Private company financing, subsection D ? | FerrariChat

Private company financing, subsection D ?

Discussion in 'Other Off Topic Forum' started by Artherd, Nov 6, 2003.

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  1. Artherd

    Artherd F1 Veteran

    Jun 19, 2002
    Bay Area, CA
    Full Name:
    Ben Cannon
    I am a partner (33%) in a new company that is trying to quietly attract selected investors. In the past, I have made my investors principles at incorporation time, and everyone has contributed an equal starting ammount of cash to the corporation. That has been the extent of the transactions.

    Now we are looking at something a bit larger, and I have been advised by a lawyer (not one I have retained...) that I may need to file with the SEC as an exemption before I can take in ANY money of any kind.

    We are looking at offering a sort of Promisary Note to screened investors, something that would hypothetically vest in x years at y percent APR.

    Do I need to file under 'Subsection D' rules that would exempt me from SEC filing requirements? What does it really take to do that? What's the story here? (I already know we will need a good corporate lawyer on our team, that's planed for stage 2.)

  2. Texas Forever

    Texas Forever Seven Time F1 World Champ
    BANNED Rossa Subscribed

    Apr 28, 2003
    >>(I already know we will need a good corporate lawyer on our team, that's planed for stage 2.)<<

    Ben, I don't know squat about California laws so what I'm about to say is about as valuable as a warm bucket of spit. But, generally, private investments are exempt from registration with the SEC and state regulators so long as they meet a "knowledgable investor" rule. Based on this, it appears that the advice from Lawyer #1 is not totally correct. However, the penalties for non-compliance are very severe. Therefore, I would strongly advise you to find Lawyer #2 before going any further. Everyone always hates to spend money on "professionals" before you even have a deal, but sometimes you have to.

    Good luck, Dale

    ps Also, again as a general rule, disclosure is the key to avoiding trouble with the SEC. I once saw an offering memo where the promoter said that investors were going to give him money to spend on whatever he wanted to spend it on. The SEC couldn't care less about the deal due to these up-front disclosures.
  3. Doody

    Doody F1 Veteran

    Nov 16, 2001
    MA USA
    Full Name:
    Mr. Doody
    ya gotta get a good lawyer.

    i'm also no expert on CA rules, but in general, if you are soliciting "accredited investors" you're generally in good shape.

    Rule 501(a) of Regulation D of federal code defines such a person as: (a) any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1 million at the time of purchase; or (b) any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and who reasonably expects reaching the same income level or greater in the current year.

    the rules for non-natural-persons (ie: LLCs, partnerships, etc.) are different and more complicated.

    as drtax points out, intelligent, protective disclosures are key regardless. fwiw, here's some text i keep on the front of my business plans, and similar language goes on any term sheet, or anything that smells like an offer to sell equity or debt.

    The delivery of this business plan does not constitute an offer to sell securities or a solicitation for investment, which can only be made with the delivery of specific documents to accredited investors.

    and never take a check unless it's accompanied by an "accredited investor questionnaire" document wherein the investor will sign asserting that they are such an individual, and may furhter explain why. this way if it turns out they are not such an accredited investor, you're protected.

    my two drachmas. i'm not a lawyer - i just play one on the net. talk to a professional.

  4. Artherd

    Artherd F1 Veteran

    Jun 19, 2002
    Bay Area, CA
    Full Name:
    Ben Cannon
    Allright, seems that I can offer to Accredited Investors with few restrictions, eeeeexcellent ;) . Which I realize now is essentially what I've been told (poorly!), but you guys explained it well enough for me to understand!

    Thanks for cutting through the BS guys. F-chat is so stud-filled sometimes it amazes me!

  5. WCH

    WCH F1 Veteran

    Mar 16, 2003
    I used to practice securities law, but it's been six or seven years and I have forgotten most of it. Just wanted to echo the suggestion that you talk to a lawyer with private placement experience. When I was playing the game, if you sold securities in violation of the securities laws, you could be personally liable to purchasers for the full amount of their investments - that'd wipe the smile off anyone's face!

    And I'd be careful assuming that dealing only with accredited investors relieves you of any obligations under the federal and state securities laws - that wasn't the case when I practiced. I know nothing about the current state of the law.

    No legal advice from me, just your usual hand wringing worry warting deal breaking fee churning lawyer stuff.

    Good luck, Will
  6. jmacphee

    jmacphee Rookie

    Nov 1, 2003
    Boston, MA
    Full Name:
    Joseph MacPhee
    I also believe you need to notify the SEC within 15 days of a sale under Reg D, even if its to an accredited investor under section 506. There is not free lunch here.

    Joe MacPhee

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