firm providing Startup funding, Simple Agreement for Future Equity (“SAFEs”) are debt-equity hybrids “intended to replace convertible notes in most cases…while preserving their flexibility.” Without interest and maturity provisions, SAFEs “are designed to have the same economics and mechanics as convertible notes.” The only significant negotiating terms are the conversion discount rate and the valuation cap; the highest valuation that can be used to determine the Notes’ price.

In early seed deals with family, friends, and less sophisticated Angels, Common Stock seems simple and most cost-effective. While affecting valuation, investors are granted no greater rights or preferences than existing shareholders; interests are aligned. Attempting to maintain decision-making control, Founders think about dual-class Common Stock. Venture capitalists, especially institutions, view this as unpalatable. A collateral rights agreement may be helpful in those situations.

Convertible Preferred Stock remains the instrument of choice for institutional and more sophisticated investors. Conversion is tied to the “Next Qualified” financing, the documentation does not affect valuation, and both parties can negotiation specific conversion formula at inception. Moreover, in the event of insolvency and other specified event, this form carries preferences placing the Preferred ahead of Common Stock.

Market appetite is always the principal driver in any Financing. As of December 2017, PitchBook (a financial data and software company) estimated that 157 US Venture Capital Funds, with $24 Billion in project commitments, have $92 Billion in “Dry Powder;” available for investment. To attract those funds, a Financing Package must demonstrate a strong management team, a well-developed business and financial thesis, and include a legal instrument that mitigates conflicting interests.

Carl H. Perdue, JD, LLM
Senior Counsel and Partner
Business and Finance

The above material is for information purposes only; and is not to be considered legal or financial advice.

ASSOULINE & BERLOWE, P.A.

1801 N. Military Trail, Suite 160

Boca Raton, Florida 33431

Main: (561) 361-6566

Fax: (561) 361-6466

Email: CHP@assoulineberlowe.com

http://www.assoulineberlowe.com/

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SEC Chairman’s Remarks at the Securities Regulation Institute

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Speaking at Washington, DC, on January 22, 2018, Securities and Exchange Commission Chairman, Jay Clayton spoke about two issues before the Commission: (1) his expectations for market professionals, particularly when dealing with new products or new forms of old products, especially concerning Initial Coin Offerings (“ICO”)and (2) the SEC’s approach to remaining Dodd-Frank rulemaking mandates.

Chairman Clayton said “Market professionals, especially gatekeepers, need to act responsibly and hold themselves to high standards….It is expected that they will bring expertise, judgment, and a healthy dose of skepticism to their work. Said another way, even when the issue presented is narrow, market professionals are relied upon to bring knowledge of the broad legal framework, accounting rules, and the markets to bear…The SEC is undertaking significant efforts to educate the public that unregistered securities investments offered by unregistered promoters, with no securities lawyers or accountants on the scene, are, in a word, dangerous….The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the securities laws, particularly in the case of an offering.”

As to the remaining Dodd-Frank mandates, the Chairman noted that the Commission is actively working on “ pursuin(g) an agenda that is true to the agency’s mission as viewed through the lens of long-term Main Street investors…(including) the broad dissatisfaction with the current regulatory approach to retail investment advice, which is commonly referred to as the “fiduciary rule.”…Executive compensation rules for both public companies and SEC-regulated entities…e rules are challenging…as a result of the complexity and scope of the existing executive compensation disclosure regime, as well as the nature of the mandates, I believe a serial approach is likely to be most efficient and best serve the SEC’s mission. I am pleased that we recently issued interpretive guidance to help companies comply with the new pay ratio rules.

The Chairman also discussed the interplay of the Securities Laws with the Administrative Procedure Act and the Congressional Review Act and the Court rulings on that subject, He indicated that the Staff is “crafting rules” sensitive to the substantive constraint of those statutes.

Concerning clawbacks related to executive compensation, the Chairman remarked that although several companies have publicized clawback policies, some going beyond what Dodd-Frank requires, few companies have attempted clawback compensation this is one area that will be given rulemaking priority.

Carl H. Perdue, JD, LLM
Senior Counsel and Partner
Business and Finance

The above material is for information purposes only; and is not to be considered legal or financial advice.

ASSOULINE & BERLOWE, P.A.

1801 N. Military Trail, Suite 160

Boca Raton, Florida 33431

Main: (561) 361-6566

Fax: (561) 361-6466

Email: CHP@assoulineberlowe.com

http://www.assoulineberlowe.com/

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Need Help Finding Investors? Can I Hire A “Finder? Yes. But, At Your Peril!

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We often hear from Start-Up and Emerging Growth Company entrepreneurs about their difficulty in sourcing venture capital. With no, or limited, operating/revenue history, getting funding to move from concept, to prototype, and to commercialization is challenging. And often, without hiring experienced financial and legal counsel, what could be a successful financing deal ends in disappointing failure.

The earlier the business life cycle, the greater capital needs. Family and friends are usually the first source of venture capital. “Angel Investors” (high-net worth individuals) the next tranche; and for more mature companies, “Institutional Investors,” (boutique and corporate Venture Capital and Private Equity firms, Insurance Companies, and the like) investing in the next successive financing rounds. If these sources are unavailable, a frustrated entrepreneur in need of cash sometimes turns to a so-called “Finder;” an individual or firm receiving compensation based on successfully finding potential investors.

Section 3(a)(4)(A) of the federal Securities Act of 1933 defines a “broker” broadly as any person engaged in the business of effecting transactions in securities for the account of others. Although Section 2(a)(1) defines a “Security” in 153 words. Simply, a “Security” is a debt or equity interest or participation in a business or other venture where the interest or participation holder (the investor) relies on the business or venture for his or her profit or loss and not on his or her own efforts.  Under the Securities Act of 1933, the following are some, but not all, activities requiring individual or entity registration:

  • Finding investors for entities issuing securities, even in a “consultant” capacity;
  • Engaging in, or finding investors for, venture capital or “angel” financings, including private placements;
  • Finding buyers and sellers of businesses (i.e., activities relating to mergers and acquisitions where securities are involved);
  • investment advisers and financial consultants;
  • persons that market real-estate investment interests that are securities;
  • persons that act as “placement agents” for private placements of securities;
  • persons that effect securities transactions for the account of others for a fee, even when those other people are friends or family members;
  • finding investors or customers for, making referrals to, or splitting commissions with registered broker-dealers, investment companies or other securities intermediaries;
  • finding investment banking clients for registered broker-dealers;

Under Florida Statute Section 517.12(1), a person who, for compensation, refers; solicits; offers; or negotiates for the purchase or sale of securities is required to register with the State of Florida’s Office of Financial Regulation.
Relying on an unregistered Finder’s “pitch” about a supposed or real list of very well healed contacts sometimes leads to fraud and disappointment. Unregistered Finders may be subject to severe sanctions under State and Federal Securities Laws. Investment contracts between company and investor, having Finder involvement are voidable and subject to Rescission. Those contracts may be cancelled, with the investors getting their money back!

Carl H. Perdue, JD, LLM
Senior Counsel and Partner
Business and Finance

The above material is for information purposes only; and is not to be considered legal or financial advice.

ASSOULINE & BERLOWE, P.A.

1801 N. Military Trail, Suite 160

Boca Raton, Florida 33431

Main: (561) 361-6566

Fax: (561) 361-6466

Email: CHP@assoulineberlowe.com

http://www.assoulineberlowe.com/

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The Wisdom of Crowds II: SEC’s New Crowd Funding Rules

CrowdfundingAn earlier Blog discussed Florida’s Intrastate Crowd Finance Act; amending the Securities and Investor Protection Act, permitting Florida-based entrepreneurs, commercial and real estate businesses capital formation through web-intermediary Crowdfunding Platforms.

The SEC has now adopted its Jobs Act Title III (Crowdfunding) Rules; expanding Crowdfunding’s reach.  Transactions relying on the new rules would be required to use an SEC-registered intermediary, either a broker-dealer or a funding web-portal.

The SEC seeks public comment on the proposed rule amendments for a 60-day period following their publication in the Federal Register. The new rules and forms become effective 180 days after Federal Register publication.

The recommended rules would, among other things, enable individuals to purchase securities in crowdfunding offerings subject to certain limits, require companies to disclose certain information about their business and securities offering, and create a regulatory framework for intermediaries facilitating those transactions.  More specifically:

  • Permitting a company, in any 12-month, period to raise a maximum aggregate of $1 million through crowdfunding offerings;
  • Permitting individual investors, over any 12-month period, to invest across all crowdfunding offerings an aggregate up to the following:
      • If either their annual income or net worth is less than $100,000, then the greater of $2,000 or 5 percent of the lesser of their annual income or net worth.
    • If both their annual income and net worth are equal to, or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
  • During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Under the recommended rules, certain companies not eligible to use the exemption include:

  • non-U.S. companies,
  • Exchange Act reporting companies,
  • certain investment companies,
  • companies subject to disqualification under Regulation Crowdfunding,
  • companies not complying with the Regulation’s annual reporting requirements during the two years immediately preceding the offering statement filing, and
  • companies with no specific business plan, or that indicate  their business plan includes a merger or acquisition with an unidentified company or companies.

Crowdfunding securities cannot be resold for one year. Securities would not count towards the threshold requiring a company to register its securities under Exchange Act Section 12(g) if the company is current in its annual reporting obligations, retains the services of a registered transfer agent, and has less than $25 million in total assets as of the end of its most recently completed fiscal year.

Companies relying on the recommended rules must file with the Commission certain disclosure information, the intermediary, and the investors. Additionally, in an annual report to the SEC companies must disclose:

  • The securities price or the method for determining price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;
  • A discussion of the company’s financial condition;
  • Company financial statements that, depending on the amount offered and sold during a 12-month period, are accompanied by information from the company’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor.
    • A company offering more than $500,000 (but not more than $1 million of securities relying on these rules for the first time) would be permitted to provide reviewed rather than audited financial statements, unless company financial statements are available that have been audited by an independent auditor;
  • The business’ description and the use of proceeds;
  • Information about officers and directors and of owners of 20% or more of the company; and
  • Certain related-party transactions.

Intermediary Crowdfunding Platforms would be SEC registered as Funding Portals and be members of a national securities association (currently, FINRA). They would be prohibited from, among other things,

  • offering investment advice or making recommendations;
  • soliciting purchases, sales, or offers to buy securities;
  • compensating promoters and other persons for solicitations or based on the sale of securities; and
  • holding, possessing, or handling investor funds or securities, Crowdfunding Platforms.

The rules would require Intermediaries to, among other things:

  • Provide investors with educational materials explaining, among other things, the platform’s investing process; types of securities offered; information a company is required to provide investors; resale restrictions; and investment limits;
  • Take certain measures to reduce fraud risk, including having a reasonable basis for believing
    • that the company complies with Regulation Crowdfunding, and
    • that the company has established means to keep accurate records of securities holders;
  • Make available to the public (on its platform throughout the offering period and for a minimum of 21 days before any security may be sold in the offering)  the company’s disclosure information;
  • Provide communication channels on the platform permitting discussions about offerings;
  • Provide investors with disclosure the intermediary’s compensation;
  • Accept an investment commitment from an investor only after that investor has opened an account;
  • Have a reasonable basis for believing an investor complies with the investment limitations;
  • Provide investors notices once they have made investment commitments and confirmations at or before completion of a transaction;
  • Comply with maintenance and transmission of funds requirements; and
  • Comply with completion, cancellation, and reconfirmation of offerings requirements.

Intermediaries would also would be prohibited from engaging in certain activities, such as:

  • Providing platform access to companies that they have a reasonable basis for believing have the potential for fraud or have other investor protection concerns;
  • Having a financial interest in a company offering or selling securities on its platform unless the intermediary receives the financial interest as compensation for the services, subject to certain conditions; and
  • Compensating any person for providing the intermediary with personally identifiable information of any investor or potential investor.

With its October 30th announcement, SEC Chair Mary Jo White said: “There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need.”

For more information on crowd funding matters, please contact:

Carl H. Perdue, JD, LLM
Senior Counsel and Partner
Business and Finance

The above material is for information purposes only; and is not to be considered legal or financial advice.

ASSOULINE & BERLOWE, P.A.

1801 N. Military Trail, Suite 160

Boca Raton, Florida 33431

Main:  (561) 361-6566

Fax: (561) 361-6466

Email: CHP@assoulineberlowe.com

http://www.assoulineberlowe.com/

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Learn How to Protect Your Clients’ Valuable Intellectual Property

Assouline & Berlowe

Assouline & Berlowe patent attorneys Peter Koziol and Greg Popowitz will be speaking at a webinar focusing on Intellectual Property for the Non-IP Attorney.  The Pincus Professional Education webinar will take place on August 06, 2015 at 3 p.m. EST

To view the full announcement and register for the event, click here.

An overview of the Intellectual Property Topics that will be discussed are highlighted below.

IP is a complicated area, even for IP attorneys. For the rest of us, the nitty gritty rules are sometimes a mystery.  Listen in on this IP for the Non-IP attorney webinar so you can understand how to best protect your client and their assets. You will learn:

Origins of Intellectual Property (IP) in the United States and Internationally

  • The USPTO is part of the U.S. Department of Commerce (Patents and Trademarks)
  • WIPO covers International IP rights
How a non-IP lawyer can identify IP to Protect their Clients and Generate Value for the Business (Emphasis on Patents)
  • Patents (patent process, patentability opinions, freedom to operate opinions; limited time)
    • Design, Utility, Plant Patents
  • Trademarks (common law, state, federal rights; rights continue with use)
    • Strategy of using intent to use application vs. actual use application
  • Copyrights, and
  • Trade Secrets
What Does IP Protection Provide?
  • IP creates value to the business (it is an asset owned by the business)
  • Protects inventions, brands, etc. of the business, which can provide a marketing and sales edge over competitors
  • Patents – generate new business opportunities since a patent gives you an exclusive right
  • Licensing and sales opportunities
  • Access to Financing
  • Leverage in Litigation (damage calculations and discovery access)
  • Leverage in Business (assets and monopoly like rights)
How to Secure International Protection
  • Work with international: IP counsel, companies and connections, and markets
  • Patent Cooperation Treaty (PCT)
  • Madrid Protocol (trademarks)
  • Industrial Designs Treaty
  • Berne Convention
General Considerations for IP
  • Coordinate with transactional and litigation counsel, insurance providers, venture capital, and tax counsel
  • Bankruptcy and creditor rights impact
  • Receiver/trustee
  • Estate planning
Common Mistakes and Misconceptions
  • Poor man’s copyright
  • Statutory Bar Date (Loss of Rights)
    • Public Use/Disclosure (trade shows, publications, offers to sell)
    • Social Media Posts
  • Non-Disclosure Agreements
  • Priority of Use

For questions about the webinar or any Intellectual Property matters, contact Peter Koziol or Greg Popowitz below.

ASSOULINE & BERLOWE, P.A.

213 East Sheridan Street, Suite 3

Dania Beach, Florida  33004

Main: 954.929.1899

Fax: 954.922.6662

http://www.assoulineberlowe.com/

Intellectual Property, Labor & Employment, Creditors’ Rights & Bankruptcy, Business Litigation, Corporate & Finance, Real Estate, International Law

Miami • Ft. Lauderdale • Boca Raton

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Update: Federal Trade Commission Prosecutes It’s First Crowdfunding Case

Federal Trade Commission

In a recent blog post on this subject, Assouline & Berlowe outlined pertinent provisions of Florida’s Intrastate Crowdfunding legislation. The new law is aimed at assisting venture entrepreneurs and smaller businesses raise investment capital through general solicitation and without the usual high transaction costs. By utilizing an intermediary online platform, individuals and businesses can reach a vast number of potential investors; usually those who have limited amounts to invest. As with all searches for “The Next Big Thing,” Caveat Emptor!

On June 11, 2015, in its first crowdfunding case, the Federal Trade Commission (FTC) announced legal action against a promoter who used the online intermediary platform Kickstarter.com to solicit funds to produce The Doom That Came to Atlantic City; a board game. Parenthetically, Kickstarter.com successfully raised over $1 billion since its inception. Crowdfunding online platforms raised approximately 2.7 billion in 2012, and approximately $5.1 billion in 2013.

The FTC files a complaint when it has “reason to believe” that the law has been or is being violated and it appears to the FTC that a proceeding is in the public interest. Stipulated orders have the force of law when approved and signed by the District Court judge. This case is part of the FTC’s consumer protection program related to FinTech; the use of new and emerging financial technology

The FTC and the promoter reached a case settlement. The promoter is

  • prohibited from making any deceptive representations in any future crowdfunding campaign;
  • required to honor any stated refund policy;  and
  • barred from disclosing or benefiting from customers’ personal information, and failing to dispose of such information properly

A $111,793.71 judgment was also imposed against the promoter; but was suspended because of his inability to pay. If it is found that he misrepresented his financial condition, it will be reinstated.

In its announcement, Jessica Rich, Director of the FTC’s Bureau of Consumer Protection said:

“Many consumers enjoy the opportunity to take part in the development of a product or service through crowdfunding, and they generally know there’s some uncertainty involved in helping start something new. But consumers should be able to trust their money will actually be spent on the project they funded.”

According to the FTC, the promoter, doing business as , Co., raised $35,000, promising certain rewards. He raised more than $122,000 from 1,246 backers, most of whom pledged $75 or more.  After 14 months, the promoter cancelled the project promising to return the funds. Neither the funds nor the promised rewards were provided to the investors. The FTC’s complaint alleged that the promoter “spent most of the money on unrelated personal expenses and for a different project.”

The FTC’s Complaint outlined the Kickstarter.com “campaign:”

To initiate a Kickstarter “campaign,” the project creator develops a “homepage” that provides information (usually including a video and multiple pictures) about the product, service, or content that will be created with the raised funds. This homepage serves as the launch point for the entire project. In addition to information about the final product, the homepage provides information about the total amount of money needed for the project and the number of days left to fund it. Project creators can choose the length of the fundraising period, but Kickstarter limits the maximum time period to 60 days.

Kickstarter is structured for “all or nothing” funding. If the creator does not raise sufficient funds to meet the original fundraising goal within the time period agreed to, the creator does not receive any money and no backer is charged.

Kickstarter’s Terms of Use stated that Kickstarter funds must be used on a project with a “clear goal” that “produces” a deliverable.

Every project’s homepage offers multiple “pledge” options. Each tier promises specific deliverables or, in Kickstarter parlance, “rewards.” Usually, the higher the amount pledged, the greater the rewards promised to the consumer.

To become a project “backer” on Kickstarter, a consumer must first locate that project’s homepage by searching for the project by its name or by browsing the various categories and subcategories within Kickstarter’s main page. A consumer has the option of searching for a project by category (e.g., dance, food, games, etc.) or location (e.g., city or state). Kickstarter’s main homepage also features “staff picks” or “popular projects that appear as soon as you arrive at the website. Clicking on the title of the project takes the consumers to its homepage.

From the project homepage, consumers can select the amount they wish to pay.

Kickstarter will prompt the consumer for his credit card information. The consumer will not be charged until the fundraising period is complete and the project reaches its funding goal. Once the project reaches its funding goal, Kickstarter charges the consumer’s credit card and transmits the money to the project creator. In the event that a project reaches its funding goal but is unable to provide rewards to its backers, Kickstarter’s Terms of Use (as existing in the current case) stated that the project creator must refund the consumers the amount pledged.

Crowdfunding is becoming an important fund raising tool. Initially developed from philanthropic campaigns, the process allows small investors greater participation in free enterprise. For the entrepreneur closed to traditional capital sourced, it can provide the “seed money” to take a concept to IPO. With all financial products, due diligence is important and skepticism critical!

To view the see the full FTC release, click here.

For more information on Crowdfunding or other Venture Capital or Private Equity matters, please contact:

Carl H. Perdue, JD, LLM
Senior Counsel and Partner
Business and Finance

The above material is for information purposes only; and is not to be considered legal or financial advice.

ASSOULINE & BERLOWE, P.A.

1801 N. Military Trail, Suite 160

Boca Raton, Florida 33431

Main:  (561) 361-6566

Fax: (561) 361-6466

Email: CHP@assoulineberlowe.com

http://www.assoulineberlowe.com/

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