Date post: | 09-Jul-2015 |
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IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.
Roger RoyseRoyse Law Firm, PC
Palo Alto, San Francisco, Los Angelesrroyse@rroyselaw.comwww.rogerroyse.comwww.rroyselaw.comSkype: roger.royseTwitter @rroyse00
FROM KICKSTARTER TO IPO:
RAISING CAPITAL
Sources of Capital
• Savings/friends and family
• Donation-based crowdfunding (e.g. Kickstarter and Indiegogo)
• Equity-based crowdfunding
– Title III of the JOBS Act
– Funding portals
• Traditional venture capital financings
• Initial Public Offerings (IPOs)
Donation-Based Crowdfunding
• Businesses seek donations in exchange for rewards
• Kickstarter statistics:
– $1.4 billion raised
– 73,000 projects funded
– Over 7 million backers
• At the high end, some projects receive over $1 million in funding
• Rewards often constitute the product or service for which the project was raising funds
Donation-Based Crowdfunding
• Why so popular?
– No loss of equity
– Easy to set up
– Low regulatory barriers
– Can fund development/production of the product (a form of pre-sales)
• Considerations
– Sales tax obligations if shipping tangible goods
– Timing problems e.g. all the income may be received late in the year before expenses are incurred leading to large tax bills in the year of receipt
– May want to form a legal entity before commencing fundraising
– Potential legal disputes – while there is little regulation in this area, states may prosecute if they suspect fraud
Equity-Based Crowdfunding:
Title III of the JOBS Act
Exemption from Registration
• Private companies may sell up to $1 million of securities in a 12-month period
• Amount sold to a single investor in any 12-month period cannot exceed:
o The greater of $2,000 or 5% of annual income or net worth if annual income or net worth is less than $100,000; or
o 10% of annual income or net worth (up to a maximum of $100,000) if annual income or net worth is greater than $100,000
• Not yet in effect – still awaiting final regulations from the SEC
• Likely to prove expensive and overly burdensome
Equity-Based Crowdfunding:
Title III of the JOBS Act• Investment must be through an “intermediary” broker or funding portal
o Intermediary must register with the SEC
• Issuer disclosure requirements
o File business plan with SEC
o File financial statements
Audited if offering exceeds $500,000
Reviewed by an independent CPA if offering is between $100,000 and $500,000
o Annual SEC filings and annual reports
Equity-Based Crowdfunding:
Title III of the JOBS Act• Post-fundraising
o Securities cannot be resold within 12 months (unless to an accredited investor)
• Private right of action for material misstatements/personal liability
• High number of unsophisticated investors
o Fiduciary duties to all investors
o Could be a concern for VCs in future fundraisings
Equity-Based Crowdfunding:
Funding PortalsPrivate Placements• General prohibition on general solicitation of investors
• No definition of “general solicitation,” however the SEC has released two no-action letters implying that issuers can use internet funding portals to raise funds
• Access to the portal must be restricted to “accredited investors”
– Broadly, accredited investors are (a) individuals with income of more than $200,000 in each of the past two tax years or with net worth over $1 million not including their primary residence; (b) partners, officers or directors of the issuer; or (c) certain employee benefit plans and trusts.
• Can have up to 35 non-accredited investors
Publically Solicited Issuances• Issuer can advertise and publicly solicit the sale of its securities
• All eventual investors must be accredited investors
• Increased Form D reporting
Traditional Venture Capital Financings
• Typical financing process
– Negotiation of terms and signing term sheet
– Due diligence
– Draft Stock Purchase Agreements and other legal documentation
– Execute transaction documents
– Deal “closes” when investors provide funding and company provides stock certificates
– Post-closing matters such as securities filings and filing amended articles of incorporation
• Investors usually acquire preferred stock (series A, series B, etc) and insist on certain additional rights and privileges such as:
– Guaranteed board seats
– Liquidation preferences
– Anti-dilution protection
• Expensive - financing requires involvement from accountants, lawyers, and other financial advisors
Initial Public Offering
• The first sale of private company stock to the public
• Why seek an IPO?
– Raise cash
– Easier to issue more stock in the future
– Creates a liquid market for the stock which helps with stock options and other equity incentive plans for employees
• Must file a registration statement with the SEC and include:
– Financial statements
– Management structure
– Market challenges/threats
– Legal issues
• “Lock up period” for company officers and employees preventing them selling their stock for at least three months after the IPO
RoyseLink: Connecting founders with investors and service partners.
Royse University: Providing business, tax, and personal finance ideas to founders and executives.
Royse Law Legal Wizard: Offering legal document templates and more.
RoyseUniversity.com
RoyseLink.com
RoyseLaw Legal Wizard
Royse Law Incorporator: Designed to help you incorporate and structure your company in Delaware or California.
RoyseLaw Incorporator.com
www.rroyselaw.com
@RoyseLaw
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