Emerging Growth and Venture Capital News - Fall 2013

by DLA Piper


New Securities and Exchange Commission rules concerning private stock sales are now in effect.

Under these rules, for the first time, certain sellers of private stock can make use of general solicitation and advertising.

The rules went into effect on September 23, along with other new SEC rules that limit companies from certain types of private sales of securities if a so-called “bad actor” is involved with the company. These new rules potentially impact all private securities offerings that rely on Rule 506 of Regulation D of the Securities Act of 1933. Because Rule 506 is the exemption relied on in many private company sales of stock to avoid registration requirements with the SEC, the new rules impact private companies wanting to sell stock, warrants or convertible debt in upcoming financings, as well as angel investors, venture capitalists and potential acquirors of such companies.

The general solicitation rule changes allow issuers to use advertising and other forms of mass communication to sell securities, but with some key restrictions. The buyers in the offering must all be “accredited investors” and the issuing company must meet a higher level of verification regarding the accredited status of its investors. It is critical to understand these changes before deciding whether or not to use general solicitation in an upcoming private stock sale.

The bad actor rules apply to all issuances relying on the Rule 506 exemption, not just those in which the issuer chooses to use general solicitation.

Under these rules, an issuer is disqualified from relying 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.” 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. There are transition rules relating to events that occurred prior to the effective date of the new rules (September 23, 2013). Companies looking to raise funds need to understand the new rules so they can gather the information needed from the relevant people involved with the company.

Find out more here and here.


With the passage of the JOBS Act, the regulation governing most private securities offerings is undergoing a dramatic makeover.

Congress tasked the SEC with developing new rules allowing companies to generally solicit funds, subject to restrictions as determined by the SEC. As described above, on September 23, 2013, new SEC rules became effective that address this topic. The SEC also proposed additional rules that are not yet final.

Managers of incubators, accelerators, angel groups and others involved in startup capital raising have expressed great concern about how the revised regulations will affect them, particularly with respect to their public-facing events, as well as the impacts of the proposed rules.

Does presenting at a demo day event, angel group meeting or business plan competition constitute “general solicitation”? This question has caused great concern among many angel groups, incubators and other event organizers around the country.

Here, we offer practical tips to event organizers on structuring a demo day, pitch event or angel group meeting event in light of the new federal rules and the current regulatory landscape.

Continue reading here.


HIPAA Toolbox: 13 steps for a healthy checkup – DLA Piper’s HIPAA team provides a helpful checklist to consider when reviewing your company’s Health Insurance Portability and Accountability Act (HIPAA) compliance.

California passes law giving minors an “eraser button” – DLA Piper lawyer Kate Lucente discusses the recently passed California bill that gives minors in California the right to require that Internet companies delete content posted online by the minors. That law takes effect January 1, 2015.

Read her post on our blog Technology’s Legal Edge.

The right of publicity in college sports – DLA Piper lawyers Melissa Reinckens and Matthew Ganas discuss the recent proliferation of litigation involving right-of-publicity claims asserted by student-athletes for the unauthorized use of their names, images and likenesses.

Read their post on our blog Sports, Media and Entertainment Online.

In re Trados: What happens when common gets nothing? – DLA Piper lawyer Trent Dykes discusses the Delaware Chancery Court’s highly anticipated post-trial decision in the In re Trados Incorporated Shareholder Litigation, where the directors who either held preferred stock or were nominees of private equity firms that held preferred stock sold the company for an amount that resulted in the common holders receiving zero proceeds.

Read his post on our blog The Venture Alley.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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