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            [post_author] => ACE Portal
            [post_author_bio] => 
            [post_author_thumbnail] => ACE Portal
            [ID] => 1890
            [post_title] => Fueling American Entrepreneurship
            [post_date_gmt] => 2015-03-17 14:39:14
            [post_url] => https://aceportal.com/insights/fueling-american-entrepreneurship/
            [post_thumbnail_small] => 
            [post_thumbnail_large] => 
            [excerpt] => 
            [post_content] => A recap of last year's Milken Institute panel on Entrepreneurship and job creation that still rings true today. The panel features ACE Portal's CEO, Peter Williams.

https://www.youtube.com/embed/2Z28h-cq8uQ

In the post-financial crisis economy, start-ups and small businesses have struggled to access the capital necessary to create jobs. Credit markets have tightened, traditional early-stage equity investors are risk-averse and public market IPO activity has contracted. What can we do to improve the financial landscape for launching businesses? What changes to securities laws and innovative approaches, whether technology, government, or investor-based, will free up capital, and what can be done to develop entrepreneurial hubs and ecosystems across the country?
            [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice.  The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients.  Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors.  Reproduced with permission from  ACE Portal
        )

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            [post_author] => VC Experts
            [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors
            [post_author_thumbnail] => VC Experts
            [ID] => 1891
            [post_title] => An Introduction to the Global Start-Up
            [post_date_gmt] => 2015-03-16 15:40:46
            [post_url] => https://aceportal.com/insights/an-introduction-to-the-global-start-up/
            [post_thumbnail_small] => 
            [post_thumbnail_large] => 
            [excerpt] => 
            [post_content] => Start-Ups have been around for a long time. Traditionally, they have been local enterprises run by small business entrepreneurs. Today, however, thanks to the Internet's global reach, entrepreneurs have the ability to tap networks and establish Start-Up operations all across the world.

Recognizing the potential of international markets, global IT development teams and other types of human capital, Start-Ups are emerging in areas beyond the typical US breeding grounds of Silicon Valley, Boston, New York, Washington, D.C. and Dallas. An increase in technical innovation and start-up activity is now also being seen in cities such as Bangalore, Helsinki, London, Shanghai, Singapore, Sydney, Tel Aviv, Toronto and Zurich.

No matter what the geographic origin, decisions made by Start-Ups at their earliest stages are likely to be among the most critical - as these decisions will impact their future ability to raise funds, engage in mergers or other business transactions, as well as impact their tax position and that of their outside investors.

Early Stage Questions for Every Start-Up

It is at the beginning "formation stage" that Start-Ups need to begin working with legal, accounting (domestic and international tax specialists) who can ask the right questions and guide them through the labyrinth of tax rules and regulations.

What Legal Entity to Be?

Initially, the first question that Start-Ups need to ask themselves is what should I be? A Start-Up founder/CEO can select from two main options to house the entity - a corporation or a transparent entity (pass through entity). In the United States, the income of a "C" corporation is taxed twice - once at the corporate level and then again when the net-after-tax-earnings are distributed as dividend income to the shareholder. At the maximum Federal tax rates for individuals and corporations, this two tier taxation results in a combined tax rate approximating 44 percent (not including state taxes), using current federal tax rates. This combined tax rate may increase substantially starting in 2011. Alternatively, a Start-Up might begin as a transparent entity, such as a Partnership, a Limited Liability Company or a US Subchapter S Corporation. These entities generally do not pay income tax on their income or losses because the owners include their share of the Start-Up's income in their own tax returns. At present, the maximum Federal tax rate for individuals is 35 percent (not including payroll tax), thus tax on the Start-Up's distributed earnings can be significantly reduced by beginning operations as a fiscally transparent entity. Subject to limitation, business losses incurred by a transparent entity might be deductible by the Start-Up's owners against other sources of income.

Where to Locate?

The second question that a Start-Up needs to ask is where should I base my operation? In the United States? Somewhere in Europe? In a low-tax rate jurisdiction? When Start-Ups aspire to go global, they often overlook the impact that international tax structures and offshore operations will ultimately have on their operations and on their investors. Start-Ups need to understand the implications and take proactive measures that will help avoid double taxation and minimize their overall effective tax rates. There are multiple ways of approaching international tax structures. If the Start-Up will initially operate in the United States, it might still be beneficial to form the Start-Up in a foreign jurisdiction at the very outset. In the case of a Start-Up that is developing intangible assets, for example, it can be very costly to transfer such assets to a related offshore entity at a future time when value has been created. Therefore, it might be beneficial to have the intangibles owned initially by an offshore entity, even though intangible development is being performed at an arm's length price by a related US entity.

Good Planning Is Key

The decisions of what and where to establish a Start-Up, however, are just the beginning. As we will explore in future MP&S articles, there are a myriad of domestic and international issues, that if not understood and planned for appropriately, could impact the ultimate value of a Start-Up when a due diligence investigation is undertaken, the profitability of the business is determined and finally, when an M&A or IPO occurs. Issues such as those below are critical and should be considered by every Start-Up CEO:
  This article originally appeared in VC Experts, Guide to Private Equity and Venture Capital. It was written by Jeanne Goulet of Marks Paneth & Shron LLP. About Jeanne P. Goulet, CPA, Senior Consultant, jgoulet@markspaneth.com Jeanne P. Goulet, CPA, is a Senior Consultant at Marks Paneth & Shron LLP. A tax specialist, Ms. Goulet has more than 25 years of experience in both industry and public accounting. Ms. Goulet spent the majority of her professional career with International Business Machines Corporation (IBM), ultimately serving as the Head of Tax of IBM Credit Corporation and a Tax Director of IBM. In those roles, she managed the tax function, developed and implemented tax strategy globally and participated with industry groups both in the US and abroad to develop tax policy for the information technology industry. In addition, she provided tax support to a number of IBM's business units including Software Group, Global Services and e-Business Solutions. Full BIO About Marks Paneth & Shron LLP We're Marks Paneth & Shron, an accounting firm committed to our clients' success. Our priority is to help them make smart decisions at every turn. As a growing firm - now one of the largest in the New York region - our focus is on giving clients access to the best and most experienced professionals in our industry, regardless of the discipline. Even as we grow, we stick to our culture of personal attention and customized services. We aim to provide value to our clients throughout the life of the relationship and to maintaining an open dialogue. We expect and encourage ongoing communication about the changing business, tax and financial landscape. Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances. For legal advice, please consult your personal lawyer or other appropriate professional. Reprinted with permission from Marks Paneth & Shron LLP. About VC Experts VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries.   [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [2] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1888 [post_title] => Crowd Capital and Online Finance [post_date_gmt] => 2015-03-10 17:37:19 [post_url] => https://aceportal.com/insights/crowd-capital-and-online-finance/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => This is a replay of a Milken Institute thought leadership panel from last year focusing on the role of online platforms in the capital raising platform--both in terms of institutional capital raising, crowdfunding, and P2P. It features ACE Portal's CEO, Peter Williams, in addition to Angel List, Prosper, Indiegogo, & Guggenheim Venture Partners. https://www.youtube.com/embed/4uF-oQZDcwA The Internet is fostering capital-raising methods that bypass traditional market facilitators and intermediaries. Online financial innovation has the potential to expand capital access, increase investment opportunities and promote new ways for businesses to engage with the public. At the same time, this innovation raises questions regarding risks to market integrity, the need for investor education and the importance of sound regulation.   About the Milken Institute The Milken Institute’s mission is to improve lives around the world by advancing innovative economic and policy solutions that create jobs, widen access to capital and  enhance health. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [3] => stdClass Object ( [post_author] => Joe Bartlett [post_author_bio] => Founder and Chairman of VC Experts, [post_author_thumbnail] => Joe Bartlett [ID] => 1884 [post_title] => Placement Agent Indemnification Agreements & Their Effect on PE & VC Funds [post_date_gmt] => 2015-02-27 17:54:23 [post_url] => https://aceportal.com/insights/placement-agent-indemnification-agreements-their-effect-on-pe-vc-funds/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => Joe Bartlett, of VC Experts, weighs in on indemnification provisions within the role of placement agents raising capital for alternative funds and speculates that they really just foster a circular flow of funds when exercised. This logic begs the question: Does the way these provisions are constructed render them meaningless? The fund raising process for most of the private equity funds…venture, leveraged buyout, secondary and others…is an arduous business. Alan Patricoff remarked several years ago that after he split from Apax to form Greycroft it took him, a Hall of Fame venture capitalist, three years (as I recall) to reach a final closing on the fund he was sponsoring. Accordingly, it is customary for funds to employ experienced placement agents to assist in the fund raising process. Editor's note you can see our video interview about the role of placement agents for more. The onus, of course, is on the principals of the fund to display and defend their track record or records in the business and manage face-to-face meetings during the various road shows they undertake. The placement agent, however, is useful as a time saver and a focus group, if you will…arranging meetings, gauging interest and commenting on the placement materials, pointing out the hits, the runs, and the errors in order to enable the fund managers to upgrade the same (Learn about whether you should use a placement agent in this article and in this video). In the process of reviewing a placement agent agreement for a recent client, it occurred to me that there needed to be some thought given to one of the conventional sections in the placement agent agreement… the indemnification provisions. The limited partnership… a/k/a the Fund… should not be a primary party to the agreement with a broker (“Broker”), in my view. In particular, the Indemnification provisions which the Broker asks the Fund to endorse make little sense (to me, anyway) because the waterfall is circular. Let’s say the indemnification claim against the Fund is that the Broker had to respond to the aggrieved parties (who will be the investors in the Fund, of course) who lost money because of inadequate and/or inaccurate information in the placement memo which the Broker had a hand in distributing to the investors. If the principal indemnitor of the Broker for misinformation is the Fund, however, the damages may well (I conclude) undergo a round trip.

A Hypothetical Indemnification Illustration

The Broker is sued and is liable for damages in the amount of losses in the portfolio. The Broker then pays the damages and levies a claim for indemnification against the Fund for the same, which the claimant(s) allege were caused by the lack of transparency in the placement memo. The assets of the Fund, however, are comprised of money and property (unrealized portfolio investments) which belong to the plaintiffs in the law suit against the Broker … the LPs in the Fund. Let's follow the bouncing ball. Investors (LPs) put $5 million into five investments. The investments stagnate … no exits, contrary to projections in the placement memo which forecast a 2x (at least) return. The Investors sue the Broker for their opportunity costs based on falsified expectations and recover a $2 million award. Where does that come from? The Fund. What is in the Fund? The investors’ property, i.e., the remaining portfolio assets which have not yet gotten off the ground. (If the Fund has insurance, possibly another story; but representations and warranties insurance is expensive … and the LPs will pay for it.) In fact, the only parties the Broker should go against for misinformation in the solicitation material are the assets of the General Partner and the Management Company. They are, accordingly, the enterprises which should be selected as the indemnitors. To paraphrase an old maxim, circularity breeds contempt. In fact, although not expressly on point, I am increasingly suspicious of indemnification obligations in favor of a Broker executed by customers of the Broker. A somewhat bizarre example of how the waterfall can get reversed is found in a case which coincidentally was written up in the NYT on the 17th. Take a look at the attached and see the argument advanced on behalf of Reef to recover legal expenses of $400,000 “or more.” Brokers Countersue to Thwart Suits by Unhappy Investors You can see more articles on placement agents:   [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Joe Bartlett ) [4] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1878 [post_title] => Challenges to Investing in International vs. US Funds [post_date_gmt] => 2015-02-23 14:18:47 [post_url] => https://aceportal.com/insights/international-vs-usa-alt-funds/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2015/02/Nobes-Insights-350x220.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2015/02/Nobes-Insights.png [excerpt] => [post_content] => Watch Peter Williams, the ACE Founder and CEO, talk with Michael Nobes, the CEO of Sixbridges Capital, about the challenges, opportunities, and reasons for international investing in funds. https://player.vimeo.com/video/115201056 Specific topics covered include:   You can also see our other interviews with Michael:
  About Michael Nobes: Michael Nobes is the Chief Executive Officer and Founder of Six Bridges Capital LLC.  Prior to founding Six Bridges Capital LLC he served as Director at Royal Bank of Canada Alternative Assets Group a structured products provider and was Head of the Offshore Custody platform for Royal Bank of Canada based in The Channel Islands. Michael holds an EMBA from the Richard Ivey Business School based in Ontario, Canada and is designated MCSI by The Chartered Institute for Securities and Investment UK. About Six Bridges Capital: Six Bridges Capital LLC is a boutique financial consulting firm in the broad alternative assets space specializing in hedge funds, private equity, debt , real estate, fund of funds and family offices. Our mandates are broad in reach providing advice and counsel to clients on matters such as third party service provider selection, regulatory issues, onshore and offshore structures, due diligence, marketing and distribution channels and business structural reviews. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [5] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 1875 [post_title] => Everything You Want to Know about Private Equity [post_date_gmt] => 2015-02-17 21:38:16 [post_url] => https://aceportal.com/insights/everything-you-want-to-know-about-private-equity/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => This is a comprehensive set of answers to many of the typical questions investors have regarding private equity. The answers are roughly organized into sections along these lines: General questions/background, legal questions, performance questions, due diligence questions, and exit questions. That said, there is overlap between the answers.  The author's originally published this article for VC Experts, while most of the information is current (and all of it is informative) there have been some changes with the Dodd Frank Act. In particular this is true of the information related to the investment adviser registration. We will add some updated information to that section in the near future.

General Questions on Private Equity

1. What are the general types of investments that fall within the private equity industry? Investments in the private equity industry generally fall into two categories: (i) investments in private equity funds and (ii) direct investments in companies. A sophisticated investor may wish to invest in private equity funds, pooling its money with other sophisticated investors. The funds will in turn search out investments in specific types of companies or assets and subsequently manage these to make a profit for both the investor and the principals of the fund. These funds generally fall into the categories of buyout, venture capital, distressed debt, mezzanine, real estate, fund of funds or a hybrid of any of these. An investor may choose to invest directly in a company or in real estate, as distinguished from investing in private equity funds. These direct investments are often made side by side or as a “co-investment” with an investment or acquisition being led by a private equity fund. An investor in a private equity fund may obtain co-investment opportunities as a result of being an investor in one or more funds. A benefit of direct investments is that the investor receives direct equity holder rights and becomes a direct owner of the entity or property. A co-investor will also typically pay no fees or substantially reduced fees to the fund with which it has made a co-investment. Since direct investments or co-investments have significantly different characteristics from fund investments, these FAQs focus on investments in private equity funds (termed “funds” here). 2. Please give an overview of the history of investments in private equity funds in the United States Funds have a relatively short history. Traditionally, investment in private companies with the goal of re-selling them was the purview of a few wealthy families. The first big private equity firm came into existence in the late 1960s, and it was not until the 1980s that private equity investors attracted much attention, often as the groups behind that era’s hostile takeovers. In the late 1990s, funds raced to invest in startup companies with unproven business models, resulting in funds extending venture capital monies without the usual safeguards behind such deals – for example, a certain amount of control if the company fell on hard times; limited syndication of investments with other funds; and funds’ joining investors in deals without performing adequate due diligence on the companies to be funded. The increase in the popularity of private equity investment can be seen clearly in the growth of funds in the last three decades. The largest fund in 1980 stood at a value of $135 million. Twenty-five years later, many funds exceeded $1 billion in value (with several funds exceeding $10 billion). Low interest rates in recent years have also made it easier for private equity buyers to borrow large amounts of cash to finance purchases. At the same time, funds are increasingly joining with other funds in “club deals” to make larger investments – a phenomenon that has resulted, in one case, in potential legal issues. On November 15, 2006, thirteen buyout funds were named as co-defendants in a class action lawsuit in which they were accused of violating federal antitrust laws. Primarily, the complaint alleges that collusion exists among the named funds, arguing that these funds no longer compete against each other for deals, but instead enter into club agreements among themselves or make agreements not to bid against each other in certain transactions. Many private equity professionals argue that there is lots of competition among the funds, particularly given the significant increase in the number of funds and the commitment size of funds raised. 3. What are the main advantages and disadvantages of investing in private equity funds? Advantages: (a) High returns: Although there is a high risk in investing in funds, investors have the potential to receive high returns on their investments. For example, in Google’s agreement to buy venture-backed YouTube for $1.65 billion, the successful venture capital fund, Sequoia Capital, will reportedly receive approximately $495 million in consideration for its 30% ownership stake in YouTube. Sequoia Capital invested a total of $11.5 million in two separate rounds and was the only venture capital fund invested in YouTube. Obviously, such returns are not the standard by which all funds and deals should be measured, but they illustrate the gains that are possible. (b) Safer long-term growth: Funds typically are heavily involved in, and provide needed expertise to, the companies they buy or invest in. Generally, these investing funds will take control of, or at least maintain a presence on, an investee company’s board of directors. At the same time, fund managers can deal with hiccups along the way without the distraction of public scrutiny or even intense scrutiny from investors. In addition, fund managers have extensive experience in accreting value in otherwise undervalued companies. Ultimately, this combination often offers a more attractive alternative than investors might otherwise have in the public markets. (c) Less regulatory scrutiny: Funds do not normally face the same level of scrutiny as other investment vehicles (including hedge funds). Since February 2006, the U.S. Securities and Exchange Commission (SEC) has required certain private fund managers to register, so that the SEC can monitor them more closely. However, most managers do not fall within the SEC’s definition of “private funds”, which applies only to funds that allow investors to redeem their interests within two years of their investment (e.g., hedge funds). The term of investment in most funds extends well beyond the two-year mark. (d) Fewer internal resources and access to bigger deals: If an investor were to attempt to build the capability to invest in buyout deals or make investments in venture capital companies and subsequently manage such companies or investments, an enormous amount of in-house resources would be required. For example, at a minimum, the investor would need someone to source the best deals out of the multitude available, someone to negotiate favorable terms regarding such investment, someone to manage the company or investment in an accretive manner (often by becoming involved in the day-to-day management) and someone to determine and expedite the most lucrative exit strategy. It is likely that several people would be required if the investor chose to follow more than one strategy (e.g., buyout deals and venture capital investments). Generally, investors do not want to use these significant internal resources when they can simply outsource such tasks to their choice of fund investment teams. In addition, given that investors are usually engaged in other types of business (and invest in funds as a way of enhancing their returns – e.g., investors may be pension plans or family trusts), they may not have access to the same amount of capital as funds. Accordingly, funds often have access to bigger deals that investors would not be able to participate in on their own. Disadvantages: (a) Less maneuverability: Funds generally tie up investments over a term of approximately 10 years, not counting any term extensions. If an investment in a particular fund is going poorly, there are few practical or realistic opportunities for investors to exit the fund. (b) Control: Investors in funds commit to invest specified amounts into a fund that is controlled by an investment team. The investor’s money is then “called” on an as-needed basis by that team. Once the money is called, the investor has a period of days within which to provide the money and has no opportunity to review or comment on the proposed investment. The investor’s primary protection is the inclusion of investment restrictions in the fund agreement (e.g., the limited partnership agreement or limited liability company agreement). (c) More competition: While certainly an advantage, higher returns can be a double-edged sword. Funds increasingly find themselves competing with many other funds, as well as strategic investors, for fewer deals. In recent years, hedge funds and hybrid hedge/funds have become increasingly more active in private equity investments. Editor's Note: We feel two more important disadvantages should be cited. The first is fees. Quite simply, PE as an asset class has historically been subject to both annual fees as a percentage of AUM and performance based carry fees. The second issue is incentive alignment. As PE funds have become larger and more powerful their incentives have, in some instances, become less directly aligned with those of their Limited Partners. This was explicitly recognized as a reason for the resurgence of interest in direct investing in our interview with WE Family Offices. 4. What have been the recent key trends in private equity fund formation? Five of the most significant trends that we have seen over the last five years in fund formation are (i) restricted disclosure of information from the fund to its investors; (ii) inclusion in the fund agreement of a management fee waiver; (iii) inclusion of an investor giveback; (iv) increased availability of recycling of an investor’s capital commitments; and (v) increase in overall size of funds. [2] Information disclosure: In response to various actions by newspapers and public advocacy groups, certain pension plans in the United States have been required to disclose information about the funds in which they invest, which previously would have been characterized as confidential. Funds are concerned about the scope of disclosure because (i) they do not want the terms under which they operate to become publicly known (and allow their competitors to undercut them), and (ii) they do not want investors reporting on aspects that are inherently subjective (e.g., valuations) and that therefore could have a detrimental effect on the investment in the marketplace. Investments made by the funds are generally held at cost unless the fund is permitted or required under the fund agreement to write down or write up such investments to reflect a change in the value, which is often in the fund’s discretion. Additionally, an investor may calculate its expected rate of return differently than the fund would (e.g., the possibility exists that the investor would have a lower rate of return than the rate calculated by the fund). As a result, funds often limit the information that they will disclose to investors who are more likely to be required to publicly disclose such information. In addition, funds often protect their ability to withhold information from all investors if there is a concern of public disclosure (particularly with respect to confidential information concerning the fund’s portfolio company investments). As this is a currently developing area driven by actions brought by third parties, such as newspapers and advocacy groups, each fund agreement attempts to provide protection against future disclosures that may result. Skin in the Game: Generally, the investment team is required to commit to the fund a certain amount of money (which varies from fund to fund) to demonstrate to the investors that the team has some “skin in the game”. As a part of the terms of most investments in funds, investors are usually required to pay a management fee to the investment team. It has become increasingly common in U.S. buyout funds for the investment team to waive a portion of the management fee, instead directing the investors to contribute an equal amount to the fund on the team’s behalf as a part of its capital commitment. Accordingly, the investment team is entitled to receive any profits generated from that contribution in accordance with the distribution “waterfall”. This reduction in the management fee effectively permits the investment team to convert management fees (taxed at ordinary income rates) to capital contributions (taxed at more favorable capital gains rates). Distribution Refunds: Throughout the life of the fund, investors receive distributions upon the disposition of an investment by the fund. Accordingly, if a subsequent liability arises that the fund does not have sufficient assets to pay without a giveback obligation on the part of the investor, the investment team would be left to pay a disproportionate share of the liability. It has therefore become increasingly common, although arguably still controversial, to require investors to “refund” prior distributions if a subsequent liability arises. The terms of such refund will vary from fund to fund but generally include (i) a restriction based upon the time during which such refund can be required (e.g., two or three years after the date of the distribution or two or three years after the dissolution of the fund); (ii) a cap on the amount of such refund (e.g., all distributions made or a percentage thereof); and/or (iii) a restriction on the purpose for which such refund can be required (e.g., indemnification liabilities or all liabilities). Regardless, investors often insist that the fund look to its assets (including any unfunded capital commitments of investors) before seeking a refund from its investors. The investment strategies of investors differ. When certain investors determine the amount of their investment, they want to ensure that this amount is their maximum exposure (other than for any refunds required, as discussed in the previous paragraph). Other investors would prefer that the amount of their investment represent the amount that is fully invested by the fund and that, therefore, fees and expenses be above that amount. The rationale for this latter approach is that the amount committed should be the full amount on which the investor earns a return and that fees and expenses should be separate. To comply with these differing viewpoints, funds will often be permitted to “recycle” certain distribution proceeds up to a specified cap. For example, if a fund makes an investment that is disposed of for a profit within 12 to 18 months of the date of the investment, the fund may then be able to reinvest the investors’ capital contributions for such investment (or, alternatively, the fund may be able to reinvest the proceeds realized on the investment that exceed the investors’ capital contributions). The rationale for this type of recycling is that since the money was not at work for a long period and the investor earned a profit, the fund should be entitled to put the money back to work. Another example of recycling would permit the fund to reinvest an amount equal to the capital contributions of the investors made for the purpose of fees and expenses. Alternatively, rather than specifying the type of distribution proceeds that can be recycled, there may be a cap on the total amount of distribution proceeds from capital commitments that can be reinvested (e.g., 110%–120%).

Practical and Legal Aspects of Private Equity Investment

5. What legal entities may typically be used as vehicles for investments in private equity funds? What are the advantages and disadvantages of each? Limited partnerships: Most commonly, a limited partnership (typically formed in Delaware for U.S. funds) is the vehicle used in the formation of a fund. Its advantages include the protection of investors (as limited partners) from the liabilities of the fund so long as such investors do not participate in the management of the fund. Accordingly, the partnership agreements of most funds clearly specify which actions the limited partners may take regarding the oversight of the fund. In addition, a limited partnership is a flow-through entity for tax purposes. Fund investors’ chief realization of value is through a distribution. As such, a fund that is organized as a partnership will see distributions taxed only once, and often such distributions will be subject to the more favorable long-term capital gains tax on the individual limited partners – a far more attractive option than the tax treatment funds would receive if organized as corporations. A disadvantage of this vehicle is that the limited partners must effectively hand over control of their investment to retain their limited liability. Limited liability companies: An alternative vehicle used for the formation of a fund is a limited liability company (typically formed in Delaware for U.S. funds). It has similar advantages to the limited partnership vehicle because investors (as members) are protected from the liabilities of the fund. The members are not restricted from participating in the management of the fund. Like the limited partnership vehicle, it is a flow-through entity for tax purposes. A disadvantage of this vehicle is that it does not have the extensive case law as a fund formation vehicle that the limited partnership vehicle has. Given the relative newness of the LLC form and the lack of corporate formalities, courts may be more likely to pierce the corporate veil and therefore subject the investors to liability in a situation where members directly manage an LLC, a management structure that is not forbidden by the legislation. Use of an LLC may pose U.S. federal income tax issues for non-U.S. investors, depending on their jurisdiction of residence. General partnership vehicles: Funds may choose to have a corporation serve as general partner of a limited partnership to avoid the potentially unlimited personal liability otherwise associated with the role of general partner in a limited partnership. Organizing the general partner as an S Corporation avoids the extra level of taxation generally associated with corporations. Limitations are imposed on an S Corporation, however – in particular, a restriction on the nationality of its shareholders and the requirement that it maintain only one class of stock; these limitations make it less favorable than other forms. More recently, funds have begun forming as limited partnerships in which the general partner is a Delaware limited liability company. The limited liability company general partner receives partnership-like tax treatment while removing the personal liability of the members and managers. The limited liability company also allows greater flexibility in its formation and particularly in its management, which need not follow traditional corporate formalities. 6. What techniques are available to minimize tax liability? How do the positions of U.S. and non-U.S. investors differ in this regard? A fund is generally classified as a partnership for U.S. federal income tax purposes. The income, gain, loss, deduction and credits of the fund pass through to, and generally retain their character in the hands of, the partners. Most of the income is long-term capital gain from the disposition of stock, which is taxed at a maximum rate of 15% for non-corporate investors (compared with rates of up to 35% for ordinary income). The general partner is granted a “carried interest” entitling it to 20% (and sometimes more) of the cumulative profits of the fund. The carried interest is a “profits interest” for tax purposes. The general partner is taxed only when profits are allocated to it, not upon receipt of the profits interest at the inception of the fund. The general partner entity itself is usually classified as a partnership for U.S. federal income tax purposes, so allocations of long-term capital gain pass through to the individual members of the general partner and are taxed at the favorable 15% rate described above. Non-U.S. limited partners generally are not subject to U.S. tax on gain derived upon the disposition of stock or debt securities of a U.S. corporation (other than stock of U.S. real property holding corporations). However, non-U.S. investors are taxed on income that is “effectively connected” to a trade or business conducted within the United States and are required to file a U.S. federal income tax return in any year in which they are deemed engaged in such a trade or business. In a fund, investments in operating partnerships or limited liability companies generate effectively connected income. To avoid direct imposition of tax and U.S. filing obligations on non-U.S. partners, most funds agree to structure investments of non-U.S. partners into an operating partnership or limited liability company through one or more “blocker corporations”. U.S. tax-exempt investors are subject to tax on “unrelated business taxable income” or “UBTI”. In a fund, typical sources of UBTI are investments in operating partnerships and limited liability companies, as well as income from debt-financed property. Most funds agree to structure investments in a manner intended to minimize the likelihood of a tax-exempt investor’s directly realizing UBTI, using blocker corporations or other holding vehicles. 7. (a) What are some applicable U.S. securities laws and other regulatory requirements relating to the promotion or management of a private equity fund? In connection with the offering of interests of a fund to investors, funds generally rely on the exemption from registration under Rule 506 of Regulation D of the U.S. Securities Act of 1933, as amended. Under Rule 506, such offering transaction will be deemed private (and not public) so long as there are no more than 35 purchasers of the interests of the fund that are not “accredited investors”. Each purchaser that is not an “accredited investor” must either alone or with a representative have the knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment; or the fund must reasonably believe, immediately prior to making the sale, that such purchaser comes within this description. An “accredited investor” is defined to include (i) any corporation or partnership not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5 million; (ii) any director, executive officer or general partner of the issuer of the securities being offered or sold, or any director, executive officer or general partner of a general partner of that issuer; (iii) any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of the purchase exceeds $1 million; (iv) any natural person who had an individual income exceeding $200,000 in each of the two most recent years or joint income with that person’s spouse exceeding $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; and (v) any entity in which all the equity owners are accredited investors. The Investment Company Act of 1940, as amended, requires the following to register as investment companies: (i) issuers that engage (or propose to engage) primarily in the business of investing, reinvesting and trading in securities; (ii) issuers that engage (or propose to engage) primarily in the business of issuing face-amount certificates of the installment type; or (iii) issuers that engage in the business of investing, reinvesting, owning, holding or trading in securities and own or propose to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets. The majority of funds rely on an exemption from registration under the Investment Company Act. See Q&A 7(b) for discussion. The Investment Advisers Act of 1940, as amended, requires the following to register as investment advisers: (i) persons who, for compensation, engage in the business of advising others, either directly or indirectly or through publications or writings, regarding the value of securities or the advisability of investing in, purchasing or selling securities; or (ii) persons who, for compensation and as a part of a regular business, issue or promulgate analyses or reports concerning securities. The majority of funds take the position that their general partners, managers or other investment team members fall under the Investment Advisers Act’s exception that such persons are not required to register as investment advisers if during the course of the preceding 12 months they have had fewer than 15 clients and do not hold themselves out generally to the public as investment advisers, nor act as investment advisers to any registered investment company or a company that has elected to be a business development company. For the purpose of determining the number of clients of an investment adviser, no shareholder, partner or beneficial owner of an investment fund will be deemed to be a client of the investment adviser unless the person is a client of such investment adviser separate and apart from his or her status as a shareholder, partner or beneficial owner. The U.S. Employee Retirement Income Security Act of 1974, as amended (ERISA), governs the investment of the assets of certain employee benefit plans that may be investors in a fund. Under ERISA and regulations issued by the Department of Labor (DOL), when a plan covered by ERISA acquires an equity interest (such as the interests of a fund) in an entity that is neither a “publicly offered security” nor a security issued by an investment company registered under the Investment Company Act, the assets of the ERISA plan generally include not only such equity interest but also an undivided interest in each of the underlying assets of such entity unless it is established that (i) ownership of each class of equity interest in an entity by “benefit plan investors” has a aggregate value of less than 25% of the total value of such class of equity interest outstanding at such time, determined on the date of the most recent acquisition of any equity interest in the entity; or (ii) the entity is a “venture capital operating company” as defined in the DOL regulations. The USA PATRIOT Act (The Uniting and Strengthening America by Providing Appropriate Tools Required to Interrupt and Obstruct Terrorism Act of 2001) requires that financial institutions establish and maintain compliance programs to guard against money-laundering activities. The PATRIOT Act requires the Secretary of the U.S. Treasury Department to prescribe regulations to govern the anti-money-laundering policies of financial institutions. The Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury, has proposed regulations that would require certain pooled investment vehicles to follow anti-money-laundering policies or procedures. Although these regulations are not yet final, the final version adopted by FinCEN could possibly apply to funds. Moreover, legislation or regulations could be enacted to require funds or service providers to funds to share information with governmental authorities regarding investors in funds. Such legislation and/or regulations could also require funds to implement additional restrictions on the transfer of fund interests. Accordingly, funds generally require information from investors to verify, for any reason whatsoever, the identity of an investor and the source of the payment of subscription monies, or to comply with any applicable customer identification programs required by FinCEN, the U.S. Securities and Exchange Commission (SEC) or other federal regulatory authority. In addition, interests in funds may not be offered, sold, transferred or delivered, directly or indirectly, to certain persons, including (i) a person or entity who is a “specially designated national and blocked person” within the definitions set forth in the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) Regulations of the Treasury; (ii) a person acting on behalf of, or an entity owned or controlled by, any government against whom the United States maintains economic sanctions or embargoes under the OFAC Regulations; (iii) a person or entity who is within the scope of Executive Order 13224 – Blocking Property and Prohibiting Transactions with Persons who Commit, Threaten to Commit, or Support Terrorism, effective September 24, 2001; or (iv) a person or entity whose contributions to the fund will be derived from or related to, directly or indirectly, any illegal or illegitimate activities or any individual or organization identified as a terrorist or as a terrorist organization by the United Nations or the U.S. federal government. (b) Are private equity funds generally regarded as investment companies? The majority of funds rely on exceptions under section 3(c)(1) or 3(c)(7) of the Investment Company Act from being required to register as an investment company under the Investment Company Act. Under section 3(c)(1), a fund will not be deemed to be an investment company under the Investment Company Act if its outstanding securities are beneficially owned by not more than 100 persons and if it is not making and does not presently propose to make a public offering of its securities. Beneficial ownership by a person is deemed to be beneficial ownership by one person, except that if the person owns 10% or more of the outstanding voting securities of the fund and the person is or, but for the exception found in section 3(c)(1) or 3(c)(7) of the Investment Company Act, would be an investment company, beneficial ownership is deemed to be by the holders of such person’s outstanding securities. Under section 3(c)(7), a fund will not be deemed to be an investment company under the Investment Company Act if its outstanding securities are owned exclusively by persons who, at the time of acquisition, are “qualified purchasers” and if it is not making and does not at that time propose to make a public offering of such securities. A “qualified purchaser” includes (i) a natural person who owns not less than $5million in investments (as defined in the Investment Company Act) and (ii) any person, acting for its own account or the accounts of other qualified purchasers, who owns and invests on a discretionary basis not less than $25 million in investments. 8. (a) What is the impact of globalization upon investments in private equity funds? Typically, when a fund is formed, the investment team is restricted from investing outside a specific geographical area. This is generally insisted upon by the investors who wish (i) to know where their money is being put to work, and (ii) to ensure that the investment team is capitalizing upon the strengths of its members and not being stretched too thinly. The primary impact of globalization on funds has been an increasing number of funds formed to invest in previously obscure geographical areas. For example, a fund focused on emerging markets may intend to invest primarily in India, Russia and China. Thus, investors are able to select funds that offer higher risk/reward investment profiles as well as gain exposure in previously inaccessible geographical areas. Interestingly, the recent annual report of the UN Conference on Trade and Development indicated that there are signs of rising hostility from labor unions and politicians around the world toward fund managers, based largely upon the short time horizon of the investments and the fact that funds usually rely on job cuts to generate the increase in profitability and capital gains that they seek. (b) What legal issues may arise from investments by the fund in foreign jurisdictions? Each jurisdiction brings its own particular set of issues. A common requirement among those investing in foreign jurisdictions is obtaining assurance that such investment would not lead to increased tax liability, create an obligation to file a tax return in a foreign jurisdiction and compromise an investor’s limited liability. Often investors will negotiate for the fund agreement to contain protective language to prevent these negative effects. (c) What factors may be relevant to the decision of where to establish a private equity fund? Generally, a fund is domiciled in the country where the investment team is domiciled. Other factors that are also taken into consideration are the primary location of investments, the primary location of investors, the familiarity of investors with the jurisdiction, the tax exposure and treaty benefits of the jurisdiction and the limited liability protection for investors. In the United States, funds are generally formed under to the laws of the State of Delaware, but often include parallel offshore vehicles for certain foreign investors.

Due Diligence and Deciding to Invest in Private Equity

9. Why is due diligence so important in relation to investments in private equity funds? Investments in funds require a long-term commitment (e.g., a 10-year term with the possibility of extension). Generally, few exit options are available because the secondary market for investments in funds is limited, and transactions in that market require the consent of the investment team. In addition, the nature of investments in funds is that investors hire an investment team and give it a large amount of discretion to invest their money (subject to any applicable investment restrictions). Accordingly, it is important for investors to perform proper diligence on the investment team to ensure that its members are trustworthy; have a good reputation, good experience, good track record and extensive deal accessibility; and are people that the investors will want to be associated with for the foreseeable future. It is also important for investors to perform proper diligence on the team’s investment strategy and its historical performance, to attempt to determine the likelihood of the fund’s success. Investors should understand the culture and values of the fund as well as its proposed market. In addition, investors should find out whether the fund follows a proper process to ensure that there is sufficient investment sourcing and analysis to seek out the best deals, that there are both an institutional approval process to review all deals and a clear method of identifying where value can be added and how investments will be managed. Ideally, investors should implement a diligence protocol that will enable them to approach each investment unemotionally. Key sources of information for the investors will likely include the following: material provided by the investment team, including presentations and interviews; informal and formal references from other investors and industry contacts; and other general industry information. 10. (a) When considering an investment in private equity funds, what factors should an investor consider (e.g., business and legal)? The answer to this question will vary from investor to investor as the investment strategies of each will differ. For example, an insurance company or bank may invest in certain funds to benefit from exposure to certain members of the investment team or the opportunity to bid for other work. On the other hand, some investors may be motivated to invest in certain funds because of the opportunity to co-invest with such fund. Regardless of the reason for the investment or its strategy, investors should ensure that the fund’s proposed investments correspond with their own investment strategy and risk tolerance. In addition, investors should ensure that (i) their limited liability is protected (e.g., investors should not be on the hook for the fund’s general liabilities); (ii) they understand their tax filing obligations resulting from the investment (e.g., will they now have to file tax returns in a foreign jurisdiction because the fund will make its investments there?); and (iii) they are comfortable with the terms of the agreement for the foreseeable future and have some protection if things do not go according to plan. (b) How does the decision-making process to invest in a private equity fund differ from the process of investing in public securities? Companies with public securities are obligated under applicable securities laws to disclose certain information to investors. In addition, regulators, including the relevant market administrators and the SEC, oversee the various filings of such companies to ensure compliance. As a result, investors benefit from increased disclosure and regulatory oversight. In investments in funds, access to information is generally more restricted because disclosure is only required in accordance with the fund agreement, and all offering documents are private. Perhaps the most material difference relates to the consequences of investment. As discussed earlier, the exit opportunities for investments in funds are very limited compared with investments in public securities. So to limit their risk exposure, investors should spend extra time and effort in deciding whether to invest in a fund; they should also actively monitor their investments once in the funds. 11. (a) Over the course of an investment in a private equity fund, how will investors obtain sufficient information to monitor their investment and to enable the investors to make an informed decision when exercising their consent rights? Investors generally negotiate for the fund to disclose certain information. Typically, investors attend formal annual meetings at which the investment team discusses both the fund’s performance and the fund’s portfolio. The investors may also be able to obtain information through informal discussions. Investors usually receive quarterly and annual financial statements and other disclosures regarding the fund (e.g., statement of the investor’s capital account and unpaid capital commitments; identification of companies in the portfolio, including the cost and current value; statement of consummated transactions and summary of any significant decisions by the investors and/or the fund’s advisory committee or any significant litigations or proceedings since the previous statement). Generally only annual financial statements are audited in accordance with applicable generally accepted accounting principles. Investors that have representatives on the fund’s advisory committee may obtain additional information, depending on the terms of the fund agreement. (b) What impact have U.S. freedom of information laws had in this regard? The U.S. Freedom of Information Act (FOIA) (and the various related lawsuits brought thereunder) may require certain investors to publicly disclose information about their investments in funds. Accordingly, funds are sensitive about the information that they are required to disclose to such investors and, with increased frequency now, funds (i) limit the information they are required to disclose to investors subject to FOIA or similar legislation; (ii) require investors to advise the fund of changes to their FOIA status; and (iii) retain the right to withhold information from any investor. See Q&A 4 for additional discussion. (c) What steps can be taken by an investor to protect its interest? To attempt to protect its interest in a fund, an investor can negotiate to include in the fund agreement a combination of the following: (i) an excuse right that would relieve the investor from being obligated to make capital contributions to the fund if the investor’s continued investment would violate the applicable laws or regulations; (ii) a right to remove the investment team with the consent of other investors (e.g., for “cause” – generally, fraud, willful misconduct or bad faith; for “no cause”; or if certain key members of the investment team are no longer involved in the fund’s management); (iii) a right either to terminate the period within which the fund can make investments or to dissolve the fund (e.g., for cause; or for “no cause”; or if certain key members of the investment team are no longer involved in the fund’s management); (iv) a right to transfer interests in the fund (a) to affiliates without the consent of the investment team and (b) to others with the consent of the investment team, which will not be unreasonably withheld; and (v) limitations on exculpation and indemnification provisions to ensure that indemnified members of the investment team will not be protected by the fund for bad acts or internal disputes. To protect the dilution of its interest in a fund, an investor can negotiate that the fund agreement contain a cap on the aggregate amount of capital commitments. This cap, combined with a limitation on the length of time during which additional investors can be admitted to the fund, ensures that investors know the minimum interest that they will hold in the fund. These provisions also serve the purpose of ensuring (i) that the fund size does not become too large and therefore exceed what the investor determines to be the fund’s capabilities, and (ii) that the investment team does not spend too much time raising capital (as opposed to investing it). To prevent the investment team from taking actions that could adversely affect the interests of the investors, often investors will negotiate certain approval rights – for example, that amendments to the fund agreements cannot be made without the approval of a certain proportion of the investors (e.g., 50%, 66⅔% or unanimous). If the investment team has made substantial capital commitments to the fund, investors often request that approvals be made on a disinterested basis (e.g., by excluding the capital commitment of the investment team). This is particularly relevant in the area of conflicts. Certain key economically significant amendments to the fund agreements, including altering the investors’ commitments or reducing their share of distributions, generally require unanimous consent of the investors and the investment team. In addition, amendments to the provisions of the fund agreement that affect a certain class of investors (e.g., ERISA, tax-exempt investors or banks) generally require the unanimous approval of those investors. The fund agreements will also provide for investor approvals for certain actions not covered in the Advisory Committee approval provisions. These may include any of the following: waiving periodic fund meetings, terminating a suspension period after a key-person event, replacing the investment team following a cause or other disabling event, dissolving the fund after a cause event or on a no-fault basis, assigning/transferring the investment team’s interest in the fund or making in-kind distributions of non-marketable securities or co-investments with sister funds to the fund. Investors can also protect their interests in the fund by ensuring that the investment team does not receive distributions that exceed their entitlement under the fund agreement’s waterfall provisions. The inclusion of a clawback mechanism ensures that if the investors have not received a preferred return (if applicable) or the investment team has received too much carried interest, the parties are “trued up” as of the clawback determination time. See Q&A 12 below for further discussion regarding distributions and clawbacks.

Investment Performance

12. (a) Which key provisions govern the relationship between an investor and a private equity fund? Fund agreements will vary from fund to fund; however, some of the more material legal provisions to consider are fees and expenses; waterfall distributions; clawbacks; Advisory Committee and investor approval rights; investment team duties to the fund and the investors; indemnification and investor giveback; and changes in governance. The fund is generally responsible for picking up certain expenses, including the management fee. These expenses are then passed on to the investors by way of required capital contributions. In calculating the management fee, most funds pay the manager a fixed percentage (often 1.5%–2.5%) of capital commitments (some larger funds may reduce the percentage if capital commitments exceed certain breakpoints). There is often a reduction (based upon a reduced percentage and/or a reduced amount – e.g., invested capital contributions) following the expiration of the investment period or upon the investment team’s raising of a successor fund. The management fee is generally paid in advance quarterly or semi-annually and is offset by some percentage (e.g., between 50% and 100%) of ancillary fees generated by investments. These ancillary fees may include directors’ fees received by the investment team as well as transaction fees and break-up fees (often to the extent that break-up expenses were borne by the fund). It has become increasingly common for a portion of the management fee to be waived and, in lieu thereof, for investors to be directed to contribute an equal amount to the fund on behalf of the investment team in the form of a capital contribution. As a result, the investment team will be entitled to receive any profits generated by such contribution according to the waterfall. This mechanism allows the investment team to gain a tax advantage by recharacterizing the management fee. See Q&A 4 for further discussion of the management fee waiver. As a general principle, the fund bears the expenses of fund formation (e.g., organizational expenses such as legal and accounting expenses and fundraising expenses up to fixed cap); acquiring and holding investments; operating costs (e.g., audit expenses, tax-preparation expenses, reporting expenses, negotiation expenses, insurance costs, interests costs and Advisory Committee expenses); broken-deal expenses; and all other deal-related costs. On the other hand, the investment team typically bears office and employee expenses (e.g., overhead, salaries and benefits) and expenses incurred in sourcing deals for the fund (including travel and entertainment). Any placement agent fees are generally ultimately borne by the investment team but, due to tax and timing considerations, may first be paid by the fund with a corresponding reduction to the management fee. The waterfall determines how proceeds from the disposition of portfolio investments will be distributed to each partner and is thus heavily scrutinized and negotiated. It is typically calculated on a deal-by-deal basis or on an aggregate basis. See Q&A 12(b) for further discussion. The inclusion of a clawback with respect to amounts received by the investment team resolves (i) the investors’ concern that the investment team may get inflated returns under the premise that the “home run” investments may be sold early in the life of the fund, while the “dogs” may not be sold until the end of the life of the fund; and (ii) the desire of the investment team to share in the profits of the fund as soon as possible. In its simplest form, the clawback causes the carried interest payment to be calculated at the end of the fund, aggregating all the disposed-of investments to ensure that the agreed-upon profit split is actually made. With the clawback, the investment team can be required to return (i) distributions received by the investment team that exceed the carried interest to which it is entitled; (ii) distributions received by the investment team that either exceed the carried interest to which it is entitled or are sufficient to cause the investors to receive a return of their capital contributions and a preferred return; or (iii) distributions received by the investment team that exceed what would have been distributed to the investment team as of a determination date if they had been made on an aggregate basis. Generally, amounts required to be returned by the investment team (regardless of the clawback formulation) are calculated (i) net of taxes payable by the investment team (calculated at an assumed rate) plus (ii) net of distributions received in connection with the capital contributions of the investment team. The clawback obligations can be calculated at the end of the life of the fund and/or periodically before then (e.g., at the end of the investment period or at periodic intervals). Generally, investors require that the carried interest recipients in the investment team each guarantee that they will be liable for the amount of carried interest that they have received in the event of a clawback obligation. Investors may also consider requiring an escrow account to be established, in which a percentage of the carried interest distributions is required to be deposited. Other key terms of fund agreements relate to investor consent rights and an Advisory Committee. An Advisory Committee is usually composed solely of investor nominees (generally, each of the investors with the largest capital commitments has the right to appoint a member to the Advisory Committee). The purpose of the Advisory Committee is to consent or otherwise deal with a variety of matters that are likely to arise during the life of the fund and to alleviate the administrative burden of rounding up investor consents. Typical Advisory Committee powers include resolving conflicts of interest, reviewing and resolving valuations of investments, waiving certain investment restrictions in the fund agreement, substituting investment team members, terminating the investment period early in certain circumstances and settling indemnity claims. Most fund agreements provide that the fund will indemnify the members of the Advisory Committee and the investors that such members represent in connection with the administration of their duties. Investors often request that the fund agreement provide that members of the Advisory Committee do not owe a fiduciary duty to the fund or to the other investors in the fund, but instead such members are permitted to act solely in the interests of the investors that they represent (or, alternatively, owe only a duty of good faith). As discussed in Q&A 11(c), certain approvals may require the investors’ consent, not just the consent of the Advisory Committee. Generally, investor consent (rather than Advisory Committee approval) is required for certain amendments to the fund agreement, termination of the suspension period, removal of the investment team and/or dissolution of the fund. Other key terms of fund agreements relate to the duties of the investment team to the investors and the fund (and corresponding indemnification of the investment team) and the ability of the team to require investors to return distributions previously made to them by the fund. With respect to duties of the investment team, the following or similar provisions may be contemplated for inclusion in the fund agreement: (i) a requirement that designated members of the investment team devote substantially all their business time to the fund until the end of the investment period, and thereafter, such time as deemed reasonably necessary to manage the affairs of the fund; (ii) a requirement that all investment opportunities within the scope of the fund strategy first be offered to the fund (alternatively, approval of the Advisory Committee is required if such opportunities are not to be first offered to the fund); (iii) a limitation that successor funds (e.g., funds that are substantially similar to the fund or, alternatively, any fund) cannot be raised by the investment team until a fixed percentage (e.g., 66⅔%–75%) of the fund’s capital commitments have been invested; and (iv) a requirement that all non–third-party transactions be on an arm’s-length basis and/or approved by the Advisory Committee. Generally, provided that the investment team members do not act in material breach of the fund agreement or their acts (or omissions to act) do not constitute gross negligence, fraud or willful misconduct, the members will be exculpated and indemnified from liability. As discussed in greater detail in Q&A 4, if fund assets are inadequate to satisfy fund obligations, investors may be required to return prior distributions they received. Finally, other key terms of funds relate to the investor exiting a fund. These provisions are discussed in greater detail in Q&A 11(c) and include the following: a key-person clause (e.g., if designated members of the investment team cease to devote the requisite time to the fund); a bad acts clause that allows investors to remove the investment team or take other action regarding the governance of the fund; and a no-fault clause that enables investors to either terminate the investment period or end the life of the fund. (b) How, typically, will the agreement provide for distributions to be made to the investors? Fund agreements contain two general types of distribution waterfalls: deal-by-deal waterfalls and aggregate waterfalls. In deal-by-deal waterfalls, distributions are generally made in the following order: first, to the investors and the investment team until they have received their capital contributions back with respect to the disposed-of investment (and any previously disposed-of investments, including capital contributions for any organizational expenses, fund expenses and management fees as allocated to the disposed portfolio investment and any previously disposed-of portfolio investments); second, to the investors until they have received a preferred return on such disposed-of investments (calculated at a specified rate of return − often 8%, compounded annually); third, to the investment team until it receives a “catch-up” of its carried interest (e.g., 20%) on the distributions previously made to the investors as a preferred return (calculated commonly at a rate of 50%, 80% or 100% such that carried interest is calculated on the entire amount of profit, allowing the investment team to share in the profits at the first dollar and therefore catch up to the investors; by reducing the percentage under the catch-up provisions, investors receive their share of profits more quickly and are able to delay the time when the investment team shares in the fund’s profits); and fourth, to the investment team at the carried interest rate and the remainder to the investors (e.g., 20%/80%). Many U.S. buyout and distressed debt funds have a deal-by-deal waterfall distribution scheme. In deal-by-deal waterfalls, investors often request that a partial or complete writedown of a portfolio investment constitute a disposition event. The investment team may argue that writing down too frequently, without the ability to write up portfolio investments, can be an administrative burden. On the other hand, investors may want to ensure that valuations of portfolio investments are as accurate as possible for purposes of their reporting but also for determining when they should be eligible to receive a return of their capital contributions with respect to such investments. In aggregate waterfalls, distributions of carried interest to the investment team are delayed until either all the portfolio investments have been disposed of or the investors have received back all their capital contributions (including capital contributions for any organizational expenses, fund expenses and management fees); distributions are then made to the investment team at the carried interest rate and the remainder to the investors.A variation on aggregate waterfalls is used in many venture capital and real estate funds, whereby investors and the investment team receive their capital contributions back with respect to the investment being disposed of and then remaining proceeds are distributed to the investment team at the carried interest rate and the remainder to the investors, so long as the capital accounts reflect a net asset value of at least 120% of unreturned capital contributions. The fund agreement may have different rules regarding the disposition of bridge investments and temporary investments (e.g., the disposition proceeds may be distributed outside the waterfall provisions). Although there is often a higher risk associated with bridge investments, investors may choose to forgo their preferred return on these investments to prevent the investment team from receiving a carried interest on them, thereby reducing the investment team’s incentive to make such investments. Proceeds from bridge investments may instead be distributed to investors and the investment team on the pro rata basis of their capital contributions, as is generally done with respect to temporary investments. 13. (a) Are the members of the investment teams subject to any legal duties? Investors generally negotiate with the investment team to ensure that the fund agreements do not reduce the legal duties of the investment team to both the fund and the investors. Under Delaware law, any implied duties that members of the investment team may owe (e.g., duty of loyalty) may be modified by agreement except with respect to the duties of good faith and fair dealing. An aggressive investor may negotiate for the explicit inclusion of increased standard of care, whereas an aggressive fund may attempt to limit such standard of care by expressly stating that the investment team may act in its own interests in the management of the fund without considering the best interests of the fund or its investors. (b) What are common ways to align the interests of the investment team with the investors? Investors argue that the more money that is contributed by the investment team, the more “skin” the investment team has in the game and therefore the increased likelihood that the investment team will act in the fund’s best interests. In addition, the interests of the investment team and the investors are aligned with the (i) reduction of the management fee either at the end of the investment period or upon the raising of a successor fund (since the investment team’s attention will not be as focused on the fund), and (ii) the offsetting of ancillary fees against the management fee (since these fees are earned as a result of the investors’ investment in the fund and therefore the benefit, or a portion of the benefits, of such fees should arguably flow back to the investors). (c) What is the most common way to motivate the performance of investment team? The investment team is primarily motivated by its desire to return sufficient profits to the investors to ensure that it receives a portion of the profit under the applicable waterfall scheme (e.g., the investment team’s “carried interest”). In addition, if the investment team is successful in returning profits to both the investors and to itself, there is an increased likelihood of successful fundraising to establish a successor fund once the current fund has been fully or substantially invested. We note that although the management fee was historically designed to cover the investment team’s overhead expenses, given the recent substantial growth in the size of many funds, it is arguable whether the management fee in some funds is an additional way to put money into the hands of the investment team in excess of these expenses. 14. What restrictions are likely to apply to the amount and period of investment, and to transferability of interests in private equity funds? The investment restrictions that may be included in fund agreements will vary dramatically according to the fund’s strategies. Generally, there is a restriction on the amount that can be invested in one entity (e.g., 15%–20% of capital commitments), but this amount may be increased if bridge investments (which are also generally capped) are made or the Advisory Committee’s approval is given; there may also be a maximum amount that may be invested outside the main strategy of the fund (e.g., if the fund’s strategy is to invest in companies in the communications industry, the amount that may be invested outside that industry is capped). In addition, there may also be restrictions on the geographic areas where a fund may invest (e.g., only 15%–20% of capital commitments can be invested outside a specified region) and on the types of investments that a fund can make (e.g., investments in public securities, investments in “hostile” transactions or investments in other funds). Moreover, a fund may be limited with respect to the amount of indebtedness that it can incur and its ability to invest in puts, calls, straddles or other derivative instruments. Depending upon the investors and other investment restrictions, the fund may also agree to restrictions on investing directly in oil or gas reserves, real estate or companies engaged primarily in the business of manufacturing or selling alcohol, tobacco or firearms. The period in which the fund can make capital calls for investments is generally limited to the first four to six years of the fund. After this period, the fund can require investors to make capital contributions only for fees and expenses, with respect to investments in progress prior to the end of the investment period, investments subject to a written commitment or with respect to follow-on investments (e.g., subsequent investments made in existing portfolio companies or investments that are or will be under common control with existing portfolio companies). As a general rule, investors’ interests in the fund are not transferable without the consent of the investment team. An investor may be able to negotiate a transfer right regarding a desired transfer to its affiliate (e.g., an entity that is controlled by the investor, an entity that controls the investor or an entity that is under common control with the investor) whereby either the consent of the investment team is not required or such consent will not be unreasonably withheld. Generally, the investment team does not pre-approve any other transfers (including those to be made on the secondary market).

Exit

15. What are common strategies to exit an investment in a private equity fund? What considerations need to be taken into account? There are three basic ways in which an investor can exit its investment in a fund: (i) through the secondary market; (ii) through the normal course exit at the end of the life of the fund; and (iii) through early termination of the fund, including by a vote of the investors to remove the investment team without replacing it. During the life of the fund, an investor that wishes to liquidate its investment in the fund can attempt to find a buyer for its fund interest. If the fund is unsuccessful, the investor may be unable to find a buyer and/or may be required to accept a substantially discounted purchase price for its investment. As discussed in greater detail in Q&A 14, a sale on the secondary market will generally require the consent of the investment team. With such consent, the transferee would typically assume any obligations to make remaining unfunded capital commitments. Each fund agreement provides for the disposition of investments at the end of the life of the fund (e.g., 10 years from the date of formation, which can be extended by the GP or with the consent of the Advisory Committee or the investors) and its subsequent liquidation. The fund may have the authority to distribute non-marketable securities to investors. Finally, as discussed in greater detail in Q&A 11(c), investors often negotiate for the ability to exit the fund and/or cease making otherwise required capital contributions, including when (i) continued investment would violate applicable law; (ii) a certain proportion of the investors decide to remove the investment team and do not subsequently appoint a replacement investment team; or (iii) a certain proportion of the investors decide to dissolve the fund. In the cases of (ii) and (iii), the fund’s assets would be liquidated and/or distributed in kind, thereby providing an exit for all the investors.

Additional Private Equity Articles

 Evaluating Private Equity Performance - Moving Past IRR How Institutional Investors are Allocating to PE (video) 5 Ways to Improve your PE Fund Selection Lifting the Lid on PE's Hidden Practices   This article was originally written for VC Experts and appeared in their Private Equity Reference Material. The article was written by Amy Johnson-Spina and Joseph Romagnoli with help from Peter Keenan, Darren Baccus, Andrew Beck and Mark Tice.
  Amy Johnson-Spina is an associate in the firm’s New York office, concentrating in corporate law with an emphasis on private equity transactions. Amy advises private equity fund managers and institutional investors on a broad range of issues, including acquisitions and investments (direct and indirect). Jay Romagnoli is a member of the Torys’ Executive Committee and the head of the firm’s Private Equity Group in New York. His practice focuses on private equity, mergers and acquisitions, and financing transactions for public and private companies, equity sponsors and financial institutions. He has represented private equity clients in a broad range of corporate transactions, including their consolidation programs and venture capital investments. He has also advised debt and equity financiers in numerous transactions, including leveraged buyout transactions, secured credit facilities and leveraged recapitalizations.
  VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [6] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 1871 [post_title] => Valuation Intangibles - Influencing Risk and Exit Strategy [post_date_gmt] => 2015-02-13 16:05:35 [post_url] => https://aceportal.com/insights/valuation-intangibles-influencing-risk-and-exit-strategy/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] =>

Effects of the Financing Environment and Intangibles

The supply of and demand for capital play an important but measured role in the valuation a company is likely to command. Capital is most restricted or expensive and valuations under greatest pressure during and following a period involving a sudden market correction or a downturn in the economy. None of us has a crystal ball for future economic growth; pricing is therefore more a function of the current or most recent nature of the marketplace. During periods of economic softening or market correction, the public markets, as well as the market for mergers and acquisitions, are in flux and directly affect venture investors' valuation analyses. Venture investors look to the prices established in the marketplace to put a prospective exit value on their investments. The values investors are willing to pay in a public offering and the values corporations are willing to pay to make acquisitions come under pressure and typically decline during a market correction or economic downturn. There is consequential downward pressure on valuations during these periods and, at times, a disconnect between a company's expectations with respect to valuation and those of investors. As a result, the feeling in the marketplace is a tightening of sources of capital. A number of intangible elements influence the ultimate valuation an investor is willing to give a company. These intangible elements are all factored into an investors' assessment of risk.

Intangible 1: A Startup's Team

First and most important, assessment of management quality and experience will directly influence assumptions regarding how an investor's ownership percentage may change over time. The more management needs to be augmented, the greater the potential dilution that future needs in terms of options will have on the ultimate ownership percentage of an investor. Most investors generally start with the assumption that a base of at least 10 percent of the capitalization of the company needs to be provided for management. This figure can grow to up to 20 percent, depending on holes in the management team.

Intangible 2: Growth Projections

Second, assumptions about revenue growth are often a source of disagreement between entrepreneurs and investors. They are arguably somewhat fungible, particularly when signed contracts cannot be used to support an entrepreneur's projections.

Intangible 3: Product Roadmap

Third, every company has unique product development, as well as customer adoption risk. How an investor assumes either will pan out for a company will influence the investor's assumptions regarding revenue growth.

Intangible 4: Ability to build an Economic Moat

Fourth, the strength of a company's competitive advantage and ability to create escalating barriers to entry are sometimes debatable.

Intangible 5: Go Forward Strategy & Customer Feedback

Fifth, the quality of the business plan and the market data, as well as testimonials, is important not only for a current round, but also in positioning a company for subsequent rounds of financing.

Intangible 6: Sexiness

Finally, and perhaps most intangible, the "sexiness" of a deal in the eyes of an investor can work for and against a company. Beauty is truly in the eye of the beholder. A space perceived to be hot and inflated will typically come under valuation pressure. While the best venture investors are drawn to investments in industries they know well, it is difficult to predict how their industry bias and personal experience will influence their valuation.

Risk and Exit Strategy for Investors

Intangible risk is a very subjective measure when it comes to evaluating and valuing an investment. Similarly, the extent to which a company and an investor agree on likely future revenue and earnings and the timing and nature of an exit reflect the assessment of both parties of future risk. Investors will typically adjust future revenue and earnings projections to reflect the investor's individual assessment of risk related to an investment. In the same vein, the VC is likely to adjust assumptions with regard to exit valuations and length of holding of an investment to factor in conservative assumptions about the likely timing, value, and nature of a prospective exit. The company that assumes with dead certainty it can go public at a specific valuation in a specific number of years is likely to be gravely disappointed by the valuation given by an investor who assumes that company is likely to generate an exit in a longer period of time through a private sale that might well be priced at a discount to the public markets.

Future Capital Needs

The extent to which companies will or may require future rounds of financing creates the opportunity for further disparity between the valuations placed on a company by investors and by its founders and employees. VCs will almost always assume that earlier-stage companies will require more time and more financing than the company projects. Management teams who believe they can do more with less, in less time, are the source of the entrepreneurial drive that ultimately propels a company forward. But more often companies face unforeseen challenges that require additional funding or slow the pace of progress. The time value of money is a critical and central factor in how investors establish their projections. When investors feel it is prudent to allocate more time and more money in their assessment of the investment horizon for a company, valuations are inevitably affected and drawn down. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [7] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1867 [post_title] => Trends in Financial Technology Investing [post_date_gmt] => 2015-02-12 13:05:17 [post_url] => https://aceportal.com/insights/trends-in-financial-technology-investing/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2015/02/Carl-Insights-350x211.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2015/02/Carl-Insights.png [excerpt] => [post_content] => In this episode of Insights, ACE Portal’s Co-Founder and CFO, Carl Torrillo, discusses trends in financial technology (fintech) investing, valuations, and average investment size with Ross Barrett, Co-Founder and CEO of VC Experts. https://player.vimeo.com/video/115202371 About VC Experts VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [8] => stdClass Object ( [post_author] => Global Innovation Co [post_author_bio] => [post_author_thumbnail] => Global Innovation Co [ID] => 1865 [post_title] => 5 Reasons European Startups Should Consider the USA [post_date_gmt] => 2015-02-11 19:22:38 [post_url] => https://aceportal.com/insights/5-reasons-european-startups-should-consider-the-usa/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => Why Startups Should Consider the US About Global Innovation: Committed to the success of start-ups, “venture” investors and Corporations involved in Open Innovation. Their service offer is three-fold and complementary. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Global Innovation Co ) [9] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1851 [post_title] => The Renewed Family Office Interest in Direct Investing [post_date_gmt] => 2015-02-10 14:51:16 [post_url] => https://aceportal.com/insights/the-renewed-family-office-interest-in-direct-investing/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2015/02/ACE-Insights-350x190.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2015/02/ACE-Insights.png [excerpt] => [post_content] => In this interview Michael Zeuner, a Managing Partner at WE Family Offices, discusses the renewed appetite among family offices for direct investing. Michael's discussion with ACE Portal's CEO, Peter Williams, is wide-ranging yet succinct. They cover why families are gravitating from private equity into direct investing, fee arrangements within transactions, sourcing deal flow, conducting expert due diligence, and organizing amongst families.   https://player.vimeo.com/video/115199833 About WE Family Offices WE Family Offices is a different kind of wealth advisor. WE stands for Wealth Enterprise and the core of their work is based on the simple tenet that families who are able to successfully manage their wealth do so as they would a business. They build Wealth Enterprises. Founded on a set of core beliefs, their mission is to work with each client – each different, each complex in their own way – to offer them insight into their wealth management, give them the information they need to make critical decisions, and support to manage their wealth successfully.  It’s about control. It’s about clarity. It’s about knowing where you are in relation to your goals. At your level of wealth they understand it can be overwhelming, but WE Family offices is here to help. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [10] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 1856 [post_title] => A Checklist for Your New Joint Venture [post_date_gmt] => 2015-02-04 14:35:57 [post_url] => https://aceportal.com/insights/a-checklist-for-your-new-joint-venture/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => The following post consists of a comprehensive "Equity Joint Venture" Checklist prepared by Gene Barton, a Principal in the Boston office of Fish & Richardson P.C. The purpose of this checklist is to ensure that you cover all of your bases when considering a Joint Venture to ensure there are no surprises. It originally appeared in VC Experts 'Intellectual Property and Joint Ventures' Reference book.

An Equity Joint Venture Checklist

Basic Overview

  1. Parties (including parents, if appropriate), legal systems under which organized and form of organization
  2. Name of joint venture and principal place of business
  3. Description of project

Defining the Relationship between parties

  1. Corporation, limited liability company, partnership or other relationship to be formed
  2. Jurisdiction of formation
  3. Principal structure features (required/permitted under applicable law)
  4. Tax implications for venture and the parties to it

Terms

  1. Commencement
  2. Threshold termination if purpose unattainable
  3. Completion of project or early termination
  4. Government approvals (if required)

Obligations of each party to the JV

  1. Equity (capital) contribution
  2. Financial liability for future cash needs (including guarantees)
  3. Service and management personnel
  4. Research obligations and offer of new developments acquired
  5. Property or contracts transferred, including IP rights, trademarks
  6. Positive covenants
    1. Right to enter agreement
    2. Right to property, including defense of IP rights transferred
  7. Negative covenants
    1. Not to pledge shares
    2. Not to compete in JV markets (or vice versa)

Management and control provisions

  1. Board of Directors or similar body
    1. Membership, representation of shares, chairman
    2. Rights to remove directors appointed by a party
    3. Meetings (in person, by phone, in writing)
    4. Voting major issues requiring super majorities
    5. Deadlocks
    6. Language of meetings and reports and advance agendas
  2.  Chief Executive and Financial Officers
    1. Responsibilities
    2. Remuneration
    3. Appointment of initial CEO/CFO
    4. Dismissal
    5. Indemnities

Capital interests

  1. Relative shares and voting power
  2. Treatment in books of account: initial balances
  3. Treatment of surpluses and deficits
  4. Allocation of tax benefits
  5. Additional contributions
    1. By both parties
    2. By one party
  6. Special procedures for shareholder meetings/votes

Use of funds

  1. Use of initial capital contributions
  2. Budget for first year
  3. Three-year projection
  4. Financial delegations
  5. Profits and declarations of dividends
  6. Reserves (required by law/discretionary)

Schedule of work (Business Plan)

  1. Agreed plan at commencement of work
  2. Schedule for first year
  3. Three-year projected work schedule
  4. Amendments to Business Plan

Insurance

  1. JV activities
  2. Officers/directors
  3. Integration with parents= plan

Information and reporting

  1. Description of liaison officers
  2. Exchange of information (considering competition law aspects)
  3. Financial reporting
    1. Scope of needs
    2. (ii) Frequency of reports
    3. (iii) Fiscal year
    4. (iv) Location and access
    5. (v) Audit
    6. (vi) Retention, including after termination
  4. Language of company affairs, records, reports, meetings

Patents, trademarks, other intellectual/industrial property

  1. Existing
    1. Ownership
    2. License of rights
    3. Defense of legal suits by third parties
    4. Prosecution of infringers
    5. Reassignment on termination
  2. Future
    1. Ownership by parents and/or venture
    2. Other issues as above

Accountants/Counsel

  1. Independent of parents
  2. General/special
  3. Local/foreign

Joint venture opportunities/conflicts of interests

  1. What must be referred
  2. What each party may retain

Disputes

  1. Negotiation
  2. Cooling off
  3. Arbitration
    1. When
    2. Where
    3. By whom
    4. Under what arbitral rules
    5. Rules of decision
    6. Aid of courts of enforcement, if feasible, and alternatives if not

Exit plans, including Dissolution/Buy-Out

  1. Minimum time commitment of parties to remain b.
  2. Early exit
    1. For cause
    2. By agreement
  3. First refusal rights preceding third party acquisition
  4.  AShoot out@ or appraisal for buy outs
  5. Dissolution in deadlock
  6. Distribution on termination of special property such as IP, trademarks
  7. Survival of covenants
  8. Disposition or retrieval of inventory

Admission of new parties to the venture

  1. One at a time
  2. Public offer arrangements

Excusable delay/force majeure

Miscellaneous

  1. Entire agreement: no representation
  2. Assignments
  3. Waiver
  4. Severance
  5. Validity
  6. Clause headings
  7. Additional instruments
  8. Counterparts
  About Gene Barton: Gene Barton is a Principal in the Boston office of Pepper Hamilton LLP,. Mr. Barton's practice emphasizes financing and merger and acquisitions activity. He specializes in the representation of emerging companies and venture capital and other private equity funds. He also provides general corporate, business planning and financial advice to public and private companies.   About Pepper Hamilton: Pepper Hamilton LLP is a multi-practice law firm with more than 500 lawyers nationally. The firm provides corporate, litigation and regulatory legal services to leading businesses, governmental entities, nonprofit organizations and individuals throughout the nation and the world. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [11] => stdClass Object ( [post_author] => Gerard Buckley [post_author_bio] => Gerard has been working in the financial industry for over 32 years, helping companies strategically plan for accelerated levels growth [post_author_thumbnail] => Gerard Buckley [ID] => 1163 [post_title] => Fintech Conference Insights from an Angel Investor [post_date_gmt] => 2015-02-02 19:34:11 [post_url] => https://aceportal.com/insights/fintech-conference-insights-from-an-angel-investor/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => Editors Note: Gerard is a well regarded Angel Investor and thought leader in early-stage investing in Toronto, Canada. As a result this piece not only has interesting commentary on potential trends in 2015 from the conference he attended, but it also has interesting comparisons of the U.S. vs Canadian startup scene. Having returned from The Future of Money and Technology, a FinTech conference in San Francisco, I had some thoughts on trends as we embark on 2015 for financing and growth of start-ups. There were clearly several trends in addition to Bitcoin and other cyber currencies that emerged in the various panels. In summary those trends are dominated by a focus on big data, regulatory changes in capital formation, an increase in investment by strategic investors or mainstream companies like Citi Ventures and the evolving collaborative consumption economy and the start-ups it is spawning like Instacart of which there are 387 listed for investment on Angel List.

Public Market vs. Private Market Investments

It is not clear that the budget-conscious consumer is interested in whether they are invested in or have access to Private Market Investments. It appears that private equity investments is a domain of high net worth individuals or investors that are particularly tech-savvy to the industry of the target investment. But there is not a significant percentage of investors waiting with baited breath for equity crowd-funding to invest their next year’s savings. What does exist besides established VC firms in Silicon Valley is a number of Hollywood-style stars with money to burn who are interested in investing in tech. These investors do little due diligence, are individuals, and generally are passive investors who often bring their star studded name to the product but not much more. I have not observed many of these type investors in Canada. However on the other hand when Silicon Valley instant messaging startup Frankly announced going public in Canada it raised more than a few eyebrows. Canada offers a fast track to a public listing that the U.S. doesn’t provide for companies of similar size and Canada has considerably less red tape than the U.S. when it comes to listing public companies.

Data: Corporations desire to understand their customers

Financial services companies are most interested in learning the behaviour of their customers and clients alike. Capturing this data in the past has been left to the institution’s internal systems and has left the company with only a partial understanding of their customer, since most people are using multiple financial institutions. Simple online banking is passé and the future of financial services technology lay in data, trading systems, security for cyber-currencies, etc. Since financial services has been one of the earlier industries to innovate, we are now completing the last digital mile in regards to the digitization of money. Smartphones are becoming an ATM in your pocket with various payment applications such as Starbucks and more recently Canadian Tire Money (I confess to being an early adopter). Most financial services innovation is focused on improving customer experience or data collection. Little effort is being spent in innovation on the business of the financial services firms themselves in such areas as ALM   (Asset Liability Management), securitization, credit management, risk capital or regulatory capital. Many of the other opportunities for financial services innovation are in credit and risk scoring, automated underwriting systems, decentralized lending, etc.

Consumer trends of Millennials and others with regards to financial services

Currently there are 25 million Americans and 2.5 billion people globally that are underbanked according to the World Bank. There are over 100 million Americans that live paycheck to paycheck. Here lies the biggest potential target group for startups to disrupt the financial services industry. Consumers that currently don’t have access to traditional banking services that are moving to peer to peer lending services, pay as you go cards, and other collaborative consumption products for their financial service’s needs. There is a dramatic rise in the number of these peer to peer lending systems, which at their basic level are debt-based crowd-funding sites with no collateral. It’s these customers that use high cost financial services such as Money Mart, Pay Day Loans, and various credit cards today and are looking for ways to reduce their dependency on the high service fee and interest rates charged by the lenders. The day is not too far away when consumers will view Walmart as a network and money will be transferred from one Walmart to another in different countries. It’s not clear how the next generation will approach their long term savings for such things as retirement, their children’s education, etc. Their buying behavior had been for the most part demand driven. Notwithstanding services such as Mint.com and WealthSimple.com are gaining traction. Relationships in financial services are intact as interpersonal relationships and trust are ultimately important to consumers as after all we are dealing with people’s money. That being said, this interpersonal relationship can and will be delivered electronically as long as trust is maintained. The millennial is looking for ease to transact with their friends quickly when they owe one another for movie night ticket or a pizza in the same way they have one touch ease in the other services they consume. Mint.com has observed a 15 per cent decrease in spending when an app is downloaded to a smart phone and utilized while at the same time there is a measured increase in financial literacy in its customers. Transparency and information in the customers’ hands is very powerful.

Technology

It is clear to me that there is a desire on behalf of start-ups and other technology providers to simplify API’s for data and payment systems. In 2013 there was over $3 billion invested in fin technology. It appears that participants in the space see the industry as a remaining lucrative opportunity for the next remaining billion dollar companies to be founded. The evolution of fin tech is moving from payment systems to investment management. Currently used bank technology is antiquated when compared to more modern security and payment protocols. The financial institutions that innovated in the ’70s and ’80s are now straddled with legacy systems that require modernization and the adoption of a new financial services thought-process will be the catalyst that drags current bank technology into the next generation. Many banks and financial firms are launching value investment programs for strategic purposes such as MasterCard, Citi Ventures, Capital One, etc.

Talent: Good People are Hard to Find

To live in the San Francisco area there is definitely a high cost of living with similar apartments being almost double the rent prices seen in Toronto. To survive working with a start-up in the Valley your company must be well funded. It would be very difficult to bootstrap a company in the Valley the way it is often the case here in Toronto. There is clearly a risk taking culture in Silicon Valley. I am not sure this is a result of the concentration of large tech companies in the area or the migration of talented workers; however, the truth is probably a healthy mix of the two.       [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Gerard Buckley ) [12] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1849 [post_title] => Raising Capital for your Startup - Legal Considerations for both Founders & Investors [post_date_gmt] => 2015-01-30 15:56:17 [post_url] => https://aceportal.com/insights/raising-capital-for-your-startup-legal-considerations-for-both-founders-investors/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2015/01/bienstock-350x197.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2015/01/bienstock.png [excerpt] => [post_content] => In this second segment of a two-part series (see Part I – “Answering Common Legal Questions When Starting Your Startup), ACE Portal’s General Counsel, Jason Behrens, and Evan Bienstock, a partner with Mintz Levin, discuss several key terms and considerations that are applicable to start-up capital raises. For anyone who has just formed a new company, is beginning to consider capital raising for their company or is interested in start-up financing generally, this interview is particularly informative. https://player.vimeo.com/video/114709912 The interview ranges across the following topics:   About Evan Bienstock: Evan’s practice involves all aspects of corporate and securities law for emerging growth, early stage and start-up companies in the digital media, energy and clean technology, sustainability and life sciences industries. He routinely advises clients on their growth and development and participates in a diverse array of transactions, from private placements of securities to mergers and acquisitions. He also counsels his clients on their daily corporate needs and has extensive experience assisting companies with compliance to federal and state securities laws. About Mintz Levin: As an emerging growth company or entrepreneur, you’ve got an impressive new idea—an innovation that will improve lives, or help businesses work smarter.  You’re ready to line up investors, launch R&D, and protect your inventions…and you need sound answers to about a million questions.  We’ve been there, and we want to help. Mintz Levin is a law firm which has a long track record—and an absolute passion—for helping entrepreneurs launch and grow businesses.  We’ve worked for decades with early-stage companies in technology, biotechnology, energy and clean technology, and many other sectors, and there’s truly nothing we’d like more than to be part of your success.  Strategically located to meet the needs of  its startup clients, entrepreneurs, and investors, alike,  Mintz Levin is a firm of over 450 attorneys with seven domestic office locations (New York, Boston, Washington, DC, Stamford, Los Angeles, San Diego, and San Francisco), as well as an office in London and an affiliate relationship in Israel.  Visit us at www.mintz.com. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [13] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 1854 [post_title] => What to Look for in a Term Sheet - An Attorney's Perspective [post_date_gmt] => 2015-01-28 20:50:07 [post_url] => https://aceportal.com/insights/what-to-look-for-in-a-term-sheet-an-attorneys-perspective/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => VC Experts has teamed up with Aspatore Books to reprint some of the more salient sections of Alex Wilmerding's Deal Terms, The Finer Points of Venture Capital Deal Structures, Valuations, Term Sheets, Stock Options and Getting Deals Done. This excerpt features an interview with a leading legal expert in the private equity arena, James M. Crane, who has served as counsel at the Boston law firm of Testa, Hurwitz & Thibeault, LLP. Jim's perspective is representative of the candid, forthright demeanor that entrepreneurs and venture professionals look for in counsel. And it's a fascinating look at what a seasoned lawyer thinks you should look out for term sheet.

What to Look Out for in A Term Sheet:

Alex Wilmerding: What exactly would you consider typical when looking for common ground in the form of a term sheet? Is there a neutral form of term sheet we can use as a starting or reference point for our discussion? Jim Crane: While it is certainly relevant to include a balanced form of term sheet as a reference point it is frankly unlikely that any two lawyers would ever agree on the neutral form of any term. Each term sheet is affected by the subjective dealings of two parties; you can always come up with an argument for its favoring one party or another. AW: Are the terms that are generally incorporated into a Series A Preferred by VCs created specifically for the current financing, or do they reflect some standard a lawyer or venture firm prefers? JC: When you're talking about an early-stage preferred financing (such as a series A or perhaps a series B that occurs a year or two after the series A) very often the things that are coincidentally found in the term sheet and sometimes end up in the deal documents are terms that VCs have used in other recent financings. AW: It may be most interesting for entrepreneurs to consider how lawyers look at a term sheet when representing a VC's interests. As companies progress through successive rounds of financing, it is standard that new VCs will bring new capital to a company. In these instances, it is important to consider how VCs interpret the terms presented to a company. Considering how VCs look at term sheets is important if entrepreneurs are looking for a perspective on the priorities VCs have when they draft a term sheet to be presented to a company. Let's consider the core terms to look out for in a term sheet. Which core terms do you first examine and consider when examining a term sheet that has been presented to you for review? JC: The things that are important to me may be different if I'm representing a VC. A VC may draft a term sheet and have me review the draft before it is submitted to a company. A VC who is already invested in a company may pass me a term sheet that has been presented to the company by a prospective new investor. If I am representing a VC who has a working first draft of a term sheet, the first thing I do is to take a quick look at the valuation of the company. The valuation section gives you a framework from which to work. The first questions I ask when examining valuation are the amount of capital going into the company and the price per share. I also look closely at the key terms of the preferred stock. They may be a little different or have different protections, depending on whether it's a first round of preferred stock, a Series A round, or a later round, a Series E round, for example. If you're looking at a Series E round, very often just by way of precedent, the other rounds and their attendant leverage predetermine much of the nature of the framework and context for the terms of a Series E round. The extent to which the new money will have leverage over the old money will be spelled out here. A Series A, by being the first preferred to be issued, has the opportunity to define terms for the preferred. A Series E sometimes will need to incorporate provisions from prior classes of preferred that you have to live with. In these instances, you have to pick and choose your battles for things you want changed in the structure coming in. In this respect, I always glance at the dividend provision, as well. I don't think whether there will be cumulative dividends is something a lawyer will dwell on, but the dividend provision is important to pay attention to, particularly when considering the implications for the preferred and the implications for a company with multiple classes of preferred, should they also hold dividend provisions. Next, I look at vesting. What you'll usually want to do if you're the VC is to put right up front what you want the vesting of the founders' shares in an early-stage financing and the options pool to be. You don't want to create a situation where your founders can sneak out and leave the company high and dry when they are more often than not–and certainly in the early stages of the company's life span–vital to a successful venture. Beyond the economic parameters that some of the other terms mentioned will dictate, the restrictions on the founders and key employees will be critical to an early-stage venture's success. After a company has been around for a while, shares will have vested; and if the company is starting to make it, then maybe the importance of keeping any one individual starts to decline. Vesting schedules are probably the biggest thing to look at when I am looking at an early-stage term sheet. These schedules could be more important to consider than the terms for the preferred; if there are few restrictions in place on the founders' and key employees' stock, there is the potential need to issue incremental stock options. While not considered part of the options pool, investors may also ask founders in an early-stage round to have their shares subject to vesting. This is sometimes generically referred to as "reverse vesting"–agreeing to have existing common stock, typically founders' shares, subject to vesting–to give founders incentive to perform. People don't often consider the importance of vesting schedules because people are trained to start digging into the terms of the preferred. And usually those provisions on the restrictions on the founder are stuck toward the back of the term sheet. But the implications for a company's future are significant. AW: Options, and particularly the subject of vesting, are of great interest to entrepreneurs. Clearly, the terms defining vesting and valuation are, to some extent, interrelated. Is this a good example of the inherent flaw in dwelling too much on any one single term without considering implications of others? JC: It is a good example of how many terms are intricately linked and cannot be considered entirely independently. The value you put on a company, assuming you'll add key people in the future, will be affected if additional shares need to be added to an option pool after a closing to provide appropriate incentive to management. I don't think this is necessarily obvious in the math of the valuation of the company unless, when you do your initial analysis, you consider vesting schedules for existing staff and whether the number of options included in the proposed capital structure at the time of closing anticipates options needs for the foreseeable future. For a relatively early-stage company, one that has been in existence for one or two years, language describing vesting schedules and treatment of options vesting should give a pretty good picture of the profile of a company's options pool. Vesting and the subject of options are sensitive for founders because many have not been involved in this process before. With good reason, founders and key employees need to be prepared to accept the shock that their shares will be restricted right off the bat. Usually key employees and founders form the company. They set it up; they issue themselves common stock; and they think they own that stock. In a sense they do, but if they want to be financed, they'll have to put the restrictions on their ownership positions that the VCs are looking for, and that's often an emotional battle. I've had clients who were virtually throwing up at the thought that they had to turn over their shares and earn them back again. It is hard to educate highly educated people, but it is understandably new territory for them. Entrepreneurs can have trouble getting around it. The company's lawyers, if they have not done so already, have to get their clients to realize this is how venture financings work. AW: Assuming entrepreneurs and companies are well advised, are there ways to anticipate some of this heartburn? What then are the preemptive strikes you would advise a company to make to mitigate terms that may appear on a term sheet? JC: Accepting that a stock restriction agreement will be part of what will be expected by VCs is the first step. Very often what I do if I am representing a company in an early-stage investment is to try to preempt the VCs on this issue and set up the stock restriction agreement for the company and their founders before opening the negotiations with the VC. This way a company is prepared to say it already has an agreement in place, and it makes the issue a little tougher because the VCs then have to impose harsher vesting terms than the ones that already exist in the stock restriction agreement. If no agreement exists, it is easy for a venture firm to ask for certain thresholds straight off the bat. Many times, the VCs don't want to make enemies with the founders because doing so is in nobody's best interest, so changing an existing agreement may be something less likely to be initiated, once established. You can't really preempt VCs on any of the charter provisions and preferred stock terms. Usually a new company will have a very plain vanilla common stock charter. The VCs typically will come in and know what they're looking for, and you may have to redo your whole charter if they want to make changes. Probably the only meaningful battle you can preempt the VCs on is the type of vesting. You have to take an educated guess based on where the market is in any particular month. A common VC approach is to have founders' shares put on a four-year vesting term. Entrepreneurs may try to preempt the vesting issue for their existing shares by adopting an agreement to have one-third vested immediately and the rest on a three-year term. Often the VCs will come in, and, depending on the relationships and how much they want to offend the parties, they'll say they'll let that stand. This is a good way for VCs to express their acknowledgement of the founders' value before the game even starts. AW: Let's move on to liquidation preference, which is often a sticking point and an important term on which to focus. What do you look for when examining a liquidation preference clause? JC: Liquidation preference is really what the deal is all about. The liquidation preference section defines how much each class of preferred stock will receive in preference to other stockholders if a company is sold or generates liquidity as a result of a transaction before any of the other stockholders receive proceeds. The definition of a liquidation event is therefore very important; it will define when liquidation preference terms take effect and how individual classes of preferred shareholders will be treated as compared to common. Liquidation will be defined as an actual dissolution of the company, and the definition could also include a merger, an acquisition, a sale of the company, or a change of control of anywhere from 50 percent to 80 percent to 100 percent of the voting power of the company–often referred to as a deemed liquidation. In the event of what is defined as a deemed liquidation of the company, liquidation preference terms would take effect. AW: What other term sheet text may reveal preferential treatment to the preferred? JC: If protective provisions are incorporated into a term sheet, the preferred are looking for a form of blocking power to block management from making certain decisions without their approval. Protective provisions typically require that a certain percentage of the preferred be required to vote to approve certain actions the company chooses to take. Without the vote and approval of a certain percentage of preferred stock, the company is blocked from taking certain actions. For example, protective provisions can stipulate limits on the amount of debt a company can take on. AW: How might protective provisions restrict a company from increasing its option pool or pursuing a subsequent financing without prior approval? JC: Protective provisions could restrict certain actions, including amending the charter of the company, pursuing a merger or acquisition, and increasing the size of the equity pool, for example. On the subject of options, protective provisions that require approval of some majority of the preferred to make any amendment to the charter of the company in effect limit a company's ability to increase its options pool beyond the authorized shares stipulated in the charter. The charter will detail the total authorized capital stock of the company, which has a limiting effect on the number of shares in the company's option pool. If the company wanted to increase the option pool and protective provisions required that approval from some majority of the preferred be secured to do so, the company would in effect be restricted from increasing the options pool unless some majority of the preferred were to approve an amendment to the charter. Assuming a company has an options pool of sufficient size to serve its needs, this power will give the preferred a degree of leverage, should a board and management look to increase the size of the options pool at some future point. If, subsequent to a financing, additional options were required to create an additional incentive for additional staff, a further increase to the size of the options pool would be dilutive to the preferred. The preferred may exercise their blocking power to, in effect, require that the existing option pool be reapportioned, for example. Such a provision does not have to be an obstacle to future expansion to an option pool; companies that meet and exceed the business plans they commit to and that require an expanded option pool to accommodate growth will most probably receive the support of their investors if such an initiative is in line with investors' expectations. Protective provisions may also forbid the issuance of additional stock and hence a subsequent equity financing without approval of some majority of the preferred. This is an additional source of leverage for the preferred and presumably a deterrent to management who might otherwise assume that serial rounds of equity financing could be a panacea to their capital needs. AW: How creative can investors and lawyers get with protective provisions? JC: You can incorporate just about anything your heart desires. There are certain terms you almost always see, such as in the case of a merger or sale of the company. Similarly, provisions preventing changes in the nature of the company's business are not uncommon; an investor does not want to be buying stock in a company that's doing X, and the next thing they know the company's doing Y instead. AW: How are protective provisions of some early form of preferred–a series A, for example–incorporated into future rounds of preferred? JC: One thing that's important for a late-stage company financing is for the interests and therefore the protective provisions associated with early rounds of preferred to be balanced with the interests of later-stage investors. A company does not want investors from early rounds who may not have the capital to participate in later rounds of financing to hold the power to prevent the company from pursuing a good deal later on in the life of the company. It would be very unlikely that a Series B would agree to let an existing Series A vote independently on this issue unless, of course, the investors in the Series A and the Series B were the same. Instead, often a later series of preferred will require the protective provisions of earlier preferred be revised so that all classes of preferred vote collectively. AW: We've talked about valuation, vesting, liquidation preference, and protective provisions. What's next on your list? JC: One of the most important things is the impact of dilution protection provisions. That's always a key thing. In the term sheet stage, negotiating the terms for dilution protection provisions is not always easy. Often investors won't actually spell out the dilution protection provision formula in the term sheet; they'll wait to do so in the final definitive closing documents. They just say a weighted-average formula. AW: But there are several types of weighted-average formulas. JC: That can be the tricky part. It probably would be a better practice to actually put the formula into the term sheet, or at least clearly define it. It's not as much of an issue if anti-dilution is a full ratchet because that's pretty cut and dry. If it's a later-stage company, maybe it's not so much of an issue because they've had a weighted-average formula in their charter, and the VCs have already seen it, and they'll just go with it. In an early-stage company, there might be a little bit of an argument about which shares will be included in the anti-dilution formula when you actually get to the drafting stage and have to put the language in. At that stage, there may be disagreement over what shares are included in the calculation. Another thing is that you'd be amazed at how often someone can later go back to the formula, or the language if there is no formula, and it doesn't read right. It's very tricky to use the English language to write out a mathematical formula. The language is awkward and weird, and it gets screwed up more often than you think it should. This is the nuts and bolts of the economics of the deal, and I think it's critical that any time you're going through anything involving numbers in a term sheet, you actually do the math and make sure the numbers work. I never read an anti-dilution provision and say, "Oh, that looks right. Those are the words I'm familiar with." Even if I am 99.999 percent sure that's the way I have seen them every other time, I still take out my calculator and a pen and paper. I take some numbers from the term sheet somewhere else and assume a scenario and plug in numbers to see how it comes out. Sometimes a very subtle mistake in how the words are transcribed from whatever previous deal you used will screw up a formula. AW: Let's consider the IPO process and how it is reflected in term sheets. Could you comment on registration rights and how they are treated? JC: Registration rights are almost more of a leverage tool that plays later on when a company goes public. This subject does not necessarily get a lot of attention from entrepreneurs when they are focused on getting enough capital in the door to get to cash flow break-even. Registration rights are one area of language in a term sheet that levels out the most in a down market–IPOs are more distant in everyone's minds. The things to look for there are the number and types of registrations and the time frames involved–how quickly a registration can be forced and when the registration rights expire. Very often registration rights agreements will have some built-in expiration, usually based on a period of time or when the shares become otherwise salable, for instance under SEC Rule 144. The expenses of registration are another thing to focus on. Typically the company bears the cost of registration, but if someone requests a registration and withdraws the request, it is not uncommon for the company to retain the right to pass the expense on to the investor who requested the registration. This is one important way for a company to put in place disciplines that encourage investors to make sure their requests for registration are well thought out. On the other hand, if you're a VC, you might agree to this approach but try to ensure that expenses will be covered by the company if the registration is withdrawn for reasons that were beyond the VC's knowledge or ability to foresee. A war or bombings that rattle the financial market are extreme examples. Investors will also want to include piggyback registration rights; they will want the right to participate not only in the first but also in subsequent public offerings. Investors will want to detail what happens if there's a cutback in how much stock can be sold on the public markets; they'll want to detail how each type of stock will be treated. Usually there will be a hierarchy: If there's a cutback, this one goes first, and we'll take it from there. I've seen some cutback provisions that get quite intricate about who gets to register their shares in what order. But often that level of detail is worked out in the deal documents and not in the term sheet. "With appropriate cutback provisions" is about as specific as the term sheet language will get. One thing that's very important with respect to registration rights is that you don't want to have a lot of registration rights agreements out there. It's important that everyone is all tied up in one agreement. It's easier and less complicated because you don't want to have to go back through the old terms. If there are varying terms you want, at least try to have them all in one document, so you have only one place to look to find out where everyone stands. You want to have everyone who has registration rights at all to be party to the one agreement. Whether you're representing the company or the investor, I can't imagine a scenario where it would be in your interest to allow multiple registration rights agreements out there. The registration rights contained in the agreement are rarely used, but it's an extremely powerful tool that has very powerful consequences for everyone registering shares for public sale. You don't want those rights to just be floating out there–you want to know where they are, and you want everyone to be wrapped up in the same agreement. If you don't do that, or at least vigorously fight for it, then I don't think you're doing a service to anyone. Usually there's no objection at all–I've never had anyone say no to it. AW: Give some examples of how term sheet style and approach can be unique. JC: The terms commonly used by one investor for one type of deal can begin to creep into term sheets for companies facing very different situations for which such terms may not be appropriate. Take for example an investor who's been working in an environment where they go into struggling companies because they can pick leverage situations or turn companies around long enough to put some money in and then get out. It is not uncommon to see the terms used by these individuals popping up in term sheets in early-stage ventures where such terms may not be the common practice. Often when companies are struggling, the term sheets and deal documents might include milestones that spell out consequences for the company's failure to meet those milestones. Very often these consequences might include existing stockholders losing control of the board and investors taking control of the company if the company is not performing. In a different investing context, such as an early-stage financing, if you have a VC who's used to getting those terms, it's harder than you'd think to get them to drop them. The most dangerous thing about term sheets is for an investor to get into the habit of just grabbing the last one he had from a recent deal and revising it. Whenever I'm asked, I'll provide an original term sheet that covers all the bases. Term sheets are restrictive in nature because you're stuck with the terms spelled out on the page. As the corporate attorney sometimes you'll be given a draft of the term sheet you'll recognize from having worked on it in a previous deal. Just because you did it last time doesn't mean you want to do it this time. I try to start with a blank term sheet, not one I've used before. There's nothing wrong, however, with using a form as a tool, as long as you use it in the right way. I have a formal term sheet I like to look at, but it doesn't have everything that could possibly be incorporated into a term sheet. This one has suggestions for alternatives, bracketed items, and notes about things to consider. It includes alternative clauses. It does not have everything. When you keep building off an older version of a term sheet, at some future point, you'll miss the chance to take another direction because the forms you always use say X, and you've forgotten the alternatives because they are not in front of you or you haven't had them in your deals lately. You've forgotten about the possibility of doing Y instead. AW: Is there a strategy you recommend people follow when negotiating a term sheet? JC: It depends on the facts for the particular deal and your sense of what's important to the company and to the VCs. As for the pricing and that kind of thing, that's better left out of the hands of the lawyers. Very often that's been settled before the lawyers even get the call from the client to look at the term sheet. I don't know that I have any advice on strategy that would apply to every situation. I think in early-stage investing, the key is the founders and their level of sophistication. If they're not sophisticated, investors may end up having problems getting past the hurdles I mentioned before, like the vesting on the founder ownership, which is hugely important. I don't know if there's a good way to soften them up before an investor starts hitting them with the other points. It really just depends on the people involved and the facts of the situation. AW: Have you seen really gross variances or differences in the evolution of the term sheet over the years? JC: Over the past five years, the staples of term sheets have remained relatively the same, and yet we have seen a big swing from company-favorable to investor-favorable financing climates, influencing which party the language favors. Consider protective provisions, for example. In a company-favorable investment climate, it is almost unheard of for a company to have a charter with a ratchet provision or very onerous provisions. In a more investor-favorable climate, the deals happen at a slower pace, and there's more time to negotiate in favorable terms. When deals are happening so fast that it may seem there are other VCs around the corner, in some cases, tripping over themselves to give a company money, investors are unlikely to incorporate extensive protective provisions. In both types of investment climates, the issues are the same. The biggest shift is in the negotiating leverage. In a very company-favorable climate, there are a lot of vanilla terms, and deals get papered very quickly. As the deals slow down, the terms get negotiated harder, and companies find themselves with more terms they have to live with. AW: Do larger law firms have certain views about how much work they'll do for early- or expansion-stage companies? JC: Large firms will be selective; they often will not get involved in every angel round. That's not to say they won't do them if there's a relationship there or something they're interested in. Usually the angel rounds happen at very small amounts, and the terms aren't so complex; it's a friendlier negotiation, and everyone is just trying to get the company into the game. The company is not quite ready to venture into the real arena yet, so they don't need a large venture law firm to work on the documents. There are individuals or small firms that will do it, and there are groups of angels who support them. Either way, you want to engage a qualified professional, with experience, who won't create problems in documentation that will cost more money later to fix. Angel investors get in and pay attention to protecting their ability to stay in the game and going forward a little bit; they're trying to make sure that down the road they're not just lumped in with common. Such terms are not necessarily complex enough to justify use of a large firm. AW: How would you recommend an entrepreneur go about selecting a lawyer or a particular firm to work with? JC: In the very early stages of a company, you at least want someone who's done this before who can hold your hand. The point is that there's almost nothing in the term sheet that isn't worth looking at. Depending on a company's bargaining position, it's important for a company to get good legal advice because you never know to what extent great thought has been put into the term sheet that may be presented to you, or if it's a remake of a previous form–some terms might not be entirely germane to the company in negotiation. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [14] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 1852 [post_title] => Employee Incentive Plan Alternatives After a Down Round [post_date_gmt] => 2015-01-26 18:38:29 [post_url] => https://aceportal.com/insights/employee-incentive-plan-alternatives-after-a-down-round/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] =>

Employee Incentive Plans for Privately-Held Companies

Despite the recent improvement in capital markets activity, many small, privately-held technology companies continue to face reduced valuations and highly dilutive financings, frequently referred to as "down rounds." These financings can create difficulties for retention of management and other key employees who were attracted to the company in large part for the potential upside of the option or stock ownership program. When down rounds are implemented, the investors can acquire a significant percentage of the company at valuations that are lower than the valuations used for prior financing rounds. Lower valuations mean lower preferred stock values for the preferred stock issued in the down round, and as preferred stock values drop significantly, common stock values also drop, including the value of common stock options held by employees. Consequently, reduced valuations and "down round" financings frequently cause two results: (i) substantial dilution of the common stock ownership of the company and (ii) the devaluation of the common stock, particularly in view of the increased aggregate liquidation preference of the preferred stock that comes before the common stock. The result is a company with an increasingly larger percentage being held by the holders of the preferred stock and with common stock that can be relatively worthless and unlikely to see any proceeds in the event of an acquisition in the foreseeable future. In the face of substantial dilution of the common stock and significant devaluation in equity value, companies are faced with the difficulty of retaining key personnel and offering meaningful equity incentives. Potential solutions can be very simple (issuing additional options to counteract dilution) or quite complex (issuing a new class of stock with rights tailored to balance the concerns of both investors and employees). Intermediate solutions range from effecting a recapitalization that will result in an increase in the value of the common stock to implementing a cash bonus plan for employees that is to be paid in the event of an acquisition. Each approach has its advantages and disadvantages, and each may be appropriate depending on the circumstances of a particular company, but the more complex alternatives can offer companies greater flexibility to satisfy the competing demands of employees and investors. This article briefly reviews three of the solutions that can be implemented-the use of additional options, recapitalizations and retention plans (cash and equity based).

Option 1: Granting Additional Options

The simplest solution to address the dilution of common stock is to issue additional employee stock options. For example, assume that, prior to a down round, a company had 9,000,000 shares of common and preferred stock outstanding and the employees held options to purchase an additional 1,000,000 shares. Also assume that, in the down round, the company issued additional preferred stock that is convertible into 10,000,000 shares of common stock. On a fully-diluted basis (i.e., taking into account all options and the conversion of all preferred stock), the employees have seen the value of their options reduced from 10% of the company to 5%, or by 50%. In this case, the company might issue the employees additional options to increase their ownership percentage. It would require additional options to purchase in excess of 1,000,000 shares to return the employees to a 10% ownership position, although a smaller amount would still reduce the impact of the down round and might be enough to help entice the employees to stay. If the common stock retains significant value, the grant of additional options can be an effective solution. It is also relatively straightforward to implement; at most, stockholder approval may be required for an increase in the option pool. In many cases, however, the aggregate liquidation preference of the preferred stock is unlikely to leave anything for the common holders following an acquisition, particularly in the short term. In that event, the dilution of the common stock becomes less relevant - 5% of nothing is the same as 10% of nothing. Companies with this kind of common stock devaluation will need to consider more intricate solutions.

Option 2: Recapitalizations

If the common stock has been effectively reduced to minimal value by the down round a company could increase the common stock value through a recapitalization. A recapitalization can be implemented through a decrease in the liquidation preferences of the preferred stock or a conversion of some preferred stock into common stock, thereby increasing the share of the proceeds that is distributed to the common stock upon a sale of the company. This solution is conceptually straightforward and certainly effective in increasing the value of the common stock. In most cases with privately-held venture capital backed companies, however, the holders of the preferred stock are the investors who typically fund and implement the down rounds and in nearly all cases the preferred stockholders have a veto right over any recapitalization. Accordingly, implementing a recapitalization would require the consent of the affected preferred stockholders, which may be difficult to obtain, particularly because the preferred stockholders may not like the permanency of this approach. In addition, a recapitalization can be quite complicated in practice, raising significant legal, tax and accounting issues.

Option 3: New Forms of Retention Plans

Another approach is the implementation of a retention plan. Such plans can take a number of forms and can use cash or a new class of equity with rights designed to satisfy the interests of both the investors and employees. These solutions are more complicated, but also more flexible.

Cash Bonus Plan

In a cash bonus plan, the company guarantees a certain amount of money to employees in the event of an acquisition. This amount can equal a fixed sum or a percentage of the net sale proceeds, to be allocated among the employees at the time of the sale, or it can be a fixed amount per employee, determined in advance. Allocations can be based on a wide variety of parameters, enabling a high degree of flexibility. Often these plans have a limited duration (such as 12 to 24 months, or until the company raises a specified amount of additional equity). A cash bonus plan: However, there are a number of hurdles. Many acquisitions are structured as stock-for-stock exchanges (i.e., the acquiring company issues stock as payment for the stock of the target company) because such exchanges may be eligible for tax-free treatment. A cash bonus plan may interfere with the tax-free treatment and, thus, may reduce the value of the company in the sale or may be a barrier to the transaction altogether. A cash bonus plan can also be problematic in that it requires cash from a potential acquirer in the event there isn't sufficient cash on hand in the target company. A mandatory cash commitment from an acquirer may also make the company less attractive as a target. Typically, a cash bonus plan can be adopted (and amended and terminated prior to an acquisition) by the board of directors, although a cash bonus plan creates an interest that may in effect be senior to the preferred stock, which requires consideration as to whether the consent of the preferred holders is required.

Issuing a New Class of Equity

A stock bonus or option plan utilizing a new class of equity, although more complicated, shares many of the benefits of the cash bonus plan, but avoids some of the major disadvantages. A newly created class of equity, such as senior common stock or an employee series of preferred stock, permits the use of various combinations of rights. The new class of equity can be entitled to a fixed dollar amount, a portion of the purchase price or both. These rights can be in preference to, participating with or subordinate to any preferred holders, and the shares may be convertible into ordinary common stock at the option of the holders or upon the occurrence of certain events. Referring to our earlier example, the company might return the employees to their pre-down round position by issuing them senior common stock entitled to 10% of the consideration (up to a certain amount) in any sale of the company. Although a return of the employees to their pre-down round position may not be acceptable to the preferred stockholders and may not be necessary to keep the employees incentivized, the new class of equity can be tailored to fit whatever balance is acceptable to the investors. This type of approach has several advantages. The main disadvantage of creating a new class of equity, at least from the employees' standpoint, is that the employee will either have to pay fair market value for the stock when it is issued or recognize a tax liability upon such issuance, when they may not have the cash with which to pay the taxes. This disadvantage can be partially ameliorated by the use of options for the new class of equity, rather than issuing the new equity up front, which at least allows the employee to control the timing of the tax liability by deciding when to exercise. Moreover, for many employees an option may qualify as an incentive stock option under federal tax law, thus allowing the employee to defer taxation until the sale of the underlying stock. A new class of equity will also be somewhat more difficult for most employees to understand, at least when compared to traditional common stock options. In addition, a new class of equity adds complexity from the company's perspective. It may raise securities and accounting issues, and shareholder approval of an amendment to the company's charter will be required. At a minimum, it will require more elaborate documentation than some of the simpler alternatives, such as a cash bonus plan, and thus it will likely be more expensive to implement at a time when the company may be particularly sensitive to preserving its cash. A new class of equity may also result in future complications such as separate class votes or effective veto rights in certain circumstances. As with the other solutions that address the devaluation problem, there may be resistance from the existing preferred holders, whose share of the consideration upon a sale of the company would thereby be reduced. These complexities are surmountable and companies may find that they are more than balanced by the advantages that a new class of equity provides over other solutions in addressing issues of reduced common stock valuations and dilution. If this article was of interest you can see several of our other articles on stock compensation as well : Figuring out Your Equity Compensation at a Startup Founders and Startup Employees Need to Understand 83(b) Stock Elections This article was originally penned by Patrick J. A. McClain and Philip P. Rossetti of Hale and Dorr LLP (Boston), now WilmerHale for VC Experts.

[post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [15] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1844 [post_title] => The Middle Market’s Outlook on 2015 Capital Raising [post_date_gmt] => 2015-01-22 15:51:02 [post_url] => https://aceportal.com/insights/middle-market-outlook-2015/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => Jeremy Swan, a Principal with CohnReznick’s Transactional Advisory Services, breaks down the findings from his firm’s Middle Market Pulse Study covering economic outlook, growth prospects and capital raising in the Middle Market. The survey involved 300 C-level executives located in 40 US states. https://player.vimeo.com/video/115203444 About Jeremy: Jeremy Swan is a principal with CohnReznick’s Transactional Advisory Services practice and leads the Firm’s Private Equity / Venture Capital Industry practice.  Jeremy provides advisory services to private equity and venture capital firms as well as private companies in the areas of due diligence, transaction readiness and financial, technology and operational improvement. Learn more about CohnReznick on their Linked-in or Facebook pages. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [16] => stdClass Object ( [post_author] => Jon Persson, CLU, CFP® [post_author_bio] => [post_author_thumbnail] => [ID] => 1845 [post_title] => Evaluating a Multi-Family Office [post_date_gmt] => 2015-01-21 19:29:22 [post_url] => https://aceportal.com/insights/evaluating-a-multi-family-office/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] =>

Multi-Family Offices are more and more common. Are they right for you?

The family office, a product of the early twentieth century, is rapidly evolving in response to a number of factors: the turmoil from the recent consolidation and personnel changes in financial services firms, a heightened sense of the need for improved risk management and objectiv­ity and the high cost of attracting and retaining the professional talent needed today to advise and serve family members on a wide range of issues. Just a couple of decades ago a fortune of $50 million was more than sufficient to justify directly employing a staff of accountants and in­vestment managers to keep track of the family finances, including the holdings of various trusts and foundations. Today, the “break even” point is closer to $250 million and climbing. Hence, many former single-family offices have grown into multi-family offices (“MFOs”), offering unrelated families the ability to share a CFO, CIO, tax professionals, and experienced administrative staff as well as valuable intellectual and technology resources. In many ways it has parallels to the emergence of fractional jet ownership as high net worth individuals ask, “Given my needs, would I rather own all of a single engine plane or a share of a private jet? And, would I like to pay someone else to worry about hiring the peo­ple to fly it and care for it, handle security, do the safety checks, update the insurance and all the other hassles of maintaining a group of personal employees?” Similarly, contracting for a “share” of the staff at an established MFO often can securely provide access to talent, processes, intellectual capital and sys­tems that simply cannot be justified at lower asset levels.

Defining the Multifamily Office

Currently, there is no agreed upon definition for an MFO. Recent surveys of the field have listed some typical characteris­tics: Services can include those of a typical wealth management firm - financial, estate and tax planning, investment consult­ing and manager selection - along with those of the traditional family office - bill paying, financial reporting, tax compliance, trust monitoring, charitable consulting, family counseling, and concierge services. Editor's note: you can see a good video interview on Family Wealth and the Role of Family Offices here.

Meeting Client Needs

Clients may consider using some or all of the services of an MFO when there is a change in their lives or in the lives of their key advisors and they: Whatever their needs, clients want it done securely, compe­tently and conveniently with people they trust.

The Financial Management Component of MFOs

In order to effectively handle finances, clients will be en­trusting all their personal data to an organization they don’t know well. In addition, they will be asked to sign a number of complex forms giving the MFO they choose various levels of authority over the movement of their money and securi­ties. “Trust me” will not usually be enough to assuage their discomfort under these circumstances. Critical inquiry, care­fully verified is a necessary first step. In our experience, that inquiry falls into five broad areas: The scope of services available can range from simple cash management and bill paying to intensive family counseling on values and mission statements. Clearly outlining all the services to be provided, in writing, will avoid confusion later in the engagement. Full disclosure of any services to be provided by third parties should be part of that written initial communi­cation. The people providing these services are often the most criti­cal factor in client satisfaction. Meeting the people who are marketing the MFO is not enough - you want to know the people who will be involved in the day-to-day handling of your finances, their experience and how much capacity they have to take on additional clients. For those services that are outsourced, you should understand the reasons for outsourc­ing and what criteria were used in selecting those third party providers. You also need to inquire about the firm itself. Its ethics, size, longevity and financial strength are prerequisites to attracting and retaining the kind of talent that will meet clients’ growing needs over time. Even if people are talented and motivated, if they are work­ing on an unfamiliar issue they may be less cost-efficient. That is one reason clients want to know that their MFO is working for “people like us”. For example, if the efficient use of a family limited partnership is an option they want to consider, it would be important to know that the firm has already been through that analysis with at least one other client. Beyond that, clients want to know that they are neither the firm’s wealthiest nor its poorest client. If they are too big, they worry they will not be able to have all their issues addressed competently; if too small, that they will not be important enough to command attention. A critical measure of an MFO is the passion with which it guards its clients’ privacy. This can be reflected in the back­ground checks that are part of its hiring process, confidentiality agreements required of employees, the lengths to which it goes in limiting access to personal data among its staff, the security it has employed on computer networks including encryp­tion of all personal data on servers, its policies on disposal of information and the procedures it has in place for storing data electronically rather than on paper. It is also reflected in the confidentiality agreements it has with third parties to whom it outsources and the due diligence it performed in selecting those providers. Finally, to the extent an MFO is providing advice, clients want it to be objective. Full disclosure of all the MFO’s sources of revenue is a starting point. You need to know how that may result in potential conflicts of interest and how those conflicts are disclosed and managed. Also, to the extent the MFO will be privy to a client’s planned securities transactions; you should examine the procedures it uses to monitor its employees’ trades to avoid even the appear­ance of potential profit from that information.

The Investment Component

In addition to keeping track of finances, many of today’s MFOs will provide investment ad­vice often coupled with an “open architecture” involving access to unaffiliated managers. If investments are among your concerns, you will want to understand the MFO’s investment process, manager selection resources, and potential conflicts of interest. The firm’s Investment Adviser Registration Form ADV usually ad­dresses these issues in rather broad terms. Issues you should explore more deeply include:

Looking Forward

Beginning a relationship with an MFO (or changing one) represents a significant expenditure of time and emotional commitment, along with a not insignificant monetary cost. It is important to get it right. Increasing your confidence in your choice through objective standards can supplement your sense that the “chemistry” of the people with whom you will be working will last a long time. For additional information on this topic, Geller Family Office Services has been kind enough to make Susan Sofronas available for questions at 212-583-6001 or ssofronas@gellerco.com.     About Geller & Company Geller & Company serves two distinct types of clients; individuals and families who are private wealth owners, and business owners and senior management who are responsible for the financial affairs of a company. For wealth owners, we provide integrated wealth management services that help turn your financial success into enduring personal wealth. We focus on a wide range of needs that wealth owners have in the areas of investments, tax, philanthropy, estate planning and cash management. For business owners and senior management, we are an outsourced partner for all financial strategies, planning, accounting and reporting functions of the organization. We help increase shareholder value and manage the complexity of running the financial operations that support large companies. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Jon Persson, CLU, CFP® ) [17] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1841 [post_title] => The Role of Fund Administration in Alternative Assets [post_date_gmt] => 2015-01-20 20:20:22 [post_url] => https://aceportal.com/insights/the-role-of-fund-administration-in-alternative-assets/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => Watch Peter Williams, the ACE Founder and CEO, talk with Michael Nobes, the CEO of Sixbridges Capital, about why a fund administrator is important and what services they provide. This is a great look at the behind-the-scenes considerations required for fund managers. https://player.vimeo.com/video/115010109     About Michael Nobes: Michael Nobes is the Chief Executive Officer and Founder of Six Bridges Capital LLC.  Prior to founding Six Bridges Capital LLC he served as Director at Royal Bank of Canada Alternative Assets Group a structured products provider and was Head of the Offshore Custody platform for Royal Bank of Canada based in The Channel Islands. Michael holds an EMBA from the Richard Ivey Business School based in Ontario, Canada and is designated MCSI by The Chartered Institute for Securities and Investment UK.   About Six Bridges Capital: Six Bridges Capital LLC is a boutique financial consulting firm in the broad alternative assets space specializing in hedge funds, private equity, debt , real estate, fund of funds and family offices. Our mandates are broad in reach providing advice and counsel to clients on matters such as third party service provider selection, regulatory issues, onshore and offshore structures, due diligence, marketing and distribution channels and business structural reviews. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [18] => stdClass Object ( [post_author] => Carl Torrillo [post_author_bio] => Carl is the CFO of ACE [post_author_thumbnail] => Carl Torrillo [ID] => 1756 [post_title] => Democratizing Access to Capital for Private Companies [post_date_gmt] => 2015-01-15 17:57:11 [post_url] => https://aceportal.com/insights/democratizing-access-to-capital-for-companies/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] =>

AIMkts interviews ACE Portal's CFO on Private Investing

In this podcast, Accredited Investor Markets Radio host Chris Cahill sits down with ACE Portal CoFounder and CFO, Carl Torrillo,  to discuss democratizing access to capital for deserving companies and, in turn, democratizing access to deal flow for investors. The interview begins at 5:39 in the podcast. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Carl Torrillo ) [19] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1156 [post_title] => What a Capital Raiser needs to know about Deal Structuring [post_date_gmt] => 2015-01-13 16:53:39 [post_url] => https://aceportal.com/insights/deal-structuring-terms-for-issuers/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => In this interview ACE Portal’s CEO, Peter Williams, sits down with David Pritchard, Principal at Aequitas Advisors to talk about deal structuring in the Private Markets. http://player.vimeo.com/video/86352223 Specific topics of conversation include:   About Aequitas Advisors Aequitas Advisors provides experienced, unconflicted advisory services to corporate clients at any stage of development, but principally during or in anticipation of capital raising, exchange or restructuring initiatives. Our input is derived from comprehensive analysis of our clients’ needs and available alternatives with a view toward maximizing the value derived from capital markets activity, preserving financial flexibility and reducing “all-in” cost of capital. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [20] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1166 [post_title] => Your Deal But My Terms - A Primer on Private Market Terms & Conditions [post_date_gmt] => 2015-01-09 17:02:05 [post_url] => https://aceportal.com/insights/what-investors-need-to-know-about-deal-terms-and-conditions/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/ACE-Full-Reverse-square-350x350.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/ACE-Full-Reverse-square.png [excerpt] => [post_content] => In this episode of Insights, ACE Portal’s Co-Founder and CFO, Carl Torrillo, discusses deal terms and conditions with Ross Barrett, Co-Founder and CEO of VC Experts.  The interview drills down into areas of interest for private market investors. https://player.vimeo.com/video/115188440 Specific topics covered include: About VC Experts VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [21] => stdClass Object ( [post_author] => Shriram Bhashyam [post_author_bio] => [post_author_thumbnail] => Shriram Bhashyam [ID] => 1161 [post_title] => Figuring Out Your Equity Compensation at a Startup [post_date_gmt] => 2015-01-06 21:48:57 [post_url] => https://aceportal.com/insights/getting-paid-at-a-startup/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => In our travels, we've talked with many folks who work at startups and two common threads have emerged: The former is a primary reason why EquityZen does what it does and the latter is the topic of this post.  We will break down the basics of incentive compensation at startups, survey tax considerations, and identify key points to raise with employers during compensation negotiations.

Why Startups Depend on Equity Compensation

Startups rely heavily on equity compensation for their employees for two reasons: (1) they are not cash rich, and (2) incentive alignment--equity compensation ties the fortunes of the employee to the fortunes of the company. How much of one's compensation is in salary and how much is in equity depends less on the role (e.g., business development, engineer) and more on company maturity.  A seed-stage company employee will likely have a greater proportion of her compensation in equity than will an employee who works at a company that has completed its Series C financing. AngelList has a neat tool that allows you to  explore salary and equity compensation; give it a whirl.  Two notes: the source data here is job listings on AngelList (and not compensation at actual jobs), and AngelList skews more towards early stage companies. Equity compensation, no matter the form, is typically subject to restrictions.  Most importantly, equity compensation is usually subject to vesting, which means that an employee must hit certain performance or time-based (more common) milestones in order for all of the stock to truly become hers; the other main prong of restriction is that the stock, even upon vesting, is subject to restrictions on transfer, resale, and pledging.  The market standard for an employee vesting schedule is a four year vesting period with a one year "cliff."  That is, 25% of an employee's total equity compensation will vest after one year, with the balance vesting monthly over the following 36 months.  If the employee were to leave or be terminated prior to completing one year at the company, she would walk away with no equity.

Types of Incentive Compensation

There are three basic flavors of incentive compensation at startups: restricted stock, incentive stock options ("ISOs"), and non-statutory or non-qualified stock options ("NSOs").

Restricted Stock

Restricted stock plans provide for the grant or sale of company stock to employees.  Grants (unlike purchase plans and options plans) are nice because the employee does not pay anything for the stock.

Stock Options

Stock options are the most common form of equity-based compensation at startups.  A stock option gives the employee the right to purchase company stock during a specified period of time for a predetermined price (referred to as the strike price or exercise price, which is usually the fair market value of the stock on the date the option is granted).  The value proposition for employees is that the employee can exercise the option at the strike price at a time when the stock may be worth more than the strike price.  In the opaque world of startup equity compensation, this sounds clearer in writing than it is in reality, but we're here to help with these issues.  Stock options are also typically subject to vesting. Let's use an example to highlight how options work.  Startup Inc. grants its employee, Emma, an option to purchase 400 shares of company stock, subject to a four year vesting schedule with a one year cliff.  The strike price on the option is $1 per share.  The option remains open for 5 years.  One year following the grant of the option, 25% of Emma's grant has vested--she can exercise her option to purchase 100 shares at $1 per share.  Let's say that Emma believes in Startup Inc.'s upward trajectory and has decided to wait to exercise her option.  After four years, her option has fully vested and she can purchase 400 shares at $1 per share.  The company assesses a fair value of $10 per share.  If Emma were to exercise her options in full, she would have "paper" gains of $3600. The key difference between ISOs and NSOs is that ISOs offer favorable tax treatment (discussed below).  ISOs are granted to employees of the company (or its parent or subsidiaries).  NSOs are typically granted to non-employees, such as consultants, who are not eligible to receive ISOs and to certain employees to whom the company wishes to confer benefits not permitted under the relevant tax code provisions.

Tax Considerations

The author does not provide individual tax advice.  You should consult your tax advisor for advice specific to your personal taxes and financial situation.

83(b) Election

Failing to make a timely "83(b) election" can have significant adverse tax consequences for a startup employee (or founder, for that matter).  If an employee chooses to make an 83(b) election, she would recognize income upon the purchase of the stock (she would otherwise recognize income, if any, until the stock as vested).  This election must be made within 30 days of the employee's purchase of the stock.  While the details of making an 83(b) election are beyond the scope of this post (Editors note: you can see this post by VC Experts on 83(b) for more), we would be happy to discuss the mechanics, pluses, and minuses further with anyone who's interested.  Shoot us an email here.

Tax Treatment of Equity Compensation

The tax treatment to employees varies based on the type of compensation and the stage.  At the time of grant, there is no tax impact, but that is the time when an 83(b) election can be made.  The chart below summarizes the basic tax implications of the most common types of equity compensation.
Compensation Type
Tax Impact at Time of Vesting
Tax Impact at Time of Exercise
Tax Impact at Time of Sale
Consequences of Termination
Key Takeaway
ISO
None.
None, unless subject to alternative minimum tax (but 83(b) election may be available).
If sold within 1 year of exercise date or within 2 years of grant date: taxed as ordinary income on the difference of share price on exercise date and the sale date.
If sold after 1 year following exercise date and 2 years after grant date: taxed as long term capital gain on the difference of share price on exercise date and the sale date.
For vested options, employee has a window in which to exercise or forfeit.
Favorable tax treatment, but employee does not own stock until she exercises her options.
NSO
None.
Taxed as ordinary income to the extent of any excess of FMV at time of exercise over exercise price.
If sold within 1 year of exercise date or within 2 years of grant date: taxed as ordinary income on the difference of share price on exercise date and the sale date.
If sold after 1 year following exercise date and 2 years after grant date: taxed as long term capital gain on the difference of share price on exercise date and the sale date.
For vested options, employee has a window in which to exercise or forfeit.
Less favorable tax treatment than with ISO, and employee does not own stock until she exercises her options.
Restricted Stock Grant
Taxed as ordinary income in the year of vesting (unless 83(b) election is made).
N/A.
If sold within 1 year of vesting date: taxed as ordinary income on the difference of share price on vesting date and the sale date.
If sold after 1 year following vesting date: taxed as long term capital gain on the difference of share price on vesting date and the sale date.
Vested shares are property of the employee.
Grant means employee does not pay for the stock. 83(b) election may make sense.

Remember These Points When Negotiating Your Startup Compensation

We recommend asking the following questions when negotiating your compensation. What percentage of the company's equity do the options represent? While being offered 50,000 options may sound flattering, it doesn't mean much without knowing how much of the company those options represent.  The point here is that the denominator matters.  50,000 options out of 50,000,000 shares outstanding is not an attractive an offer as 5,000 options out of 500,000 shares outstanding. What was the most recent valuation of the company? This will also help determine the value of your compensation, but not all companies will be willing to share this information with a prospective hire. What was the most recent "409A" valuation and when was that valuation done? The "409A" valuation is an appraisal done for tax purposes and is commonly done every 6 months.  The exercise price of options is often set by reference to the 409A valuation.  If the company won't tell you what this valuation is, you should nonetheless ask when the last 409A valuation was done.  If it's been a while, the company may have to do another 409A valuation, which means your exercise price may go up. Does the company expect to issue stock or fundraise in the foreseeable future? This will give you some insight into whether there are any dilutive events on the horizon.  A more cryptic may to back into this information is to ask "how long do you expect your current funding to last?"  Fundraising typically has a dilutive effect on your holdings.  See our earlier post, which addresses the topic of dilution. Does my vesting accelerate if the company is acquired? It is not uncommon for companies to offer accelerated vesting upon the company's acquisition.  Layoffs are unfortunately not unheard of after a startup is acquired and the acquiring company might not be the right fit for you.  Accelerated vesting is nice to have in these situations.  
  About the Author: Shri is a founder of EquityZen, a marketplace for investments in private tech companies. Prior to founding EquityZen, he was an attorney at Shearman & Sterling, where he advised market participants on regulatory, transactional, and trading and markets issues. Shri regularly writes about venture capital, secondary investments, and startups on the EquityZen blog and elsewhere. Follow him on Twitter @ShriBhashyam. EZLogow More on EquityZen: EquityZen is a marketplace for investments in proven private technology companies. Angel Investors, funds, and family offices use EquityZen to access investments in premier venture-backed companies. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Shriram Bhashyam ) [22] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1158 [post_title] => Family Wealth and the Role of Family Offices [post_date_gmt] => 2015-01-05 16:37:26 [post_url] => https://aceportal.com/insights/family-wealth-and-the-role-of-family-offices/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/12/Insights-Backdrop.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/12/Insights-Backdrop.jpg [excerpt] => [post_content] => In this interview ACE Portal's CEO, Peter Williams, interviews Michael Zeuner, a Managing Partner at WE Family Offices, which is a Multifamily office for 65 US based families with an aggregate of $3.2 billion in assets with WE Family Office. https://player.vimeo.com/video/115175707 The interview offers a fascinating inside look at the ins and outs of an MFO's operation. Topics covered include: If you're interested in more on this topic, you can see Angelo Robles, CEO of the Family Office Association, more closely define a family office here About WE Family Offices WE Family Offices is a different kind of wealth advisor. WE stands for Wealth Enterprise and the core of their work is based on the simple tenet that families who are able to successfully manage their wealth do so as they would a business. They build Wealth Enterprises. Founded on a set of core beliefs, our mission is to work with each client – each different, each complex in their own way – to offer them insight into their wealth management, give them the information they need to make critical decisions, and support to manage their wealth successfully.  It’s about control. It’s about clarity. It’s about knowing where you are in relation to your goals. At your level of wealth we understand it can be overwhelming but we are here to help.
[post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [23] => stdClass Object ( [post_author] => Vitruvian Energy [post_author_bio] => Vitruvian makes biofuel from sewage treatment waste [post_author_thumbnail] => Vitruvian Energy [ID] => 1152 [post_title] => Crowdfunding as a Risk Reduction Tool for Socially Responsible Investing [post_date_gmt] => 2014-12-22 15:04:38 [post_url] => https://aceportal.com/insights/crowdfunding-as-a-risk-reduction-tool-for-socially-responsible-investing/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => Entrepreneurs and investors have a growing interest in building and funding companies that integrate people, planet, and profit. But despite market demand for goods and services with environmental and social value, startup ventures based on these values are typically perceived as higher-risk or lower-return, and often struggle to maintain their unique identity as they trade equity for capital. Crowdfunding can be a powerful tool that enables a socially responsible company (SRC) to overcome these challenges, resulting in more and better opportunities for socially responsible investing (SRI). But how does the power of "the crowd" empower new startups and reduce risk for investors?
A Crowded Space Crowdfunding's popularity has surged over the past 5 years, with over $5 billion raised in 2013 alone.(1) Some companies have been very successful pre-selling a consumer product, such as the Pebble smartwatch, which raised over $10 million on the Kickstarter platform, from an original goal of $100,000.(2) New technologies that are not consumer products but that appeal to environmental concerns have also been successful, most notably Solar Roadways, which raised over $2 million on the Indiegogo platform to develop solar panels for road surfaces.(3) With the increasing visibility of high-profile crowdfunding success stories, many startups have turned to non-equity ("rewards-based" or "perks-based") crowdfunding platforms as an opportunity to reduce or replace traditional seed-funding. Because of this, the startup crowdfunding space has ironically become very crowded — entrepreneurs are understandably attracted to the idea of equity-free seed funding. But the reality is, most startup ventures that pursue crowdfunding fall well short of their funding goal. For example, Kickstarter's statistics show that, as of the writing of this article, 64% of technology projects fail to raise even 20% of their funding goal.(4)  

Socially Responsible Startups

Despite the challenges of raising seed money through a crowdfunding platform, socially responsible startups can benefit greatly from crowdfunding — regardless of how much they raise. SRCs may take various corporate forms, such as a state-specific Benefit Corporation(5) or Social Purpose Corporation(6), and may also pursue a third-party certification that factors in environmental, social, and governance (ESG) and Corporate Social Responsibility (CSR), such as the B Corporation certification(7). But regardless of how an SRC startup defines its social and environmental purpose, developing and executing a crowdfunding campaign is the perfect opportunity to accelerate the startup's development, define its identity as a company, and gain valuable exposure to like-minded people. The end result is a stronger, more mature company that is more attractive to later SRI or Impact Investing.
The Impact of Shared Values Socially responsible companies are creating new ways of doing business that integrate their values deeply into business practices and even corporate by-laws, while growing a profitable company. They generate economic value both by delivering a cost-effective product and by meeting the social & environmental desires of their stakeholders. When preparing for a crowdfunding campaign, the SRC startup must anticipate a large amount and variety of engagement from potential stakeholders within the crowd, because the economic value proposed by the SRC includes its own nature as a company. People and organizations who show interest during the crowdfunding campaign are doing so not only because they are interested in purchasing the eventual product, but also because they feel the company is aligned with their ideals. Because social and environmental responsibility is embedded in the DNA of an SRC, when it reaches out through the crowd, it naturally connects with people and organizations who desire to actively support its values. In essence, these early supporters are practicing what one might call "Impact Crowdfunding".
They Grow Up So Quickly An SRC's crowdfunding campaign also functions as an accelerator to develop many of the important elements of an established business. The opportunity for widespread media exposure requires the creation of compelling marketing materials, and necessitates critical thought and planning around the structure and goals of the business. This entry into the public eye acts as a trial by fire, forcing the business into a more mature state. After running a crowdfunding campaign, a startup has gone through business characterization, product development, a marketing cycle, and potential product delivery to end customers — all within a shortened timeline. A post-crowdfunding SRC represents much greater value because of the business and marketing experience of the startup team, increased media exposure, potential working capital from crowdfunding contributions, and a supportive and engaged community who could become future customers.
Better Startups Through Crowdfunding The crowdfunding ecosystem has the potential to spawn an increasing number of viable SRCs which are then available for Impact Investing or other types of SRI. Not only can crowdfunding produce more SRCs to invest in, but these resulting companies have a better value proposition and a lower expectation of risk. An investor, especially during seed funding, is investing in a startup's people as much as in the company and the product. Through crowdfunding, the startup team has developed the critical ability to both lead and follow — to lead from its social and environmental vision, and to follow the feedback and enthusiasm of its potential customer base. Crowdfunding, when combined with SRC startups, produces ventures that are in a unique position to be vehicles for profitable investment in a socially responsible manner. Want to contribute to Vitruvian's campaign?

  Final   About Vitruvian Energy: Vitruvian, a Seattle-based Social Purpose Corporation, has launched an Indiegogo crowdfunding campaign for its EEB biofuel. This biofuel can power a vehicle, blend with gasoline and diesel, or produce clean electricity.They believe that all organic waste materials can be captured and recycled to produce green products and clean energy. For more information, please visit vitruvianenergy.com and follow @vitruvianenergy.   About the Authors: Zack McMurry and Todd Robinson are the founders of Vitruvian Energy, a Social Purpose Corporation based in Seattle, Washington. They have launched a crowdfunding campaign for their biofuel made from sewage treatment waste, www.indiegogo.com/projects/community-sourced-biofuel
References 1. http://www.recrowdfunding.eu/news-updates/2014/8/22/rewards-based-crowdfunding-a-stepping-stone-for-tomorrows-renewable-energy-technologies 2. https://www.kickstarter.com/projects/597507018/pebble-e-paper-watch-for-iphone-and-android 3. https://www.indiegogo.com/projects/solar-roadways/ 4. https://www.kickstarter.com/help/stats 5. http://www.benefitcorp.net/ 6. http://www.startuplawblog.com/2012/05/08/social-purpose-corporation/ 7. http://www.bcorporation.net/ [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Vitruvian Energy ) [24] => stdClass Object ( [video_url] => https://player.vimeo.com/video/114773014 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1150 [post_title] => The Growth of Private Company Investing - Online Platforms, Accurate Data, & Robust Analytics [post_date_gmt] => 2014-12-18 15:45:27 [post_url] => https://aceportal.com/insights/the-growth-of-private-company-investing/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/12/growth-panel-350x171.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/12/growth-panel.png [excerpt] => [post_content] =>
Just before Thanksgiving, ACE Portal in conjunction with our partner, VC Experts, hosted an intimate panel discussion on 'The Growth of Private Company Investing: The Importance of Online Platforms, Accurate Data, and Robust Analytics.'
https://player.vimeo.com/video/114773014
The panel, hosted by Ross Barrett, a Founder and CEO of VC Experts featured: Since the panel contains such rich dialogue around the growth of online investing we wanted to make it available to everyone who could not attend. We will also follow with a full transcript of the event at a later date. Let us know if you have any additional questions for our panelists, we’d be happy to pass them along.     [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [25] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1145 [post_title] => Key Regulatory Considerations for Alternative Funds in the EU [post_date_gmt] => 2014-12-17 19:12:25 [post_url] => https://aceportal.com/insights/key-regulatory-considerations-for-alternative-funds-in-the-eu/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => In this interview, Peter Williams the ACE Founder and CEO, interviews Michael Nobes, the CEO of Sixbridges Capital, about the complexities of the private fund space with an emphasis on doing business in the European Union. In particular, their conversation focuses on the impact of the Alternative Investment Fund Manager Directive (AIFMD) on compliance and cost of doing business. https://player.vimeo.com/video/114155146

Alternative Investment Fund Manager Directive

The Alternative Investment Fund Manager Directive (AIFMD) started in the EU in 2008, to regulate alternative asset managers who are operating or marketing in Europe. This interview is relevant for funds and managers operating or thinking about operating or raising capital in the European Union. Some of the major challenges that AIFMD imposes on Fund Managers and that are covered in the interview include: About Michael Nobes: Michael Nobes is the Chief Executive Officer and Founder of Six Bridges Capital LLC.  Prior to founding Six Bridges Capital LLC he served as Director at Royal Bank of Canada Alternative Assets Group a structured products provider and was Head of the Offshore Custody platform for Royal Bank of Canada based in The Channel Islands. Michael holds an EMBA from the Richard Ivey Business School based in Ontario, Canada and is designated MCSI by The Chartered Institute for Securities and Investment UK. About Six Bridges Capital: Six Bridges Capital LLC is a boutique financial consulting firm in the broad alternative assets space specializing in hedge funds, private equity, debt , real estate, fund of funds and family offices. Our mandates are broad in reach providing advice and counsel to clients on matters such as third party service provider selection, regulatory issues, onshore and offshore structures, due diligence, marketing and distribution channels and business structural reviews.   [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [26] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 1140 [post_title] => Where are All the General Solicitation Deals? [post_date_gmt] => 2014-12-10 15:55:47 [post_url] => https://aceportal.com/insights/where-are-all-the-general-solicitation-deals/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/VCE-square-logo.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/VCE-square-logo.jpg [excerpt] => [post_content] => This post by Robert Fisher, the CEO of Fisher Tanner Associates, originally appeared in VC Experts Daily Buzz. In it, Fisher talks about pitfalls to the implementation of 506(c) General Solicitation provisions under the JOBS Act and why we are not seeing an explosion in deals marketed under the 506(c) provision. Basically, the article looks to answer the question, 'Why aren't we seeing deals being marketed more broadly now that it is legal to do so?"

 ----------------------------------------------------

With speed approaching perilously close to that of light itself, recent deregulation has freed huge and heretofore inaccessible pools of private monies to fund new investment and unshackle innovation... Just kidding – that didn’t happen. Would have been nice, eh? One could argue it wasn’t for lack of good legislative intention. As part of the JOBS act – Congress did indeed instruct the SEC to remove the ancient prohibition against General Solicitation and Advertising under Regulation D. The concept: make it easier for start-ups to cast a wide net when seeking investors. You may recall good ol’ Reg D which provides exemptions from SEC registration. The Reg D exemption relied on by most private investors – now called 506(b) continues the solicitation ban. The new exemption since last September – 506(c) – eliminates the ban but not without a new gotcha of its own. What are the hidden 'gotchas?'

Enhanced Investor Credentials Required

In the JOBS Act Congress specified that issuers need to take “reasonable steps to verify” accredited investor status for advertised deals because they were concerned that new types of advertising and general solicitation would attract investors who were not accredited (based on either income or net worth– see the SEC definition). This was undoubtedly based on myriad published cases of problems arising from self-certification. Kidding again – of course there aren’t any. The legislation also directed the SEC to set the detailed rules on reasonable verification, and these rules went into effect in September, 2013. Regardless of whether this reflects sage SEC wisdom, making the issuer responsible for certifying their investors are truly accredited is a surmountable issue, whether done by a fearless issuer or a trusted third party certifier. So given the ultimate solvability of this accreditation issue leads us back to our initial question: why are we not seeing more 506(c) (i.e., General Solicitation) deals?

A Shortage of Legal Pioneers

Our travels and meetings this year with some of the smartest securities lawyers around leads us to a credible hypothesis: no one wants to be first. Law firms we met uniformly indicate that although they believe the migration to 506(c) is inevitable, to date they have steered clients to the more traditional 506(b) exemption. Pioneers are the ones with arrows in their back and most lawyers are paid not to be too adventuresome especially when facing new regulations. But lest we get too complacent, there is reason to suspect we may not have the luxury of relying indefinitely on 506(b) going forward.

No Place to Hide

The term “General Solicitation” has never been clearly defined. Entrepreneurs may reasonably assume a pitch for investment made in a public forum qualifies. But what about Demo Days, Pitch Contests, Business Plan Competitions, or oblique references to capital need made on social media? Enforcement of violations of the ban by the SEC or by state regulators has been rare in the past. But the JOBS Act changes the playing field. Because there is now a legal way to publicly solicit private investment, tolerance for illegal solicitation may wane. Most of the securities lawyers we spoke to are concerned about clients inadvertently sliding into a solicitation violation and risking rescission of the funding transaction because they didn’t reasonably verify the accredited status of their investors when their original offerings closed. The entrepreneur also risks being flagged as a Bad Actor wherein the penalties can effectively block them from future start-up ventures. That first step is a doozy. (See VCE's note below for additional concerns about proposed SEC rules.) Two new bipartisan bills, supported by Angel Capital Association and introduced by several Congressmen and Senators including U.S. Senator Chris Murphy (D-Conn.) called the HALOS Act (Helping Angels Lead Our Startups) attempt to remedy this by clarifying the definition of “General Solicitation” and carving out common types of presentation and forum sponsors as pre-approved. The effort is commendable but it may ultimately prove akin to trying to paint bright lines in quicksand. If one learns of a company seeking funds at a presentation open to the public, does it matter who sponsored it? Also - the fluidity and diversity of today’s communications (think tweets, emails, web sites, social media, mobile communications, et al.) makes it almost impossible to determine the provenance of the investor’s knowledge of the investment opportunity.

Solicitation Envy - The Solution to the Impasse?

There actually is a carrot to accompany this stick. As the start-up CEO begins to see other companies raising money via email campaigns, web sites, social media, public pitches, etc. – he/she will not be content to rely on traditional pre-506(c) methods to get the word out. Once accepting the 506(c) approach, General Solicitation becomes an opportunity and not a threat. For that reason alone, most lawyers believe it just a matter-of-time till their clients insist that General Solicitation be part of their arsenal.   Robert Fisher, CEO of Fisher Tanner Associates. He is a member of Ohio Tech Angels, X-Squared Angels, and the Angel Capital Association. Angel Capital Association ACA has a variety of resources and information for the press, whether you are looking for angel industry trends, the impact of angels and innovative startups of the US economy, ACA's positions and feedback on public policy issues, and connections to interesting investors and their portfolio companies.   (A note from VC Experts: While this article refers to enacted rules, many in the start-up community are particularly concerned about proposed SEC rules on Regulation D and Form D, which if finalized would require issuing entrepreneurs to submit a Form D in advance of their general solicitation and require them to file all fundraising materials by the date of advertising, among other things. While the proposal includes a one-time ability to correct a filing, any other violation would mean the issuer would not be able to raise capital through Rule 506 for one year. It is unclear if and when these proposed rules might become final.)   [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [27] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1139 [post_title] => Transaction Readiness - Will you be Ready if a Suitor Comes Knocking? [post_date_gmt] => 2014-12-10 15:38:48 [post_url] => https://aceportal.com/insights/transaction-readiness-will-you-be-ready-if-a-suitor-comes-knocking/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => In this interview, ACE Co-Founder & CFO, Carl Torrillo, discusses the concept of 'transaction readiness' with Jeremy Swan of CohnReznick. Jeremy covers a range of topics to help you prepare your business for a potential investor or suitor and discusses why this can be important strategically--even if you are not immediately contemplating a transaction. To quote Jeremy: "if you're not ready when a suitor comes knocking, then it's too late." https://player.vimeo.com/video/113614970 Specific topics covered include:     About Jeremy Swan: Jeremy Swan is a principal with CohnReznick’s Transactional Advisory Services practice and leads the Firm's Private Equity / Venture Capital Industry practice.  Jeremy provides advisory services to private equity and venture capital firms as well as private companies in the areas of due diligence, transaction readiness and financial, technology and operational improvement. With more than 16 years of experience advising private equity firms, emerging private companies and large corporations, Jeremy works with CohnReznick’s private equity and corporate clients on transaction driven due diligence, strategic and operational initiatives.  Jeremy has extensive experience working in the technology industry, investment banking and private equity and is an expert in mergers and acquisitions, transaction readiness and both equity and debt financing transactions.   Learn more about CohnReznick on their Linked-in or Facebook pages.       [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [28] => stdClass Object ( [video_url] => https://player.vimeo.com/video/86353287 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1135 [post_title] => Institutional Investors & How They Are Allocating to Private Equity [post_date_gmt] => 2014-12-08 18:57:18 [post_url] => https://aceportal.com/insights/institutional-investors-how-they-are-allocating-to-private-equity/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/12/joe-smith-video-350x252.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/12/joe-smith-video.png [excerpt] => [post_content] => ACE Portal CEO, Peter Williams, interviews Joseph A Smith, a Partner at Schulte Roth & Zabel LLP, about how institutional investors are approaching private equity.   https://player.vimeo.com/video/86353287 Key topics of discussion include:  
  About Joe Smith: Joseph A. Smith is a partner in the New York office, where he represents private equity fund sponsors and institutional investors in connection with fund formation, the acquisition of portfolio investments and the implementation of exit strategies. In this capacity, Joe advises clients on securities, governance, ERISA, Investment Advisers Act and structural issues. He has extensive experience with all alternative asset classes, including venture capital and later-stage growth equity investments, leveraged buyouts, mezzanine investments, real estate ventures and opportunity funds, secondary investments, funds-of-funds and hedge funds. Joe has also represented many fund managers in connection with spin-offs and consolidations.  
  About Schulte: Schulte Roth & Zabel LLP is a multidisciplinary firm with offices in New York, Washington, D.C. and London. As one of the leading law firms serving the financial services sector, SRZ regularly advises clients on investment management, corporate and transactional matters, as well as providing counsel on securities regulatory compliance, enforcement and investigative issues. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [29] => stdClass Object ( [post_author] => Joe Bartlett [post_author_bio] => Founder and Chairman of VC Experts, [post_author_thumbnail] => Joe Bartlett [ID] => 1133 [post_title] => 7 Fundraising Tips for Startups Pursuing VC Money [post_date_gmt] => 2014-12-08 18:04:23 [post_url] => https://aceportal.com/insights/7-fundraising-tips-for-startups-pursuing-vc-money/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/VCE-square-logo.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/VCE-square-logo.jpg [excerpt] => [post_content] => In this article you will find  a collection of fundraising advice geared towards pitching a traditional Venture Capital Firm.  Most of Joe's advice, however, would apply just as well when using an Online Portal or pursuing other fundraising avenues. To summarize the efforts in relation to online portals: find the right Portal with the right investor base for your offering, present the material in an easily digestible and engaging format, follow through, and don't stop your other complimentary efforts. If you think your company is right for VC Funding then here are Joe Bartlett's seven key pieces of advice:

Rule #1: Pitch the Appropriate Audience

VC funds collect huge sums of cash, and managers must put it to use within four or five years, or risk losing it. Despite their vast resources, venture funds' staffing is generally lean and mean — managers cannot afford to look at investments that involve, from their perspective, trivial amounts of funding. If you're looking for very early-stage funding (the so-called "angel round") or financing under, say, $5 million, don't go to a professionally managed venture-capital fund. Find angel investors instead. They specialize in taking a company from inception to the next round of financing.

Rule #2: Don't Insist on an NDA

Never ask professional investors to sign a nondisclosure agreement (NDA) up front. They won't do it. VCs will immediately view you as a rookie if you insist on an NDA before they've even reviewed the materials, and that will undercut your position from the start. If there is sensitive information in your business plan, don't provide it at the start. Once you've garnered investors' interest, you can start to let them in on the secret. Some VCs will sign an NDA but only after they've made up their mind to invest - and that's many meetings down the line.

Rule #3: No "Cold Calling"

Don't bother submitting business proposals over the transom to the VCs. You will be wasting your time. You must find a contact, a midwife, who knows the investor to introduce the opportunity. Unsolicited business plans are returned just as quickly as first-time novels. [Take this rule with a grain of salt. Every company is different, and for some (especially if your numbers are good) a cold call approach can work. For a great take on how to get VCs to notice your company see this post by a seasoned VC].

Rule #4: Keep Your Pitch Short

Venture funds receive hundreds of business plans every week. The longer the plan, the more likely it will be put aside for later reading that often never occurs. Never submit a full business plan to a VC. A three-page executive summary is the outer limit that they will read.

Rule #5: VC Money is Nervous Money

After the Dot-com meltdown, no individual wants to be the next bozo, sinking millions into a boo.com. VCs look for a low burn rate, a solid revenue model grizzled management and partnerships with genuine strategic value. This anxiety has ushered in lower valuations. It is a waste of time, and potentially off-putting, to even discuss an overly aggressive valuation for your business. Given the recent performance of certain venture-backed companies in the public markets, VC's in general are skeptical.

Rule #6: Follow Through on Interest

Don't count on the VCs to get back to you on their own. Keep in touch. The trick is to stay just this side of being a pest. Many entrepreneurs have a "good meeting" with the VC and begin to count on receiving cash, neglecting other sources of capital. You haven't gotten to "yes" until the term sheet has been initialed and the VCs' lawyer has started to do due diligence. Until then, keep looking.

Rule #7: Don't Stop Looking for Investors

There's a corollary to the last point: Remember that, until the company is public or is sold (sometimes even after it becomes public), you must continuously hunt for investment capital. Every executive must be on the alert, looking for sources of money. Don't neglect or delegate this obligation. First-preferred stock is an equity ownership that has seniority over preferred and common stock, particularly with respect to dividends and assets. First-preferred stock is also superior to second-preferred stock, but is subordinate to debt holders. Did you like these tips? Are you actively raising capital for your company? If you're considering using an Online Portal we'd love to discuss whether ACE Portal is right for your offering. For other non-VC strategies see this post.
VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries.   [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Joe Bartlett ) [30] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1129 [post_title] => Answering Common Legal Questions When Starting Your Startup [post_date_gmt] => 2014-12-04 18:40:46 [post_url] => https://aceportal.com/insights/answering-common-legal-questions-when-starting-your-startup/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/12/Evan-Bienstock-350x174.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/12/Evan-Bienstock.png [excerpt] => [post_content] => ACE Portal's General Counsel, Jason Behrens, discusses with Evan Bienstock, a Partner with Mintz Levin, the various  business and legal choices facing a startup as it incorporates and starts its business journey. This is a highly informative, entertaining, and practical interview for anyone in the early stages of forming a company.     https://player.vimeo.com/video/113618447   Specific topics that Evan covers include:
  1. How do I choose between organizing my business as an LLC and C-Corp? What are the Pros/Cons of each?
  2. At what point in the startup process do I hire legal counsel?
  3. What are the considerations in setting up your company board? How can founders maximize control of the company?
  4. What are the equity considerations for founders? Are they typically subject to vesting?
About Evan Bienstock: Evan’s practice involves all aspects of corporate and securities law for emerging growth, early stage and start-up companies in the digital media, energy and clean technology, sustainability and life sciences industries. He routinely advises clients on their growth and development and participates in a diverse array of transactions, from private placements of securities to mergers and acquisitions. He also counsels his clients on their daily corporate needs and has extensive experience assisting companies with compliance to federal and state securities laws. About Mintz Levin: As an emerging growth company or entrepreneur, you’ve got an impressive new idea—an innovation that will improve lives, or help businesses work smarter.  You’re ready to line up investors, launch R&D, and protect your inventions…and you need sound answers to about a million questions.  We’ve been there, and we want to help. Mintz Levin is a law firm which has a long track record—and an absolute passion—for helping entrepreneurs launch and grow businesses.  We’ve worked for decades with early-stage companies in technology, biotechnology, energy and clean technology, and many other sectors, and there’s truly nothing we’d like more than to be part of your success.  Strategically located to meet the needs of  its startup clients, entrepreneurs, and investors, alike,  Mintz Levin is a firm of over 450 attorneys with seven domestic office locations (New York, Boston, Washington, DC, Stamford, Los Angeles, San Diego, and San Francisco), as well as an office in London and an affiliate relationship in Israel.  Visit us at www.mintz.com. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [31] => stdClass Object ( [post_author] => Shriram Bhashyam [post_author_bio] => [post_author_thumbnail] => Shriram Bhashyam [ID] => 1124 [post_title] => The Business Metrics Required for Raising a Series A Round [post_date_gmt] => 2014-12-03 15:26:26 [post_url] => https://aceportal.com/insights/the-business-metrics-required-for-raising-a-series-a-round/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => After closing our seed round a few months back, my co-founders and I decided to figure out what traction we'd need to reach the next fundraising milestone: Series A. I was surprised to find that there's not a great single resource on the internet that sets out current market VC expectations for Series A companies. So we're now providing that resource. We did a lot of digging into this, including asking mentors, current investors, and prospective investors. Here's what we found.

The Series A

Series A is an order of magnitude greater, in terms of diligence and required metrics, than the seed round. Current market conditions--the so-called Series A Crunch--don't help either. The Series A Crunch refers to the fact that there is a lot of capital available for seed rounds, with a new micro-VC fund seemingly popping up daily, and AngelList, SeedInvest, etc. also adding to the pool of capital ready to deploy for seed investments. But since the Series A round involves big institutional players, who have strict mandates and fiduciary duties to their LPs, the bar is set much higher to raise your A round than was required for your seed round. Through our research, here's what we've found vis-a-vis metrics needed to raise a Series A round from institutional venture investors.

General Series A Requirements

Let's start with an important caveat: there is not one set of metrics that applies to every business and we can't paint all investors with a single broad stroke. Below are general guidelines that are broadly applicable and further down I discuss sector-specific metrics.

E-commerce Metrics for a Series A

This is a dense market, with diminishing margins, and heavy-weight incumbents (see Amazon). Also, VCs are licking their wounds from companies like Fab and Gilt (wasn't Gilt supposed to IPO for the last 4 years?).

Consumer Apps

Another crowded field and the shadow of King Digital looms.

SaaS Metrics for a Series A

Jason Lemkin (the SaaStr himself, of Storm Ventures) has noted the following: We've built PayRight, a B2B SaaS tool for companies to efficiently manage their equity and cash compensation. Naturally, we've looked into B2B SaaS-specific metrics:

Marketplace Metrics for a Series A

Marketplaces are tricky (trust us, we know) because of the chicken/egg problem with supply and demand (buyers want to see good supply, and good sellers will list where there are buyers). It is understood that liquid marketplaces also take a while to build. Disagree? Have more knowledge to add to the communal pot? Let us know. This post originally was originally published on EquityZen's blog. Editor Note: For a complimentary take on moving from Seed Round to Series A see this post from CB Insights. Further Resources.  EquityZen has built an Excel cap table tool for pre-Series A companies that's freely available for download. Check it out here. If you are interested in their company managed liquidity services for employees see their PayRight services.
  About the Author: Shri is a founder of EquityZen, a marketplace for investments in private tech companies. Prior to founding EquityZen, he was an attorney at Shearman & Sterling, where he advised market participants on regulatory, transactional, and trading and markets issues. Shri regularly writes about venture capital, secondary investments, and startups on the EquityZen blog and elsewhere. Follow him on Twitter @ShriBhashyam. EZLogow More on EquityZen: EquityZen is a marketplace for investments in proven private technology companies. Angel Investors, funds, and family offices use EquityZen to access investments in premier venture-backed companies.     [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Shriram Bhashyam ) [32] => stdClass Object ( [post_author] => Victor Sowers [post_author_bio] => [post_author_thumbnail] => [ID] => 1122 [post_title] => Why Your Private Placement Should Move Online [post_date_gmt] => 2014-12-02 18:46:25 [post_url] => https://aceportal.com/insights/why-your-private-placement-should-move-online/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/NYSE_Image3-350x233.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/NYSE_Image3.jpg [excerpt] => [post_content] => You should use digital communities or online portals to help you raise capital because that’s what everyone else is doing. Seriously. It’s a numbers game… In a world where capital seekers and investors are already congregating online to find one another, following your peers into the online fundraising world not only makes sense, it’s a key business imperative.

Private Offerings are Already Happening Online

An IntraLinks M&A survey of over 2400 deal professionals for example, found that 54.5% of buy side and 40% of sell-side interviewees had closed a deal sourced online. Furthermore, 55% of respondents stated that over 25% of their deal flow stemmed from online sourcing while 39% had marketed over five deals on social networks in the last year alone. Ignoring the distribution and reach of online portals can significantly undermine the ability to conduct a successful private placement.

ACE Portal Is A Specialized Transaction Network for Private Deals

As the centralized infrastructure for private capital markets, ACE Portal is designed to bring together all of the parties involved in a private deal in order to create a more efficient network. In doing so, ACE seeks to create a centralized hub for all private placements that is:
  1. Transparent and equitable for investors
  2. Simple and efficient for agents
  3. Time and cost efficient for issuers
  4. Compliant for all parties
Online networks, particularly those with embedded end-to-end transaction tools, represent a natural solution to private capital fundraising that addresses many of the issues of opacity and transparency that apply to traditional private placements. With capital raisers and funders meeting, conducting due diligence, and committing funds online, the time to start participating is now. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Victor Sowers ) [33] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 1120 [post_title] => Founders & Startup Employees Need to Understand 83(b) Stock Elections [post_date_gmt] => 2014-12-01 20:33:16 [post_url] => https://aceportal.com/insights/founders-startup-employees-need-to-understand-83b-stock-elections/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/subway-sunset-350x232.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/subway-sunset.jpg [excerpt] => [post_content] => This article, published originally by our partner VC Experts, goes in depth on how to avoid one ugly tax scenario as a founder or early-stage employee. Entrepreneurs founding startup companies are often unaware of a potentially significant tax liability that can rear its ugly head with respect to stock issued to founders and employees. Emerging business founders often acquire their stock through a restricted stock purchase arrangement providing for time-based vesting. However, this common structure may set the stage for an unwelcome and unexpected tax bill down the road. An 83(b) election can, in the right circumstances, provide a relatively simple and effective way to avoid the tax.

Stock Vests Over Time but Tax Implications are Complex

An emerging business will commonly issue equity to its founders and early employees in the form of restricted stock subject to a vesting schedule that incentivizes those individuals to remain with the company during its critical early years. Unless and until it vests, restricted stock is normally subject to forfeiture to the company if the founder or employee leaves the business. For example, under an ordinary four-year graded vesting schedule, one-quarter of the stock would vest and therefore cease to be subject to the risk of forfeiture after the first year, and the remaining restricted stock would vest pro rata on a monthly, quarterly, or annual basis over the next three years. The potential tax problem arises because the IRS does not consider restricted stock to be actually received by the founder or employee until it is no longer subject to a substantial risk of forfeiture. The stock’s holder is therefore deemed for tax purposes to acquire the stock in installments over time as it vests, rather than all at once when originally issued.

Restricted Stock Gets Taxed At Time of Vesting

As restricted stock vests according to the agreed vesting schedule, the founder or employee would be subject to taxation based on the value of the stock at the time of vesting, and this taxation will be based on the recipient’s ordinary income tax rate and the value of the stock on the vesting date. If the emerging business is successful and performs well, resulting in the company’s value increasing year-over-year, the holder of the restricted stock may become subject to an increasing tax liability as his or her equity vests. And there is no corresponding tax relief in the event that the value of the business subsequently declines. In addition, the holding period for determining the future capital gain or loss treatment upon the disposition of the stock will not start to run until the shares vest. For an example of how the tax would apply in the real world, assume that a startup company founder were to acquire 100,000 shares of restricted stock valued at $0.01 per share at the time of issuance, subject to a four-year graded vesting schedule. One year later, the company has substantially increased in value so that the founder’s restricted stock is then worth $5.00 per share. Under the vesting schedule, one quarter of the founder’s stock would vest, and those 25,000 newly-vested shares would have a total fair market value of $125,000. The founder would have to include that $125,000 of value as ordinary taxable income for the year in which the shares vest. One can easily imagine a similar scenario leading to an unexpected and painful tax burden.

Tax Relief through 83(b)

An 83(b) election can provide a solution. 83(b) refers to a section of the Internal Revenue Code that allows a person acquiring restricted stock to choose to be taxed upfront based on the value of that stock at the time of issuance, notwithstanding that the shares are unvested. The holder of the stock making such an election is taxed on the difference between the fair market value of the equity at the time of issuance and the price, if any, the holder paid for the equity. In the case of a founding employees, the purchase price and value of the restricted stock is typically a very low or nominal amount because the startup has little value at the time of original issuance. If the purchase price for the stock equals the stock’s fair market value, then no taxable income would result from the transaction. In addition, since the value of the shares will have been included in the holder’s ordinary income, the holding period for capital gain or loss purposes will begin to run as of the date of issuance.

Is the 83(b) right for me?

A person acquiring restricted stock can make an 83(b) election by filing a relatively simple form with the IRS within thirty days after issuance of the equity. However, anyone considering making an 83(b) election with regard to the acquisition of equity should consult his or her tax advisor before doing so. The election is irrevocable once made, and may not make sense for every situation. In most cases, however, the ability to make an 83(b) election can offer an emerging business founder a welcome relief from a possible future tax headache.
The Authors: Daniel H. Peters, Partner Daniel H. Peters is a Partner in the Los Angeles office of Locke Lord LLP where he counsels clients engaging in domestic and cross-border corporate and financial transactions in a variety of industries. Mr. Peters concentrates his practice on mergers and acquisitions, joint ventures, strategic alliances, investments and similar transactions. He regularly represents clients in the purchase and sale of both public and private companies, and has substantial experience advising both strategic investors and issuers in venture capital and similar investment transactions. He also counsels both public and private companies in various legal aspects of their business operations and activities, including corporate governance and compliance matters. He advises emerging companies in various stages of growth, providing legal and strategic guidance in all phases from formation through exit. In addition to corporate transactional matters, Mr. Peters also has experience representing both financial institutions and borrowers in commercial lending, equipment finance and public finance transactions. Stefan P. Smith, Partner Stefan P. Smith, a Partner in the Dallas office of Locke Lord LLP, has extensive experience in employee benefits and executive compensation law. He works with both public and private entities to establish and ensure the continued compliance of tax-qualified defined contribution and defined benefit retirement plans, including 401(k)/profit sharing plans, traditional defined benefit plans, money purchase plans, employee stock ownership plans, and cash balance plans. In addition, Mr. Smith assists with employee benefit matters arising during mergers and acquisitions and works with all forms of health and welfare plans and executive and equity-based compensation, including incentive and non-qualified stock options, restricted stock awards, stock appreciation rights, employee stock purchase plans, phantom equity, performance unit and bonus plans, SERPs and other excess benefit plans, and non-qualified deferred compensation plans.
Locke Lord LLP Locke Lord is a full-service, international law firm with offices in Atlanta, Austin, Chicago, Dallas, Hong Kong, Houston, London, Los Angeles, New Orleans, New York, Sacramento, San Francisco and Washington, D.C. Its team of approximately 650 lawyers has earned a solid reputation in complex litigation, regulatory and transactional work. Locke Lord serves its clients' interests first, and these clients range from Fortune 500 and middle market public and private companies to start-ups and emerging businesses. Among Locke Lord's many strong practice areas are appellate, aviation, bankruptcy/restructuring/insolvency, business litigation and dispute resolution, class action litigation, consumer finance, corporate, employee benefits, energy, environmental, financial services, health care, insurance and reinsurance, intellectual property, international, labor and employment, mergers and acquisitions, private equity, public law, real estate, regulatory, REIT, tax, technology, and white collar criminal defense and internal investigations. Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from Locke Lord LLP and VC Experts. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [34] => stdClass Object ( [video_url] => https://player.vimeo.com/video/103526931 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1109 [post_title] => Private vs. Public Market Technology Trends & How to Invest [post_date_gmt] => 2014-11-24 16:54:39 [post_url] => https://aceportal.com/insights/private-vs-public-market-technology-trends-how-to-invest/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/11/ACE_NYSE-350x171.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/11/ACE_NYSE.png [excerpt] => [post_content] => https://player.vimeo.com/video/103526931 Privately held technology companies are attracting a great deal of interest and rightfully so. In this interview, David Garrity, a frequent CNBC Technology Pundit and a Principal at GVA Research and a Managing Partner at Whitemarsh Capital, talks with Jason Behrens, the ACE Portal General Counsel, about private vs. public market trends in the tech space. Garrity covers  market adaptations to the longer life cycle of private companies in the tech space. Specifically he addresses valuation concerns in the technology sector, emerging trends in fintech (financial technology), investment strategies in the private and public sector, the idea of strategic acquisitions, and how individual investors can participate in the early-stage returns of the tech space despite the longer private life-cycle of these companies. In other interviews with David he discusses:   [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [35] => stdClass Object ( [post_author] => Victor Sowers [post_author_bio] => [post_author_thumbnail] => [ID] => 1111 [post_title] => Requirements of a Reg D Private Placement [post_date_gmt] => 2014-11-20 21:19:47 [post_url] => https://aceportal.com/insights/requirements-of-a-reg-d-private-placement/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/11/ACE_NYSE-350x171.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/11/ACE_NYSE.png [excerpt] => [post_content] => Raising capital and investing in private companies involves an intricate process for companies and investors that is governed by stringent regulatory requirements. While the introduction of Rule 506(c) under the JOBS Act does potentially address some of the issues around advertising and broader reach, the Regulation D offering process remains a complex mix of compliance, marketing, and due diligence. [For more on the stages of a private placement see this post]. In this post, however, we examine the basic requirements that define an offering as a private placement.

Requirements of a Private Placement (under Regulation D)

  1. The securities may be sold only to “accredited investors.”
  2. All the offerees and purchasers must have access to the same kind of information and must be able to understand and evaluate that information.
  3. The issuer and broker-dealer must take all reasonable steps to ensure that all provided information is complete and accurate. We refer to this as due diligence.
  4. All of the offerees must have access to meaningful current information concerning the issuer.
  5. For private placements not marketed under 506(c) rules, these offerings cannot be the subject of advertising, general solicitation, or public meetings.
  6. The issuer must exercise reasonable care to assure that the purchasers of the securities are not acquiring the security for redistribution.
  7. The issuer must file a notice of sale on Form D with the SEC within 15 days after the first sale of securities. Subsequent notices are required every six months after the first sale and 30 days after the last sale. [1]
As always, please note that nothing here should be construed as legal, finance, or tax advice and is provided for educational purposes only. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Victor Sowers ) [36] => stdClass Object ( [post_author] => Chris Kern [post_author_bio] => Domain Media is a multi-channel Internet media network that operates in focused market verticals which provide compelling engagement marketing solutions to businesses that want to connect with their audiences better. [post_author_thumbnail] => Chris Kern [ID] => 1096 [post_title] => Top 10 Best Practices for Marketing Your Deal [post_date_gmt] => 2014-11-19 19:23:52 [post_url] => https://aceportal.com/insights/top-10-best-practices-for-marketing-your-deal/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/11/10-best-practices-350x453.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/11/10-best-practices.jpg [excerpt] => [post_content] => If you’re marketing your next (or first) big fund or deal – we know that you’re probably wondering about crowdfunding, deal portals, TPMs, investment banks or taking the family office route as some of the best angles to get funded. Chances are you’ve already done at least one of these in the past on a prior transaction or are contemplating them right now. The questions to consider in pursuing the great balancing act of marketing your deal in 2014 and 2015 are designed around what best practices to use to successfully complete your raise, do it in an efficient manner, and be safe in your approach.

Marketing Your Deal Post JOBS Act

With the advent of the Jobs Act, the new crowd-funding rules and the many platforms that have emerged, there are numerous points of view that are circling the industry regarding where and how you can market your deal. Regardless of any choice you make, there are best practices to employ so that you can get the most out of your marketing efforts while maintaining a high level of standards and being compliant. Speaking of compliance - kindly note that the information in this guide is not to be construed as legal, finance, or tax advice and is provided for informational and entertainment purposes only. Consult with your professional advisers regarding those matters. Now that we’ve stated our disclaimer and got that out of the way – let’s move forward. So, based upon many years in the finance and investment banking field myself, as well as the research we’ve conducted – here’s our list of the top ten best practices to consider in marketing your deal. You can also download Top 10 Best Practices For Marketing Your Deal as a PDF.

1. Specifically determine who your target investors (audience) are ahead of time.

Before you start designing your collateral material, and even your offering documents, you need to be completely in tune with the audience you are going after, what specific needs they have, what value points and concerns they are typically focused on, and where the best places are to connect with them. Build a persona of the type of individual you will be dealing with and design your collateral and messaging around them. How old is the person you will be typically dealing with (generational focus and issues), what do they like to do (personal interests to connect with), where do they live (helps define their social circles), what type of car do they drive (your car is an extension of your personality or what is important to you), what type of activities do they do (experiences help shape how people think), are they married and have kids or are they typically single (what type of family values do they have), and the like. Building this persona, or what marketers also call an “avatar”, will help you really identify and connect with the target audience you are going after much better. Once you have fully identified with your target investors – take inventory of the relationships you directly have with that audience, as well as who you know in your extended network that has strong ties to them.

2. Decide on the best approach to connect with your target investors

Is it a more broad based consumer approach that can take advantage of the newer crowdfunding and general solicitation rules (a la 506(c)), or will you be targeting a much more tight knit group of investors such as family offices or pension funds? Crowdfunding is the new frontier in marketing to investors and some of the rules and processes for properly conducting a crowdfunding effort can be quite tricky. The best bet to take this route is to team up with a FINRA registered broker dealer/investment bank that has the expertise and back-end reporting and tracking systems to efficiently run a crowdfunded offering. While we can go on and on for another twenty pages about crowdfunding – we boil it down to one of the most prominent issues it entails – general solicitation. One of the biggest issues around crowdfunding is how and to what degree you are marketing (soliciting) your fund or deal to potential investors and the mediums used to get the word out. Being that the rules and regulations of crowdfunding are new and still changing in many instances, it is better to take the high road and be fully in tune with all of the reporting and tracking mechanisms required. Taking a short cut or not being cognizant of the nuances with this new financing marketing strategy can likely trip up your efforts down the road or question the validity of you taking advantage of the new crowd funding rules to begin with. Even though it goes without saying, we’re going to say it anyhow - The last thing you want to do is become a test case with the SEC, so be sure to consult with legal counsel that is well versed and experienced with crowdfunding projects. [For info on what we've seen regarding general solicitation at ACE see this post] If you are going after a more tightly focused group of investors (ie. Family offices and Pension funds) – make sure you also have the technology or use a platform to help manage the marketing, tracking and follow up correspondence to stay on top of everybody you approach and what type of feedback you are getting. Also – be careful not to cross the chasm and fall into using marketing tactics that may be considered a general solicitation. Posting your deal or offering, or inviting people to ask you more about it on social media websites such as Facebook, LinkedIn, or Twitter can be construed as a general solicitation, so be very careful about what you say about your deal and where you say it. [Interested in targeting family offices? See how they think about direct investing]

3. Be organized

In any fund raising effort – there are numerous things that have to be managed in every step of the process. From preparing and updating your offering documents, to working with professional advisors such as auditors, lawyers, and investment bankers, to designing your collateral material and managing your marketing, communications, meetings, and follow up correspondence – if you are not organized, your head will spin. [See Stages of a Private Placement for more]. In addition, potential investors will also see that you are not organized or have developed a systematic approach to manage the fundraising and relationship aspects of your business. If they sense sub-par performance in your outreach and follow up with them, chances are they’ll have added concerns about your ability to manage your fund or company, or will just be turned off and decline. Being organized will also create efficiency in your efforts. Create a specific plan for the entire offering process, include timelines and deadlines to keep your team on track, and solicit the help of your professional advisors and other people as needed at the appropriate time. With a well thought out timeline – you can easily anticipate when people will need to be brought into the fold. Almost equally as important is how your information is organized and presented.  Investors appreciate seeing that the company is well managed and organized and those insights reflect on you and your team and provide confidence to the investor. Make sure your messaging is consistent from document to document. Please, please, please use a spell checker on all of your documents. Misspellings in today’s world are a simple sign of laziness and not caring about details. In addition, make sure all of your documentation is laid out nicely and looks clean and professional. There are plenty of firms and outsourcers that specialize in preparing offering documents, presentations, and reports. If you don’t have the ability or expertise in house to do this yourself, make the small investment to hire a professional that does – it will yield great dividends going forward in your marketing efforts.

4. Leverage technology to streamline all of your communications

Technology is the great equalizer for many companies regardless of the industry and it is no different for marketing and raising capital. Utilizing technology in your communications, managing the creation and distribution of your documents, and keeping track of who spoke with whom at what point of time and what was said will make your life so much easier. The days of using a spreadsheet to keep track of these things is old-hat, and while relatively simple to use and update, is not the most efficient method of tracking communications. It also leaves out document flow and many other aspects of the process. Utilizing an integrated contact management system is a big step up and will definitely help you with managing the entire process and staying on top of your communications efforts. Yes, it will take time to set up and connect everything together, however, it will be very much worth the effort both short term and long term. Platforms such as CapitalIQ or newer entrants into the market such as ACE Portal, or Axial Networks have very effective tools to use to help manage your fund raising efforts, as well as provide a strong venue to connect with potential investors. Let technology help you become more efficient, be more organized and streamline your communications efforts. In doing so, it will allow you spend more time traveling and building relationships with the very people you want as your investors or partners instead of chasing down emails and trying to remember what was discussed in your last investor meeting.

5. Make sure all of your documents are current, factual, and do not omit any material facts

Where many deals get tripped up with their investors and where many issuers get hit by our infamous regulatory agencies is in the information that is provided, or not provided for that matter, in the company’s offering documents, disclosure statements, and marketing materials. With any of the documents that you put out to your potential or existing investors – take the extra time to be sure that information in them is current, factual and does not omit any material facts. If they don’t uphold this simple rule – you are setting yourself up for potential issues down the road. Here are a couple quick tips to think of here: If you employ these three simple steps, I can honestly say that you’ll be able to sleep better at night knowing that you covered your butt, while your professional advisors will be grateful that you did and your investors will notice that your documentation is buttoned up and tight, which also protects them.

6. Scrub your financials and any track record you are reporting

Yes – we know this sounds a lot like number 5 above – but this one has to be stated as a standalone item in our best practices list. With funds and fund advisors – how and what you state as your track record in your offering and marketing documents can make or break you (other than having a stellar or crappy history of producing returns). A very close second to that are the financials that you are reporting. In both cases, whatever the numbers are – don’t get fancy or try to be cute. Be factual and straight to the point without adding too much fluff. This is also an area where you’ll want your auditor and legal counsel to take a look at because any misstep here can be the recipe for disaster. Did you know that one of the biggest catalysts for public companies to have class action lawsuits brought against them is due to misstatements on their financials? Even though there will be some added expense to have your financial and legal advisers look at these closely, consider it as investing in an insurance policy for your future. Take notice to any unusual items or adjustments and be prepared to answer questions about them. Investors will typically find these nooks and crannies and want to know more details about them. It is much more efficient to be prepared up-front and will build confidence with your investors if you do not have to scramble around trying to understand the questions yourself and put together an answer that is coherent on the fly. Lastly on this subject, read your financials and track record statements from the view of the prospective investor and ask yourself, does this sound right and is there too much hyperbole (that’s a better word to use instead of bullshit) stuffed into it? Have others on your team or some of your associates read them as well. If you keep coming up with consistent feedback that it sounds like a stretch or too much fluff – then perhaps consider dialing it down to reality more. Stacking yourself up against facts and market metrics are the best bet here as facts can hardly be contested.

7. Communicate with everyone that is part of the process

Communication is the key to coordinating and managing the fund raising effort at the highest level. Just as football coaches communicate the game plan and special plays to his team, if that never took place the chances for that team to effectively advance the ball down the field and win become close to zero. Communication among all of the parties in the process of marketing your deal is more important than you think. This goes with your partners, your associates, as well as your professional advisors and your target investors. Communication helps build and maintain a relationship which is of the utmost importance with investors. In addition, the mode of communication is highly important and making a concerted effort to think about the best method to communicate anything needs to be made, regardless of whether you are communicating with an investor, your accountant or one of your associates. Some things are much better discussed over a phone call instead of an email. And when it comes to emails, never send one when you are under an extreme emotional state, as emails lack a certain filter or ability to express inflections and the real meaning behind what you are saying. Give yourself some time to cool off, even if it’s an extra hour or an extra day before you send that important email. Everyone is extremely busy and multi-tasking to get things done. Making sure to communicate with everyone on a consistent basis keeps everybody on the same page and will pay off big time.

8. Manage our professional advisors and don’t let them manage you

Yes – I’m talking about the attorneys, financial advisors, and anybody marketing your deal. You need to manage your professional advisors to make sure they stay on track with your game plan, and your budget. Don’t let them run amok or give them too much room to get off track as it can easily become a situation where they’re racking up unnecessary fees and are otherwise wasting time and effort. As a team that has specific objectives, a timeline to work on, and certain tasks to complete, communicating and making sure all of your professional advisors are on the same page is critical to a successful deal being completed. Remember – your professional advisors work for you and are there to help you. If they are not staying on board with the program or not performing at a level that you believe is acceptable, don’t be afraid to let them go. There are plenty of competent professional advisors out there that are very good at their jobs. Search for the best in their respective fields by getting referrals from people that you know and trust or researching the professionals involved in previous transactions that were highly successful.

9. Review and measure your results

How many people did you reach out to, how many people did you actually connect with, how many attempts did you make before you confirmed a meeting, what was the investor’s feedback, what was their decision, what documents were sent and when, how long did it take until they made their investment from the point of their the meeting or day they decided to make the investment? These and other questions should be measured in your marketing efforts to find areas that need improvement, and also areas that are working well. In addition, these questions and measurements should also be made from person to person to see who is performing at a higher level as compared to others. What are the elements that are creating the most success in the process? If you can answer those questions – you will quickly create an optimized environment where marketing your deal in a systematic fashion produces better results. Bottom line - the more information you have at your disposal around the process and actions that create the results, the more you can refine and improve upon them.

10. Be flexible and adapt

The world of financing and funding a transaction is an intricate dance that encompasses so many things from psychology, to personal issues, macro-economic events, business sector changes, government regulations, and societal issues, to just having a bad hair day. If you are going to win in this environment, or any business environment for that matter – you must be a) staying on top of the market to notice what’s going on; b) open minded enough to recognize that change is taking place and something must be done to accommodate it, and c) flexible enough to actually make the change or take advantage of unique opportunities when they present themselves. If you look at the most successful companies out there, or funds that have had long runs of success and have launched multiple funds since their initial one – they’ve all been flexible in some fashion with their thinking, how they approach the market, and how they run their business. Investors will also appreciate the fact that you take the stance of being flexible and keeping sight of changing market conditions so that you can adapt and act in a proactive manner instead of being reactive and behind the curve where you’re unable rise above the noise or unable to take advantage of unique opportunities.

Summary

The best practices outlined here can be adopted rather easily and start to yield positive results very quickly. Even if you only implement one of them or have a new perspective of what to consider when marketing your deal will improve either what you’re doing or how you run the process. In either case, we hope you gained a new appreciation for what’s involved and how important it is to have a great team that you communicate with while also leveraging technology when marketing your deal. With that being said – go get your deal done!
About the author: Chris Kern is a retired technology and media investment banker with over 20 years of experience as a corporate financier. Raised in New York and currently living in Arizona - Chris is the founder and president of Domain Media, a multi-channel Internet media network of networks that are focused within specific market verticals, and is a principal with ScottsdaleSeoPro.net, an engagement marketing, digital media strategy, and search engine optimization firm that serves companies in the financial services, software, and business services industries to expand their reach, do more business online, and to better connect with their target audiences. Domain Media Corp logo Contact information: www.ScottsdaleSEOPro.net Email: info[at]scottsdaleseopro.net Phone: 480-499-4269   [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Chris Kern ) [37] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 1093 [post_title] => Early-stage Startup Funding Depends on Solutions & Not Ideas [post_date_gmt] => 2014-11-18 21:53:12 [post_url] => https://aceportal.com/insights/early-stage-startup-funding-depends-on-solutions-not-ideas/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/11/ACE_NYSE-350x171.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/11/ACE_NYSE.png [excerpt] => [post_content] => This article, by James F Coffey, a partner at Nutter McClennen & Fish LLP, discusses the key principles an early-stage startup requires to move from an interesting concept to a company worthy of securing angel funding. Perhaps even more interesting is the overall concept that a company's value lies not in its idea, but in it's actual solution, or execution to a given problem. 

A Startup's Key to Securing Early Stage Funding

As a lawyer who specializes in emerging companies and a member of the Boston Harbor Angels, I hear 10-20 pitches a month by entrepreneurs seeking angel funding. There are several factors that account for success or failure in a new company's ability to attract funding. However, one common theme always rings true: all successful businesses are based on great ideas, but not all great ideas become successful businesses. [Editor's Note: For a really interesting take on why ideas matter so much for a startup see Sam Altman's Lecture at Stanford]. Let's say you're an entrepreneur. You present your slide deck to an angel group and deliver your presentation without a hitch. You think it went well. However, the angels don't like it. One of them tells you "great idea, but this isn't a business." What on earth does that mean, and where do you go from here?

Investable Businesses versus Ideas

There are plenty of great business ideas—but not all ideas and innovations generate the kind of returns that justify angel investor financing. Angel investors invest in solutions, not ideas. They take significant risk in deploying their capital, and so they naturally expect a large return. This means that there must be a large market for your business if they are going to consider an investment. Providing a solution to a major business problem that exists in a large, clearly defined and targeted market (e.g., $100+ million) will separate your business from the rest of the pack. It's essential to capturing angel investor interest, and the difference between the winners and the losers.

Go-to Market Strategy is Key

Your business solution must also accompany a well–developed go–to–market strategy to rapidly claim significant market share (e.g., 20 percent–plus). [Editor's Note: Why 20%? Market leaders capture most of the value of an industry, and that appears to be true no matter the industry. See VC Firm Firstround's post for more].  As much as your solution needs to be well thought out and easy to use, if you haven't fully developed your thoughts on how to deploy it in the marketplace, you'll have problems. Moreover, if the solution isn't wholly unique, i.e., there are other competing solutions in the marketplace, it needs to be significantly better than the others. Keep in mind that angels prefer innovative solutions over incremental enhancements to common products and services. Your proposed solution can't be an "optional" one, i.e., non–essential. It should be a need–to–have product or service.

Which Means Knowing the Target Customer

Before making your pitch to present your solution and demonstrate how it fits in the market, clearly identify your target customer. You must have an identifiable market segment and show that you have a clear understanding of the end-user/customer. Your ability to demonstrate a significant demand for your proposed solution from a targeted customer base will help clear the path for funding. Consider these two companies. The first company, Bad Co., was a platform technology company in the social networking space. It had literally millions of dollars worth of infrastructure (including intellectual property) that had been purchased, pennies–on–the–dollar, from the trustee of an insolvent company. The entrepreneurs used this pre–existing base to create a niche, online marketplace that brought together buyers and sellers of goods and services. Bad Co. established strong, strategic corporate partnerships and it marketed itself to targeted customers in the Latino community. Neat idea, but they forgot about eBay, Craigslist, and the dozens of other competitive sites already up and running. Bad Co. didn't get funded. The second company, Good Co., struggled at first trying to define its business model. Good Co. had developed an interesting technology using proprietary algorithms that allowed it to measure and collect carbon credits generated through the implementation of its bike sharing program. These carbon credits could later be sold and traded in Europe. However, after speaking with their business advisors and prospective investors, they soon recognized that in order to be successful, they needed a solution for the marketplace, not just a great idea. Moreover, they needed to provide a solution for a market that existed, not one that they hoped would exist. Once they demonstrated that their technology was a solution for customers in a targeted marketplace, specifically the "Zipcar for bikes," they were on the path to funding. Good Co.'s real name is Zagster, and it's one of the hottest new technology companies in Boston, having been selected as a TechStars and MassChallenge finalist.
The Key Takeaway for Pitch Time
So at pitch time, remember that your well–crafted explanation of the problem you solve, how you solve it, and how big of a market there is for your solution, is what you need in front of the angels. Don't waste your time talking about ideas. Solutions are heralded over good ideas all the time. Versions of Coffey's article have appeared in Xconomy and VC Experts.
James F. Coffey, Partner Jim Coffey is a partner in Nutter McClennen & Fish's Business Department. He is a member of its Emerging Companies, Venture Capital, Mergers and Acquisitions, and Workout, Restructuring and Bankruptcy practice groups. Jim has particular expertise representing companies in critical phases of transition. From start-ups or early stage development companies seeking angel funding to fully mature businesses seeking an intelligent exit strategy, Jim provides strategic counsel, contacts, and expertise to help clear the path to success.
  VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [38] => stdClass Object ( [video_url] => https://player.vimeo.com/video/101089348 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1075 [post_title] => Investor Verification Versus Suitability on Direct Investments [post_date_gmt] => 2014-11-17 17:07:10 [post_url] => https://aceportal.com/insights/investor-verification-versus-suitability-requirements/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/11/ACE_NYSE-350x171.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/11/ACE_NYSE.png [excerpt] => [post_content] => https://player.vimeo.com/video/101089348 In this interview, ACE Portal General Counsel, Jason Behrens, interviews Joe Bartlett, the Co-founder of VC Expert and Special Counsel at McCarter & English. Their conversation focuses specifically on the difference between investor accreditation and suitability, which is a vital but often obscure topic for capital raisers. The conversation also narrows in on suitability in a post-JOBS Act context. Jason and Joe's conversation is a nice precursor for listening to Dan Gorfine of the Milken Institute discuss the future of suitability in this post. or diving into Joe's more in-depth written pieces on what steps to take to verify an investor's status. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [39] => stdClass Object ( [post_author] => Victor Sowers [post_author_bio] => [post_author_thumbnail] => [ID] => 1041 [post_title] => The "Crowd" May Just Revolutionize Direct Investing [post_date_gmt] => 2014-11-12 20:10:00 [post_url] => https://aceportal.com/insights/the-crowd-may-just-revolutionize-direct-investing/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/11/tree-in-water-350x231.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/11/tree-in-water.jpg [excerpt] => [post_content] =>

Traditional versus New Models of Capital Raising

Private capital raising has typically hinged on companies and funds being able to connect to a narrow base of large institutional investors. This historical focus on only tapping a select group of large investors is largely a byproduct of a regulatory and technological framework in which the costs—whether in time, money, or compliance risk—of accessing more investors outweighs the benefit of receiving more numerous smaller checks. New innovation and new regulation are changing this paradigm. [See 'Fundraising Post JOBS Act' for more]  As this space evolves, I believe the new “normal” in private capital raising will include substantial funds being raised by a larger pool of smaller investors that have been aggregated via low-cost and scalable technology solutions.

The Old System of Raising Capital

Imagine the traditional structure of the historical private capital landscape as one giant see-saw with investors forming the base of the seesaw and the companies and funds seeking capital as the board on top. The ultimate goal is to get as many investors exposed to as many capital raisers as possible in order to foster the most efficient transfers between buyers and sellers. This is basically the definition of an efficient free market (one with open information and friction-less transactions to satisfy supply & demand). Private Capital Market Landscape

Areas of Inefficiency in the Old Capital Raising System

Clearly, however, a see-saw represents a system in a delicate and often sub-optimal balance. The companies in the middle of the see-saw (Company A), can easily access the select venture capitalists, private funds, and well-known investors that form the top of the see-saw’s base. The smaller yet more numerous investors underneath this upper strata have less exposure to these opportunities, even if they are still writing checks worth millions of dollars. The problem is even worse for companies however.  Outside of that narrow subset of companies in the middle, as you move along the see-saw (towards either 'Company X' or 'Company Z') you start encountering companies and ideas for which raising capital has historically been much more difficult, time-consuming, expensive, or downright impossible. This caps the number of good ideas and good companies that have access to capital in order to grow. As a result, private capital raising has existed in a distinctly sub-optimal way. [See 'Strategies For Businesses Seeking Capital' for more]. It has provided outsized rewards for a select few while throwing up unnecessary barriers to the efficiency of the system in general. [See this post for more on this returns argument]

Online Platforms: A New Approach

In part this explains the parabolic rise in the popularity of crowdfunding platforms. If we go back to the see-saw analogy it is easy to see that underneath this narrow layer of investors that have historically had access to this market is a much more diverse landscape of capital providers that is ready to participate in funding new innovative ideas, new companies, and up-and-coming funds. Indeed, this is already happening. The potential advantages for all parties is fairly straightforward and has been outlined in detail elsewhere: more contact points, more interested investors, more investment opportunities, and more ideas funded at better terms.  To the extent to which technology solutions can optimize the functioning of a this traditionally opaque marketplace the resultant structure for the private capital markets would be a more stable, efficient, and level playing field.

Integrating Old and New Systems for Capital Raising

This is not to say there are not advantages for a company in limiting the number of its investors. Aside from the simplicity of large block investments versus more numerous smaller tickets, there are advantages for companies in ensuring that at least some of their investors are of strategic value. Furthermore, having an order of magnitude more investors inherently complicates future communication efforts as well as adding incremental costs. As a result, a primary and still unaddressed challenge within private capital raising is merging the desire for democratized access and more involvement of retail accredited investors with the assurances of institutional level due-diligence and the benefits of having large ticket connected investors supporting private company growth. In short, the challenge ACE seeks to address is the integration of institutions and individuals into one coherent streamlined process that benefits all parties involved by lowering risk, ensuring fair and transparent information disclosures, and highlighting the benefits of professional vetting and communication of the opportunities and risks. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Victor Sowers ) [40] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 1062 [post_title] => Evaluating Private Equity Performance: Looking Beyond IRR [post_date_gmt] => 2014-11-11 19:56:10 [post_url] => https://aceportal.com/insights/evaluating-private-equity-performance-looking-beyond-irr/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/11/airplane-airport-city-1850-11-350x204.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/11/airplane-airport-city-1850-11.jpg [excerpt] => [post_content] => How do you best evaluate the performance of a private equity fund? Is there one right way? Why is the popular Internal Rate of Return  popular and potentially flawed? How do you truly gauge a manger's performance and compare it to others? How do you select the best PE Fund Manager? The answers to these questions not only take you beyond that IRR but also beyond the spreadsheets and all the numbers. This guest post, originally from Private Equity International and featured in VC Experts' Guide to Private Equity, investigates how science and art meet in evaluating private equity  performance.  

A High IRR Gets Attention

"Just look," smiles the placement agent, "at those IRRs. These guys know how to deliver serious returns." The head of private equity investment looks at the memorandum on his desk and can't help but revisit the chart showing annualised IRRs for the private equity firm's previous funds. The numbers look impressive. And that's one reason why IRRs matter so much in private equity: a high IRR figure for your fund has been shorthand for saying that you're very good at making money. When you're out fund raising, competing for the attention of an investor who is wary of taking a meeting and quick to remind you how busy they are, an eye-catching IRR is a great attention grabber. "Sure you'll have investors telling you that IRR doesn't mean anything to them, but you still find them sniffing round the number as soon as the conversation starts," says one general partner at a UK buyout firm who regularly pitches to investors. To declare that IRR is an empty formulation would be wrong, but to suggest that it has been significantly compromised in the eyes of many investors is not. As several of the participants in our Limited Partner Roundtable confirmed, a fund's IRR is regarded with immediate suspicion and is for some little more than a starting point for their investigations when evaluating a new fund. As Rick Hayes, senior investment officer for CalPERS Alternative Investment Management programme declares: "When people say that last year the IRR on VC was 30 per cent, I don't know what that means. We have a toolkit of performance measurements: one of them is realised IRR, one is the absolute cash in / cash out and there are softer measures such as how the private equity team is adding value to the portfolio companies." In fact, many investors will, like Hayes, use a combination of hard and soft methods when trying to get a better sense of the likelihood that this new fund - whether a firm's first or fifth - is going to deliver the kind of returns that warrant a commitment. But the decision is going to be driven by a host of factors - "it's still a mix of head and heart" says one very active UK LP - and it's unrealistic to expect any one formulation to deliver a definitive answer. And that perhaps is part of the problem with IRR: over inflated expectations as to what it signifies have prompted a number of investors to round on it (and the GPs involved) when a fund fails to deliver a suitably robust IRR, let alone the one that had been mooted during the fund raising. As Professor Josh Lerner, the Jacob H. Schiff Professor of Investment Banking at Harvard Business School says: "there's no magic bullet, but you still find people clinging to IRRs as the solution." But if you have decided to look beyond IRR for better indicators, what mathematical tools are you using instead to assess private equity?

Alternative Tools for Private Equity Fund Evaluation

The answer seems to be both everything and nothing. Lerner recounts how a recent visit to London had him touring both leading private equity firms and investors talking to them about performance measurement: he was struck by the fact that most were reluctant - or unable - to disclose the methods they used. Others though, who see an opportunity to encourage greater debate about private equity performance (and are keen to play an active part in this), have been busy coming up with alternative analytical tools. One such is Partners Group, the Zug-based alternative investor that runs a number of funds of funds invested in over 100 private equity partnerships. Recent research undertaken by the group focused on the limitations of IRR and looked at what credible alternatives there might be. The fact that one fund's cashflows can produce multiple correct IRRs was an immediate concern, as was the assumption embedded in the calculation that cashflows are reinvested. Next on the list of negatives was the treatment of unrealised value in a fund (see also the IRR reminder alongside this article) that made accurate and reliable calculation of the IRR all the more unlikely. Finally, the volatility of the resultant IRRs left the Partners analysts convinced that its utility as a reliable benchmark was compromised. To the Partners team it instead made sense to look for alternatives that were more reliable and which also could accommodate the unique characteristics of private equity: time weighted returns [TWR] and Investment Horizon Return [IHR] are already embraced by firms such as private capital data gatherer Venture Economics as methods that acknowledge the long term nature of the asset class [a decade is an exceptionally long investment period] and hence the time value of money. Getting your dollars back out in year two or in year ten makes a big difference to real returns. Partners also saw that the performance of a fund could usefully be indicated by its investment ratio and realisation ratio. The former is the ratio between drawdowns and outstanding commitments and the latter marks distributions against a fund's Net Asset Value. Both are illustrated in the accompanying charts. These activity ratios enable an investor to gauge what Partners described as "the market's temperature" and more particularly also lets them assess the dependency a fund has on investments and exits. Partners also looked more closely at the feasibility of comparing private equity performance with other asset classes using TWR and periodic IRRs. The accompanying illustrations help confirm that the variability of performance amongst different funds makes it an unnervingly different investment destination - the scattering of funds around the S&P500 index line is marked - and underlines the challenge for investors to pick successful funds. The other chart also delivers a broad but telling message: that different sub asset classes within private equity occupy very different parts of the risk and return spectrum. Unsurprisingly US venture sits way outside the mainstream, delivering a strong return but with a high risk weighting whilst European venture, strikingly, offers inferior returns but at much less risk - an indication of its markedly different character (investing in more mature and robust businesses perhaps but also being remote from the IPO boom that was part of the US tech bubble). As one looks more closely at private equity as an asset class it becomes apparent that the aforementioned sub-asset classes manifest particular performance characteristics. At the most basic, venture funds have a fundamentally different profile to buyout funds: the amount of capital they raise and deploy, the amount of companies in their portfolio and the nature of their realisations are all factors here. This ensures that these two types of fund can manifest hugely different IRRs which in themselves might warrant commitments to venture over buyout: some US venture funds were able to report triple digit IRRs on the back of rapid fire investments and exits for instance. But as one limited partner commented: "I'm not interested in sky high IRRs generated by a quick flip or two: give me multiples. Give me a buyout fund that gives me three times the money back and I have no interest in the IRR. It's got 10 per cent instead of 110 per cent [IRR]. Who cares?" Josh Lerner at Harvard echoes the point that a stellar IRR does not mean the best capital return: "at Harvard we remind students that putting $500 into a hot dog stand that makes $2000 may give you a great IRR but the $5000 you put into the other stand which gives you back $15,000 in the same period is preferable."

More Tailored Criteria Needed to Benchmark PE Funds

Most private equity funds are insufficiently diversified across an adequate range of industries to make direct comparison with mainstream indices such as the S&P 500 particularly meaningful. Instead it makes more sense to pare down a main index using sub-sector categories to produce a more closely matched indicator to a private equity fund. Given that most indices are based around standard industrial classification codes (such as the NASDAQ composite index) it seems appropriate to categorise a private equity funds investment portfolio according to those same codes. "Ideally this would be something that the private equity funds did themselves" commented one funds of funds manager. "If we could see the industry weightings of the portfolio broken down by classification we could begin to get a more accurate picture of a fund's performance. John Buehler's recent paper for the Institute of Fiduciary Education illustrates the benefits of this more precise categorisation of a private equity portfolio. Taking the example of a VC fund that invested broadly across the technology sector, he describes how the fund was able to declare a net IRR of 60 per cent from 1995 to 1999. If this is benchmarked against the return achieved from the S&P 500 for the same period the performance looks markedly superior: the S&P delivered 34 per cent. If though the same fund was compared to returns within the technology rich NASDAQ Composite or the S&P Technology Sector sub index then the returns gap closes: the former delivered 53 per cent and the latter 52 per cent from 1995 to 1999. Given that many investors in private equity apply a broad rule-of-thumb principle that they expect to see a 500 basis point return premium from allocation to the asset class, these revised comparative benchmarks make the returns from the VC fund sufficiently superior (being 700 basis points) but not as startling as the original comparison. But there isn't really a problem here is there? There is if you then factor in the risk premium appropriate for the sector. If the 500 bps rule applies to a mainstream index like the S&P where the risk Beta is one, then the Betas assigned to the various industries in the sub indices should be applied to sector specific funds [or for funds active in a number of sectors done on a capital weighted basis per sector). If the Beta for the technology sector is two then a risk-weighted premium an investor should expect from a private equity fund investing in that sector should be 1000 not 500 bps. Combine this revised premium with the actual returns achieved by the technology sub indices mentioned above and suddenly the VC funds IRR is inferior to both (60 per cent versus 62 or 63 per cent).

Look Sharpe: Using the Sharpe Ratio for Risk Adjusted Returns

It's possible to go a step further with regard to developing risk adjusted return benchmarks for private equity by employing the Sharpe ratio which delivers the risk-adjusted return of an investment and which enables an investor to compare returns among disparate market sectors and, as illustrated in the table, among different types of private equity funds. The Sharpe Ratio uses standard deviation principles to create a risk / reward profile for an investment: the higher the Sharpe Score the more attractive the risk-adjusted return. US Venture during the period covered in the table not only was able to deliver a pooled IRR of 37.1 per cent but also a markedly higher dispersion of returns ("the good, the bad and the ugly all live in venture says one buyout-biased LP) with a standard deviation of 153.9 per cent. In terms of pooled IRR performance buyout looks disappointing at 15.3 per cent (but don't forget that multiples mark out, to take Professor Lerner's metaphor, the hot dog stalls to invest in). And the standard deviation is notably more sober too - something that novice investors will be attracted too.
Cumulative composite US private equity funds formed 1989-2000 Net IRR (%) to investors from 1989 to 2000
Pooled IRR Standard deviation* Risk-adjusted return score (Sharpe score) Risk-adjusted return rank
All venture 37.1 153.9 0.19 3
Buyouts 15.3 44.6 0.18 4
Mezzanine 13.5 20.7 0.29 2
All private equity 24.6 85.2 0.20 -
*: All venture, buyouts and mezzanine standard deviation reported from inception (1989) to 1999 Source: Venture Economics Benchmark Reports, Dresdner Kleinwort Capital and EIF Group
  Besides the need to have a set of competent analytical tools to work with and a number of other asset class benchmarks to reference, private equity investors endeavouring to select the best funds need to compare one with its peers. This has given rise to what the aforementioned FoF LP describes as "the cult of the vintage year." Whether this benchmarking of funds that start investing in the same year has become overplayed is open to debate, but it is certainly the case that as investors examine the track record of a particular fund they can gain a vital picture of its relative performance by comparing it with funds active at the same time in the same sectors. The most appropriate comparative funds may not be proffered by the candidate fund itself by the way. The same LP again: "as you do your homework, talk to people and pull out numbers on enough funds you begin to get a much better idea of what a fund could achieve in the right market. You'll find people coming in highlighting their IRR of 60 per cent but you then see that it's a VC fund vintage 1996 and suddenly that's way below par." As the vintage year comparison table reveals, the pooled IRR for 1996 vintage year VC was nearly 100 per cent - although most will quickly point to quick flip IPO exits and the absence of sector specific risk weighting in these numbers.
Vintage Year Comparison for US Private Equity Funds
Vintage Year Type Pooled Average IRR Pooled Average Distributions over Paid-in Capital [DPI] Pooled Average Residual Value over Paid-in Capital [RVPI] Pooled Average Total Value over Paid-in Capital [TVPI]
1989 Venture 19.2 2.2 0.3 2.5
Buyout 14.7 1.7 0.2 1.9
All private equity 16.8 1.9 0.3 2.2
1993 Venture 40.0 2.9 0.7 3.6
Buyout 21.2 1.3 0.6 1.9
All private equity 26.6 1.6 0.6 2.2
1996 Venture 99.1 3.7 1.9 5.6
Buyout 12.8 0.5 0.9 1.4
All private equity 40.2 1.2 1.1 2.4
Source: Venture Economics
  Instead of drilling deeper into the analytical methods open to private equity investors, some perspective should be given on how significant these investors actually think any set of numbers, ratios or scores are. As Professor Lerner points out: "all the techniques in the world won't get you the clarity you hoped for: private equity investing is never going to be a purely scientific process." And limited partners will immediately acknowledge that the numbers are only part of the picture. In their 2002 survey of (real estate) private equity funds, Ernst & Young commented that "There is no doubt that there are inconsistencies in, and in many instances, a limit to, the types of information being provided to investors." The report also acknowledged that the pronounced variability in what different funds used to evidence their performance made "comparability of performance between funds during their terms based solely on traditional return measurements [are] both insufficient and impracticable." Unsurprisingly, too many investors have seen too many varieties of numbers to make it possible for any fund to let their numbers do the talking. In this respect, moves by the Association of Investment Management and Research (AIMR) to try and establish an orthodoxy to performance reporting can be seen as trying to re-establish some credibility. As the Association says in its summary to the proposed venture capital and private equity provisions: "These principles are meant to bring consistency and transparency to the valuation methodologies used… Without the foundation of a meaningful valuation, the various calculation and reporting provisions are not of much value." Interestingly a survey currently being undertaken of European LPs by a European placement agent has preliminary results showing that the numbers are ranked as the most important factor when evaluating a new fund. More admittedly anecdotal evidence when interviewing US LPs would suggest that significance of the numbers for these investors would rank below both the people involved and the proposition or strategy of the fund. Whether this indicates a healthy scepticism on the part of the US buyside born of experience with the numbers may be debatable but every investor will agree that the non-mathematical, non-quant, non-scientific factors are vital when formulating that investment decision. Says the FoF LP who is busy investing his latest fund across a range of funds from all sub asset classes of private equity: "I ignore the numbers. I read the bios of the guys, look at the plan then, and only then, maybe flick through the claims they're making for their past performance. Do I rely on these? Never. Will I through them back at the guys when I meet them? You bet."

IRR: A Reminder of its Ubiquity and Utility

Even if some are now recommending that a fund's Internal Rate of Return should only be one of a set of analytical tools used to evaluate private equity performance, and that these tools as a group are complements, and never substitutes, for "softer" criteria, there's no getting away from the fact that IRR matters to a lot of people a lot of the time. Proponents will claim that it is the best of a bad lot when it comes to producing useful numbers from that analytical toolbox, as it is capable of reflecting the diversity of cashflows into and out of a private equity fund. In comparison, for example, calculating Time Weighted Returns (TWR) removes the impact of these cashflows. And because the GP controls the cashflows into and out of the fund it is important to use a tool such as IRR that recognises the effect of these flows - and hence factors in the time value of money. "The decision to raise money, take money in the form of capital calls and distribute proceeds is totally at the discretion of the private equity manager. Thus timing is part of the investment decision process and thus the manager should be rewarded or penalised by those timing decisions," reminds AIMR in its reporting recommendations proposal for private equity firms. This also happens to serve as a good reminder as to why some GPs will spend significant amounts of time mapping out cashflow schedules that optimise IRR. Just ask a lawyer who has spent considerable time on behalf of his limited partner clients negotiating revisions to the compensation clauses in a fund document where the fund's IRR was critical to determining who got how much. "It's amazing how the distribution of hundreds of millions of dollars helps focus people's minds...."

Modifications to IRR to address Weaknesses

IRR proponents, and in this regard this includes the AIMR, will also remind you that because the typical private equity fund is a fixed life, closed fund with a set total amount of capital (in other words, is neither evergreen nor open-ended), then IRR is well suited to accommodate the kind of cashflows that occur. In their estimation, because of the straightforward nature of the cashflows and the closed-end basis of the fund, there are few scenarios that will beat IRR. Some will also add that its calculation is made even more straightforward - as soon as anyone discovers the XIRR function in Excel that lets you incorporate daily weighted cash flows. Others, Professor Lerner at Harvard included, question IRRs reliability and simplicity. Not because it is intrinsically flawed but rather because it can be manipulated and also because it can give more than one mathematically correct answer. Says Lerner: "One of the biggest problems is what in academic terms you could call multiple roots: that a single set of cash flows can produce multiple IRRs. This happens where there are cash flows that go in and come back, then go in again then come back. For instance a fund draws down some capital, had a quick hit with an IPO and distributes the shares to LPs, then draws down a second and third tranche of capital. There you have a situation where a calculation can produce two or three IRRs each of which is a right answer." And it's worth noting too that the Excel spreadsheet you've used will not alert you to the alternative IRRs that are computable, adding further to the likelihood for confusion. What about manipulation? Professor Lerner prefers to call it "gaming" but the principle is the same: by engineering the cash flows you can produce a startlingly high IRR. One tactic is to use a "time zero" approach where instead of taking in cash flows as they occur, people instead aggregate them as if they all occurred on day one. Fans of IRR at this point may simply shrug and tell you not to blame the tool when you should be blaming those who abuse it. Others will suggest you use Modified IRR. Given that the uneven and variable nature of the cash flows into and out of a private equity fund can create multiple correct but different versions of its IRR, some suggest that this, a "purer" version of IRR, is preferable. To calculate Modified IRR you assume that a single contribution (capital call) is made to the fund at the first date of calculation instead of multiple contributions over time. To reach this figure, each contribution is given a present value for the date of calculation by discounting it by an appropriate benchmark [such as the Treasury Bill rate]. Some modify the equation further by also applying this principle to the distributions out of the fund as well: again, the aim is to establish a single figure [in this case the distribution value at a particular close date] to feed into the IRR calculation. To achieve this, you again have to apply a specified rate of an appropriate comparative (such as a public equity index like the S&P 500) so that the cash flows coming out of the fund earn money according to a specified schedule from the day of distribution until the effective date of the IRR. This is achieved by compounding each distribution by that specified comparative rate to a future value at the effective date. The result, in the end, is a very simple IRR calculation, using one cash flow in and one cash flow out. Now's a good time to introduce another fundamental issue that makes a fund's IRR open to question and this relates to the valuation of the unrealised portion of the fund. Although the cashflows out of a fund can be given a hard value (some will be cash, others will be stock and these latter outputs can be open to varied valuation as the chart in the main feature illustrates), the unrealised portion of the fund has to be ascribed a valuation too and this is far more subjective. In this regard critics of IRR argue that as a measure of portfolio performance it is a just a retrospective assessment of the net between cash inflows and outflows. It, they argue, completely ignores residual value and is therefore incomplete unless the fund has been liquidated or is near liquidation - when the unrealised value of the fund has become insignificant. Many, GPs included, will acknowledge that the valuation of the unrealised portion of a fund is difficult - or in other words open to debate. In an effort to try and bring some sort of consistency to the valuation process both the EVCA and the BVCA have released guidelines for its members suggesting valuation methodologies to employ - but these are no more than guidelines and it remains very much up to the particular GP to decide how they want to value their portfolio. One important factor here is the extent to which a fund's advisory committee is able to review and approve all asset valuations for the fund. This is where a fund's existing limited partners can gain a clear picture of that unrealised portion of the portfolio and a growing number are asking for information at the portfolio company level, including quarterly summary financials for each company and a report from the GP assessing whether the investment is tracking on, below or above targeted IRR. This though is not something that readily reaches prospective investors in a fund and it is down to the new investor in their due diligence to examine the make up and valuation of the unrealised portion of a firm's previous funds to gain a more accurate picture of it's real potential. A continuing issue since the upheavals of 2000 is the extent to which private equity firms have written down the value of their portfolio companies in the wake of the profound devaluations of publicly traded companies operating in the same sectors: technology in particular. Some are still holding these investments at the valuation determined when they first invested, others have trimmed the valuation to match the latest round of financing, whilst a (very) few have taken it on the chin and written off some of their portfolio entirely. UK listed private equity group 3i is a case in point here: their prompt writing off of portions of their technology portfolio had other venture capital firms who were invested in the same companies alongside 3i blanching at the prospect of having to do the same. As a director at one such firm said: "I knew those guys had upset the apple cart as soon as I started to get calls from my limiteds quizzing me about the companies we were co-invested in."  

VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries.

[post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [41] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1054 [post_title] => The Latest on Private Company Trading Platforms [post_date_gmt] => 2014-11-07 14:51:39 [post_url] => https://aceportal.com/insights/the-latest-on-private-company-trading-platforms/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/10/NEW-Insights-Logo-350x136.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/10/NEW-Insights-Logo.png [excerpt] => [post_content] => The private capital markets continue to grow, both in terms of primary and also secondary transactions, including liquidity events for pre-IPO companies.  How will new regulatory changes, including the JOBs Act, impact the development of the market?  What online platforms are emerging that can help bring efficiency to the private placement marketplace and increase liquidity for private shares?  And how does this all impact and improve equity compensation programs for private companies?  This webcast [transcript below] entitled "Private Company Trading Markets: The Latest" hosted by CorporateCounsel.net brings together industry leaders including Peter Williams, CEO of ACE Portal, Gregg Brogger, President of Nasdaq Private Markets, Annemarie Tierney General Counsel of SecondMarket and Dave Lynn, Partner of Morrison and Foerster to discuss their insights and these topics and provide their views on how the market will shape up.

Why Private Markets are so interesting today

With the continued growth of stock markets that allow for trading in pre-IPO companies, many are wondering how the federal securities laws can be complied with when trading on them. [For video interviews on aspects of compliance see here and here]. One of the most interest things going on - besides the liquidity aspect of all this and the related impact on equity compensation - is the emergence of new businesses building on top of the secondary trading markets. This is a fundamental shift in the world in which private companies operate, including their expectations of confidentiality. There are also endless technical issues beyond the obvious ones, including how these new markets affect the various definitions of "public trading market" used under tax and securities laws (280G, 409A, Reg S) and how this can impact private company valuations. This Webinar discussion featured the following key market players:

Private Market Topics in this Webinar

Broc Romanek, Editor TheCorporateCounsel.net: Welcome to today's program, "Private Company Trading Markets: The Latest." It's a bringdown of a program we did a few years ago. There have been a lot of developments in the area since then. I'm very excited about this program. Let me go ahead and introduce our panel for this webcast. Greg Brogger is President of the Nasdaq Private Market - he'll explain what that Market is. Dave Lynn is my co-editor of this site and a Partner of Morrison & Foerster. Annemarie Tierney was formerly with the NYSE; she's now General Counsel at SecondMarket. And Peter Williams is the CEO of ACE Portal. I'll turn it over to Peter to kick us off with an overview of the current private capital markets environment.

Current State of Private Capital Markets

Peter Williams, CEO, ACE Portal: As Broc said, I wanted to give sort of a lay of the land. The private capital markets, as many people know, are actually going through a very transformative state right now, in large part due to some recent regulatory changes, primarily the JOBS Act. In particular, Title Two of the JOBS Act lifted the ban on general solicitation for private placements, and Title Five increased the maximum number of shareholders allowed in a private company fourfold, from 500 to 2,000. The historic private company market infrastructure is not equipped to handle this market transformation. Historically, private offerings have been marketed over the telephone, typically via one or two individuals in the Capital Markets Group, and by one-to-one conversations. The number of investors in a private placement has typically been quite low. At the same time, we're seeing some trends in the public markets that are making it more costly and sometimes more difficult to be a public company. So companies are either electing to, or being forced to, stay private longer. As a result, this is becoming a much more important marketplace. We're seeing a need for broader marketing campaigns, an expanding universe of market participants relative to what it's been before, and heightened scrutiny around regulatory compliance. I think we'll see a lot of technology platforms being implemented. At the same time those are implemented, all participants will need to be particularly cautious around ensuring that compliance is met and regulatory oversight is maintained. I think we will see in some areas people proceeding with caution. Unfortunately, in other areas, people may be jumping the gun. We will probably see some bad actors over the next couple of years as well.

Size of the Private Capital Market

In terms of framing the size of the market, a lot of people don't know that the U.S. private market - the new issue private market anyway - is larger than the new issue public market. We're $900 billion per year. The secondary market is much smaller - I'll get into that momentarily. The market is also growing at a 15% compound annual growth rate. So we see this as an increasingly important asset class relative to the public markets. Here are some statistics. As part of the $900 billion annual market, there are over 30,000 Regulation D private offerings in the U.S. annually. About 45% of those are greater than $5 million. The average transaction size is approximately $30 million, but the median is about $1.5 million. So, there are obviously a lot of small transactions. The secondary marketplace has been smaller as a result of limited liquidity, historically capping out in probably the $25 to $30 billion range. And a smaller portion of that would be the corporates; the larger portion is represented by the LP interests in alternative funds. If you look at the statistics, there are over 40,000 qualified institutional buyers in the U.S. and 3,000 family offices, but over 8,000,000 accredited investors. There are currently 500,000 qualified purchasers, whom control $440 billion of alternative fund interests. When you compare that to the $25 billion in historic secondary market size, there is obviously a very large opportunity that increased as liquidity increased. About 230,000 investors participated in Reg D offerings in 2012, but the average number of investors per transaction has been limited - about 13. There was very limited reach on marketing programs [because they were] done one-to-one. We anticipate that expanding. In terms of performance, Duke and Ohio State did a study of the performance of private investments relative to public over the period from 1984 to 2000. During that period, private investments earned 18% more than the S&P 500. There have been similar studies elsewhere. Obviously there are tradeoffs between public and private investments. Investors need to consider whether they're traders or investors and what their liquidity requirements are. You'll never get the same liquidity in the private market as you will in the public markets. But if you're looking at investing over a long horizon and liquidity isn't critical, private investments can be an area you want to consider. Interested in allocating to alternatives? See this article and this one on allocation considerations]. Issuers considering public versus private have to consider the regulations, the cost of compliance, and the size of issuer. These are the kinds of things that go into their decisions.

Implications of the JOBS Act

We'll get more into the JOBS Act later on. Just quickly in terms of background - as I mentioned earlier, Title Two, which lifted the ban on general solicitation, was really critical. Historically, agents or issuers were not allowed to reach out to any investors with whom they did not have a substantive preexisting relationship. So, while a lot of people refer to the term advertising or solicitation, and think that means the standard definition of advertising (billboards or letters), the traditional rule really meant that you couldn't reach out to investors whom you didn't know. With that ban lifted, you can still do transactions in a confidential manner, but you can avail yourselves of the safe harbor to ensure that you don't run afoul of those rules. The second JOBS Act issue that I mentioned was Title Five. The increase in the maximum number of private company shareholders from 500 to 2,000 is very significant. It should increase liquidity over time Again, historically, the average number of investors in as private transaction has been 13. So a 500-shareholder maximum really wasn't an issue for private companies unless they got larger, which we saw with Facebook and other companies. Going forward, I think you'll see transactions being more broadly dispersed, and that increase in the shareholder limit will become important. That was a very quick overview of the current landscape of the market, both primary and secondary.

Legal Issues of Private Market Transactions

David Lynn, Editor, TheCorporateCounsel.net and Partner, Morrison & Foerster: Great. We'll turn it over to Annemarie to talk about some of the legal issues that come up in this space. Annemarie Tierney, General Counsel, SecondMarket: For some background, SecondMarket has roles in both primary offerings and secondary offerings. I will talk about our role as I walk through the legal issues that we see as we do transactions in this space. Peter is completely right - the impact of the JOBS Act cannot be underestimated. Peter noted the statistics on how many securities are offered under private placements versus the public offerings. I think that has been a historical trend that's going to be even more pronounced as companies can choose to stay private longer. We were pretty involved in the parts of the JOBS Act that Peter talked about - the general solicitation piece and the 2,000 shareholder piece. We were seeing private companies, including our own, being forced to consider going public because they had issued securities to a significant number of employees over time. Those employees had securities that vested, and as either RSUs or options were exercised, they became shareholders that counted towards the 500 number. And companies are deciding to stay private longer. According to the last statistics I saw, about ten years ago a successful private company would take four to six years to go public. The numbers now are more like 10 to 12 years. So, as you are growing and hiring more employees, you start to have a significant number of shareholders who can't get liquidity for their securities. When we started in the secondary space in 2007, we were focused on providing liquidity for well-known tech companies. We did a big market in Facebook shares and some other well-known private companies. At that point, Facebook was not that concerned about secondary trading in their shares, because they were preparing to go public. So they weren't really trying to limit secondary transactions. Secondary transactions are what really impact private companies. The shareholder number that triggers registration is now 2000. And that number excludes shares that are issued to employees under exempt equity compensation plans. Most of the companies that we deal with, at least a significant number of private companies in this space, have rights of first refusal on the securities being transferred to a third party or have some limitation of shareholders' right to transfer. Maybe there's a board approval requirement. All these transactions need to be taken into consideration by the company and their independent valuation entity when they do a 409A valuation, generally at the end of every year, to decide the price at which they're going to offer equity in the following year to their employees. Even with the private company limit now being 2,000 and excluding employees, companies are still cognizant of the impact of secondary trading. What we were seeing back in 2010 and 2011, before the JOBS Act passed, were companies actually asking us not to transact in their securities. They didn't want the burden of the paperwork that had to be dealt with around the right of first refusal, board approvals, and their 409A valuations. So we took a step back from the secondary trading that we had been doing and started trying to figure out what companies really wanted in the space. Secondary transactions are generally done either pursuant to Rule 144 if somebody has held the securities for 12 months - but that exemption is not available to affiliates - or under "Section 4 (1 ½)" which is not actually a codified Federal exemption but a structure or a construct that's been developed under case law and by the securities bar. The "Section 4 (1 ½)" exemption is in-between a Section 4(a)(1) exemption and a Section 4(a)(2) exemption. A holder of securities can be deemed to have basically a good 4(a)(1) if they follow the parameters - I'll talk about that in a minute. It was really easy to make a market in a company like Facebook. But when we tried to create liquidity for companies that were not Facebook, or who were not other really well-known, well- followed companies, we realized that the biggest stumbling block to creating liquid secondary markets, in a traditional broker-to-broker fashion or a negotiated matching system, were the state Blue Sky laws. Since "Section 4 (1 ½)" is not an actual Federal exemption, all transactions of secondary shares have to comply with the state laws in all the states where potential buyers are located. About two years ago, we did a really in-depth analysis of all 50 states and the exemptions that are generally available for secondary trading in each of those states. We put out a survey, which is available on our website at secondmarket.com in our legal research room. We found that, even though a majority of states had adopted similar language, many states interpreted similar language differently or imposed different limitations. The exemptions generally relied on by sellers in the secondary sales of private company shares are we call exemptions for "isolated non-issuer transactions." If you were a holder of shares in a private company, and you weren't an executive or an affiliate of that company, you could sell securities in secondary transactions. But it depended on the state how many transactions you could do a year. And it depended on the state how many people you could actually sell to. So that was pretty problematic. The other exemption that was pretty well used was the broker/dealer exemption. But in that context, the transaction has to be unsolicited. FINRA and SEC rules say that if a broker/ dealer had a substantial preexisting relationship with a client, as Peter noted earlier, in the private placement context pre-general solicitation - Rule 506(b) now - the broker could reach out to its existing client base to find out if there was interest in a private primary placement. That's not the case with secondary sales. You can't reach out, as a broker/dealer, to your existing client base. That was very frustrating, because the disconnect between federal law and state law in that case didn't make very much sense to us. So we started working with NASAA, the North American Securities Administrators Association, about two years ago on a potential new Model Exemption that would create a new model for secondary trading. NASAA was very receptive to it. The upside for the states is pretty significant. If employees or former employees of a private company exercise options, for example, in a state with an income tax, they pay an income tax on that exercise. And when they sell their shares, they pay a capital gains tax. So secondary trading has pretty significant tax ramifications for states. It also makes companies more attractive to employees if people know that they would be able to actually sell their shares and get liquidity pre-IPO. So we worked with the states and, as I said, they were generally very receptive. We worked with their Board and their Corporate Finance Committee. But the states haven't, as of right now, adopted the Model Exemption. In the meantime, some of the members of Congress that we worked with on the JOBS Act pieces had reached out to us to ask whether there were other problems in the secondary markets. We started working with some members of Congress on the House side, Representative McHenry first and foremost, on a bill that would actually codify "Section 4 (1 ½)" at the Federal level, and make securities sold under this new exemption, which was proposed Section 4(a)(7), also exempt from state Blue Sky laws. Happily Dave Lynn was one of the think tank people who helped us come up with the language, when we were asked by members of Congress for some input into what the draft should look like. That was pretty exciting. That bill was passed by the House Financial Services Committee back in May. We're looking to find some bipartisan support for it and some Senate support as well to assist the Congressman who's proposing the bill to get it into what Congress is thinking might be a JOBS Act 2.0. So that's what's happening on a secondary front from a regulatory and legal point of view. More down in the weeds, what we're seeing is that companies, although they can now have up to 2,000 shareholders excluding employees, still care about things like rights of first refusal, and tax implications. As we worked with the various law firms and companies that we have relationships with, we realized that what companies really wanted was control over all of aspects of the secondary market programs. About three years ago, we switched our program, so that what we do now in the secondary space is really to facilitate private tender offers. Either company buy-backs or third party private tenders are done under Rule 14(e). In the context of these programs the company gets to choose parameters - for example, existing shareholders who are employees can sell maybe 20% of their vested equity. They provide data and disclosure through a virtual data room that's on our website. All the documentation is signed electronically to prevent the possibility of an incorrect tender. We put the whole process on our electronic platform, taking out the guesswork from share ownership and how much you're allowed to tender. It's been a really popular product, and we've gotten a lot of positive feedback from the law firms and the companies who we've worked with. Just as an example, in 2014 we've closed about $1 billion worth of these private tender offers. About 40% were company buy-backs, and 60% were transactions where a third party, generally an institutional buyer or a group of institutional buyers, were reaching out to companies to buy either preferred or common, or whatever the classes outstanding were. We see the secondary space heading more towards these privately negotiated transactions than historical liquidity programs, which is what we used to call the auctions that we did in private company stock. On the primary side, we're seeing a back-and-forth between whether companies are choosing to generally solicit and whether they're not choosing to generally solicit. Dave will talk a little bit about the proposed Reg D changes that I think are creating an overhang on the marketplace. When the SEC finally made effective the rules that allow general solicitation last September, they also proposed rules that would impose some requirements on private companies that would create a friction in choosing to generally solicit. We're seeing a pickup in general solicitation. The CFTC passed some rules a week or so ago that made it clear that hedge funds had the ability to generally solicit around private transactions, which I think will mean that more issuers will choose to generally solicit if they want to. As Peter was saying, it's not that they're putting up billboards or sending out letters. But under the new rules, companies are able to reach out to people who are not already clients. They're able to have a website that's open to the public. Many issuers are choosing to utilize electronic platforms to facilitate private placements. Some companies are choosing to disclose the fact that they're having an offering outside an accreditation wall and some are choosing to stay inside accreditation walls, so that only accredited investors have knowledge of the offerings, which is a typical 506(b) structure. What's helping people get comfortable around general solicitation is that there's an increased amount of guidance out there. The SEC set out some guidance a month or so ago around how to verify accreditation. And we put out our own FAQs. Part of the product that we offer on the primary front is all the aspects of closing primary offerings. We don't actually introduce capital or buyers to companies. But we do all the parts of the transaction that are closing-related. So issuers come on our platform. We do background checks on them. We do document execution. We do accreditation verification if the company chooses to generally solicit. And then we do closing and fund settlement. We've gotten a lot of experience around accreditation verification. I think that issuers are finding that investors who want to get into big transactions are generally willing to provide the documentation. It's painful the first go-through. But once angel or other more prolific private investors are interested in other companies, they're willing to do it again. We're hopeful that the SEC will continue to put out good guidance here and that more issuers will be willing to consider general solicitation. But I think a lot will depend on if and when the SEC actually adopts the proposed Reg D changes, which will have some impact on what companies have to do in the context of 506(c) offerings, what they have to provide to the SEC and some other items. So that's what we're seeing in the primary tender offer space.

Structuring Private Company Liquidity Programs

Lynn: Thank you, Annemarie. Greg, maybe now you could talk a little bit about the structuring aspects of private company liquidity programs - how those come down and what they look like today. Greg Brogger, President, NASDAQ Private Market: Sure. First of all, thank you for having me on the program. By way of slightly further introduction, I'm the President of the NASDAQ Private Market. That's a joint venture between NASDAQ and SharePost, which is a company that I founded in 2009. The NASDAQ Private Market is a platform for private companies to do a number of different equity-related things. Certainly the most relevant of those things for this panel conversation is the running of the liquidity programs that we've already been discussing. We also do things like managing capitalization table and stock plans and integrating that into liquidity programs. The focus of my few minutes here is going to be, just as you said, Dave, on what questions or considerations companies need to think through in structuring a liquidity program. As Annemarie said, more and more companies are doing these. There are emerging best practices, or at least, we're starting to see where most companies are going with these programs. Naturally it starts with - why is the company doing the program in the first place? What are its objectives? That kind of breaks down into a couple of different points, but the first and foremost is - who are you providing liquidity to? Generally it's to employees for the purpose of enhancing the private company's ability to recruit the best team members and to retain them. There are alternative purposes around providing angel investors liquidity, or liquidity for other players, such as strategic investors or venture capitalists. But that is the minority of these programs. Another key objective that will have a lot of impact on how the program is structured is - who are the investors? Is it a VC that's already invested in the company and already sits on the board? Or is the company seeking new investors? It could have a number of different reasons for that, such as bringing fresh capital or long-term deep-pocketed institutions to the company. Then there's a grab bag of other situational factors, things like how close the company is to an IPO, or what sensitivity the company has to financial disclosures. The last factor I'll mention is whether the liquidity program is happening in conjunction with a primary capital raise or whether it's a standalone program to provide selective liquidity to particular shareholders. Because so many companies are situated differently or have different objectives along these lines, it's hard to say that there is a single type of program that's getting run. But I would say, as we go through these key questions, that the most popular program that we are seeing amongst our clients is one in which the objective is to recruit and retain employees and where the company already has identified particular buyers, be they existing investors or just investors that have been dialoguing with the company and that the company is now comfortable with. The capital raise portion, or the introduction to new investors, generally is already accomplished by the time the liquidity program is to be conducted. So with that as our assumption set, I'll talk about the key terms. I'll try and provide some concrete examples as we go. I think the key topics the company has to decide on are the price and terms by which the shares will be repurchased, the legal structure, the amount and type of disclosure and to whom, and the parameters for the participants. Who gets to sell into the program, and what are the limits on their participation? Lastly, there are the execution details - how the program is going to be run, the timing schedule, etc. To start at the top - price and terms. There is certainly some sensitivity here amongst companies as to how price is set and who exactly is negotiating on behalf of the sellers. I think companies see a certain amount of liability. By the way, I'd certainly like the other panelists to jump in here, because almost everything that I'm talking about has legal impacts. So, Annemarie, feel free to chime in, because I know you see a lot of these issues pop up every day. In any case, the price and terms are usually figured out on the front end of the program, because of course, without those, the program can't move forward. Typically, by the time a program gets to us, the buyers have been selected and the price has been set. One of the issues that gets navigated with the buyers in conversation with the company are some of the 409A concerns. That is one of the most important issues to navigate. There are different structures that we're starting to see to make that an easier approach. Some companies are differentiating the common stock that's being sold in these programs from other common stock being valued for 409A purposes, by creating some set of ancillary rights that might go to the buyers purchasing within the program. That's I think somewhat inventive. We haven't seen it pass scrutiny in either the case law or amongst the regulators. But we're starting to see some experimentation there. It certainly makes some sense to us, and there is come precedent for it amongst 409A evaluation firms. Once price and terms are set - so now we know who the buyer is, we know what the security is, and we know what rights the buyers going to take once the transactions are closed - we then move to a legal structure analysis. There you see the typical securities law analysis around what exemption is being used. Everyone prefers of course the safe harbor of Rule 144 where it's available. But frequently Section 4 (1 ½) is something companies get comfortable with. Law firms, of course, are involved both on the investor side (the buyer's side), as well the company side. Different platforms are always looking to be helpful in that securities law analysis, to make sure that everybody's comfortable. That's obviously a crucial part of the program. One of the advantages I think in using the platforms - and by platforms I'm referring to SecondMarket or NASDAQ Private Market, or others that are just getting started - is that because they run these programs so frequently, their systems are hardwired, in a sense, to provide compliance. So disclosure is tracked and issuers can always after-the-fact go back and take a look at who saw what, when. And the holding periods are logged into the system. So generally companies feel more comfortable, at the end of the day, that they will have a program that meets all of the SEC's rules and all of FINRA's requirements, and they can sleep better at night when a large transaction gets done. So the legal structure is critical. Moving on to the next topic, disclosure becomes an enormously sensitive issue. One of the great benefits to being a private company is that you get to be very selective as to who you share what level of financial information with. Since the beginning of this current version of the private market, the presence or absence of financial information in the marketplace has been what has driven the secondary market for shares. Even in the company-sponsored liquidity programs that we're been talking about, it has been the central issue - outside of companies like Facebook, because, as Annemarie said, in those companies people were willing to buy and sell without direct disclosure from the company. But by and large, in almost every other case, disclosure is a prerequisite. That situation, at least on the buy side, is much easier if the company is dealing with an existing investor. It's likely, if they are a preferred stock investor, that they already have information rights. So there's no incremental information that needs to be disseminated. Typically the companies that are conducting these programs are used to raising capital. Generally the only companies running secondary liquidity programs are ones where there is an excess amount of investment capital seeking the company's shares. Otherwise, they'd probably just be taking what capital is available for primary purposes. So they're typically successful companies when it comes to raising capital. And they share financial information in the traditional way with institutional investors under nondisclosure agreements and such. When you move the capital transaction into a situation where you now have 100, 200, 500, or even 700 simultaneous sellers, almost all of whom are going to be company employees, it becomes a much trickier issue. One of the things that certainly we would encourage, and that others have encouraged, is a symmetry in disclosure, so that both the buy-side and sell-side have access to the same information at the same time, ideally at the point of, or just immediately prior to, the transaction. One of the key questions that companies have to navigate in deciding whether or not to do these programs is how much information they are willing to share, and with whom. I think one of the advantages, again, in using a platform is that they provide some measure of control around how that information is shared - typical data room security things like watermarks or online non-disclosure agreements. They do provide some level of protection. But companies that think of liquidity as part of the price of recruiting and retaining employees need to get comfortable with some amount of disclosure. At the NASDAQ Private Market, as you might imagine, there is a huge amount of focus on creating a fair and transparent marketplace. We have a series of requirements for minimum levels of disclosure, which companies can always exceed if they choose. What we require are generally trailing financials. We encourage management teams of companies to provide some sort of going-forward insight into the company's expected performance where that's possible. But that's more of an optional thing. Certainly that's going to be something that gets discussed internally at a company with its board and senior team and with the platform on which it's conducting the offering in any liquidity program. The next key decision that a company makes in organizing a sponsored liquidity program is to decide who gets to participate - who gets to sell. In the example that we're talking through now, we're looking at a company whose primary purpose is to recruit and retain employees. A typical set of parameters might be that the company says this program is open to employees who have been with the company three years or more. And those eligible employees are able to sell up to 15 or 20% of their vested shares. In that way, a company is not throwing open the doors to liquidity to people on their first day at work. It creates an incentive to stay at the company. And even when participating in the program, employees are limited in the number of shares that they can sell, so that they're not disincented - they are not able to cash out of their position in the company. Again, that helps the company with retaining employees over time. More and more private companies, as they get larger and larger, find themselves competing for senior executives or midlevel executives with public companies, where liquidity for equity compensation is much more reliable. Offering a program of the kind that we're talking about on a reliable basis - maybe once a year, maybe twice a year, or something like that - gives private companies a way to offer a similar sort of benefit along with the rest of the compensation package. The parameters for the participants of course go back to the objectives. As you can imagine, what a company is seeking to accomplish is what is going to really drive who's eligible to participate and the limits upon their participation. The last piece that I'll talk about is the execution of the program. I think most people in the audience are familiar with the relatively cumbersome, expensive process for a transaction in unregistered securities - the right of first refusal, legal opinions, etc. The documentation for this type of transaction is not a simple thing. If you imagine having 500 participants essentially closing a private company transaction all at the same time, the need for some level of automation becomes apparent. Typically, the companies that we talk to will say that at any point that they've tried to do one of these programs on their own for 20 or 25 employees or more, that's the point at which it just becomes unworkable. Typically, companies are not going to have the staff to do this - either because it's the first time that they've done it, it's not their core business, or they're not very good at it. It becomes a more or less full time job for the CFO and/or the GC, if you're trying to run a program with even 30 different participants at the same time. So using a platform is important for that reason, as well as some of the other reasons I've already talked about. Think through what you need in a platform, meaning the scale of the platform and what sort of services it provides in addition to just the liquidity program piece. Are there escrow functions? Is it a broker/dealer? Is it an alternative trading system? Can the platform help you find investors? Is it integrated into other equity functions in a way that would be helpful to you going forward? You can imagine, if you're closing 500 simultaneous shareholder transactions, then having to take that information and port it over to your capitalization table system. Trying to reconcile the two can be a pretty significant headache. There are, at this point in time, two major alternatives out there in the market. There are probably others getting started now as well. We encourage private companies contemplating these transactions to have more than one conversation. Once you've picked your platform, much of the process fortunately gets taken out of the company's hands. It's probably more correct to say these processes can be put on something like autopilot, because the process is hardwired into the way these platforms work. So all these issues and the inputs - price, terms, legal structure, disclosure, documentation, etc. - once given to the platform, they all have a home on that platform. That can obviously make it much easier for the company to operate that program. I don't know if there are any questions from anyone else on the panel. But I'll stop there.

Secondary Trading Policies for Pre-IPO Programs in Private Companies

Lynn: Great, thanks very much, Greg. I'll just spend a couple of minutes batting cleanup on some of the legal issues. I think we've covered the landscape pretty well in terms of the types of things that you think about when you're addressing these transactions. The first thing that I think is very important to keep in mind when advising private companies today is from the get-go trying to be organized around things like record-keeping and the types of policies that you're adopting with respect to the transferability of the company's securities and what types of restrictions there are going to be. The right of first refusal, which we talked about, is pretty universal. But the company might also decide whether there are going to be any other transfer restrictions as part of the equity awards that are made to employees.

Record-Keeping Issues

Lynn: Going back to record-keeping, when you think back to a world where a company could anticipate eventually going public one day, there wasn't as much of a focus on record-keeping, because you knew you could clean up the capitalization and everything else pre-IPO. You might be inclined to keep track of things on the back of a napkin, or on an Excel spreadsheet if you were a little bit more ambitious. What you always see when you go into these situations is - who got the options? Are there resolutions? Are there board minutes? Were the terms of the awards specified somewhere in a document. And how can you verify all that for the purpose of facilitating the secondary market type of transaction? So my counsel to companies today is that you might want to make sure you're thinking about the possibility of these liquidity programs down the road when you're trying to design your internal controls around your equity compensation practices, and even your regular transactions in securities with your angel and venture capital investors and others. You should utilize the technology that's now available to do that in a way that's going to be much more productive if you decide one day down the road to allow people to cash out.

Company Policies on Secondary Trading

Lynn: In terms of the issues around transferability, rights of first refusal and the like, thinking back to when Annemarie and I did this webcast in 2011, we were at the tail end of a lot of focus around the possibility that companies could be subjected to these secondary market transactions when they really didn't want to be, and what the ramifications of that would be. There had really been a lot of focus on how the company could maintain control in such a way that they weren't going to trip the 500 holder of record registration provisions that were in existence at the time, pre-JOBS Act, and how they were going to avoid having shares get into the hands of competitors, people they didn't like and people that were outside the control and scope of the company. I think the world has changed a little bit. While a lot of those issues are still absolutely critical and require focus on the part of the company and their counsel when doing the initial financing rounds, today we're in a much different environment than we were back in 2011.

Other Issues

Securities Law Issues

Lynn: In terms of some of the issues that come up from a securities law perspective, I think we've talked a lot about how people look at these exemptions. The private tender offer world, that Annemarie mentioned, is a very useful mechanism, which enables you to set up a program for a third party or for the issuer to repurchase securities. I often run into some level of surprise that the SEC's tender offer rules extend to companies that aren't public companies. Regulation 14E, the anti-fraud tender offer provisions, makes no distinction between whether your company has securities registered under Section 12 or not. It's really sort of the baseline regulation. So keep that in mind. This is why it's helpful, I think, to look to the platforms to try to structure these transactions. There are very specific requirements that apply in Regulation 14E tender offers. There's a minimum time period in which the tender offer must be open. It has to be at least 20 days. Tierney: Twenty business days. Lynn: Exactly - 20 business days. You have limitations around situations where you are increasing or decreasing the amount of securities sought, which can result in an extension of an offer period. You have the prompt payment requirements that people are familiar with. You have notice requirements in the event of an extension. Some of the other things that people sometimes are particularly surprised about are of the ability to make purchases outside of the tender offer under Rule 14e-5-type situations, as well as some limitations on the types of trading that might occur in connection with the tender offer under Rule 14e-3. So it's a very comprehensive regulatory environment. It's certainly nothing like doing a public company tender offer. But it's nonetheless a regulatory environment. It helps to slot yourself into a preexisting, established framework in order to accomplish it in a way that's compliant.

Technical and Execution Issues

Lynn: Last but not least, I will pick up on one of the topics that Annemarie mentioned. One of the issues from a primary offering perspective that people have continued to focus on is that while the SEC, in accordance with the JOBS Act, did deregulate offers and permit general solicitation under the conditions established in Rule 506(c), they proposed at the same time a set of rule changes that would put people on notice as to these types of offerings. An advance Form D and then a final Form D would be required in connection with launching and closing an offering. And some additional information would be required in Form D, which would get into a lot more detail about the issuer, where they offered securities, the use of proceeds and the like, as well as the types of general solicitation used. There were also legending requirements around the types of information that might be used from a general solicitation perspective. When these rules were proposed, they received a lot of negative commentary from certain quarters, and not as much positive commentary. I think they were designed around an investor protection theme. The SEC felt like it had to propose and suggest rules like these at the time it freed up general solicitation. One issue that Annemarie touched on that I think is worth noting is that we don't know whether these rules will ever see the light of day, whether they will be modified ultimately to take away some of the portions that caused people particular concern, or whether they will be adopted as purposed, which I think would have a negative impact on the market place as it develops for primary offerings under general solicitation. There really hasn't been any indication from the staff of the SEC as to when this could happen, although they've continued to say that these JOBS Act implementation issues remain a priority. So even though none of these requirements are in effect, people tend to worry about them, because they are out there hanging over our heads. Tierney: I think they also have some implications for issuers who are in a continuous capital raising mode under Rule 506, since so many startups are continuously raising capital. We've had questions from a lot of different constituents that if the rules came into play while they're in the middle of a continuous offering, what would that mean and how would that implicate them? Would they be out of compliance with, for example, a requirement to pre-file a Form D? I think that there are some real issues around continuous offerings. And some other issuers wouldn't be interested in providing general solicitation materials to the SEC in the context of a private placement. So I think there are some real issues for companies. And I do hope that the SEC makes a decision about how to go forward. Something like 90% of the comment letters were negative regarding the proposed rules, but we have a Commission that is almost split 50/50 between pro-JOBS Act and pro-investor protection points of view. It will be interesting to see where the proposed rules come out. Lynn: I agree - but hopefully they won't come out. Tierney: I agree. Lynn: To wrap it up, I'll turn it back to Peter to talk about where things go from here.

The Future of Private Capital Markets

Williams: What's evident from this program is that the regulators will have a lot to say in terms of how this is implemented. Or at least, what the regulators come out with will change how things are happening. But overall, very quickly, I think the markets are growing, and the regulatory environment and the market trends are all supporting that. We'll see an increasing number of participants suddenly having the ability to look at the private markets as an investment alternative, be it through primary issuance or secondary transactions. With that, and with the increases in terms of number of shareholders and these new platforms that are coming to light, several of whom are represented on today's panel, we'll see increasing liquidity as well. In the private market, the liquidity of the secondary market will always be smaller than the public markets, because that's a highly liquid trader-centric market. But there is a very large room to grow in that space. Companies were slow initially at adopting things like Rule 506(c). We've seen it actually pick up substantially over the last three to four months. The first few months after the new rule was implemented, it seemed as though everyone was sitting on the sidelines waiting for the first person to dive in. We've seen a substantial increase on our platform in terms of transactions that are 506(c). In terms of secondary transactions, I think Annemarie had mentioned that things are moving more to the privately negotiated transactions. I think true secondary trading in private companies will be challenged, and the market will move more towards company-managed programs. But we are still seeing substantial increases in liquidity. In terms of the concern about bad actors in the space, I think you'll see a shakeout in the market in terms of the platforms and their models in terms of disintermediation - whether you will have the participation of investment banks, or whether you will be cutting the banks and the placement agent (and more importantly the regulatory oversight) out of the process and having the platforms take on that full responsibility themselves. Either way, I think over the next few years you'll probably see a substantial shakeout. A few platforms with the brand name and reputation will keep going and a number of the smaller upstarts will fall by the wayside. And you may see a market consolidation to a small handful of platforms. I see a lot of upside here in the private markets driven by liquidity, technology and a favorable regulatory environment, notwithstanding some ups and downs that we will probably see over the next few years as all those regulations come to be and shake out. So that's my view. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [42] => stdClass Object ( [post_author] => Victor Sowers [post_author_bio] => [post_author_thumbnail] => [ID] => 1037 [post_title] => The Different Stages of a Private Placement Offering [post_date_gmt] => 2014-11-05 15:53:55 [post_url] => https://aceportal.com/insights/the-different-stages-of-a-private-placement-offering/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/market-trends-image2.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/market-trends-image2.jpg [excerpt] => [post_content] => A traditional private placement for a standard Reg D offering generally follows a series of well-worn steps which are outlined here. The following diagram, which first appeared in ‘Economics of the Private Placement Market,’ a Federal Reserve White Paper, provides a nice visual for the basic flow of these steps from start to finish:

Stages of a Private Placement Offering

  In summary, the general mechanics of a private offering requires an issuer or their representatives to:
  1. Prepare and track offering documents
  2. Maintain the confidentiality of all documentation
  3. Monitor current sales and their concurrent suitability documents
  4. File Form D in a timely fashion
  5. Comply with Blue Sky state authorities and deal with escrow
From issuer and broker-dealer discussions all the way through the marketing and close of a deal, the length and complexity of each period can vary greatly. What each stage has in common, however, is the existence of a delicate back and forth process between all parties as they navigate through various negotiations and myriad regulatory hurdles. This balance remains no matter how an issuer is choosing to go to market—whether via online portals or through more traditional routes. As an example of the back-and-forth nature of the process take Stage Two, “Design of major contract terms.” This stage surrounds the preparation of a disclosure document, or private placement memorandum (PPM). The PPM is the central document presenting the company story to potential investors and defining potential terms of investment. While traditionally prepared by a broker-dealer, PPM’s can also be prepared by the company, fund, or law firm. For good summary articles on the PPM see here and here. For a checklist of what the PPM should contain see this article. Finalizing a PPM is in and of itself a large undertaking for which an issuer usually seeks professional assistance. Yet preparing a PPM is only the first step of this stage.  Once the PPM is created for example, any material changes to the memorandum over the course of a private placement must be communicated to potential investors. This process itself requires various levels of effort and tracking on the part of either the issuer or broker-dealer. Furthermore, if at a later time the PPM is found to be materially misleading the broker-dealer (or issuer) may be deemed to have violated anti-fraud provisions of the federal securities laws.[1] All of this should indicate that not only are the mechanics of a private placement complex, but the litigation, liability, and legal framework surrounding it are fraught with potential issues. Partly as a result of this complex regulatory environment the entire private placement process has traditionally been labor intensive and subject to uncertainty and risk. Making sure this process is as streamlined as possible while automating key compliance hurdles is part of what we take pride in doing here at ACE. No matter what avenue one uses to market a private placement, however, a deep understanding of the mechanics of the process and the potential pitfalls within each stage is key to a successful and compliant offering.   [1] Generally, courts that review challenges to private placements place a large emphasis on investor access to underlying information. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Victor Sowers ) [43] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1035 [post_title] => Growth of Private Company Investing: An ACE Portal Event [post_date_gmt] => 2014-11-03 16:14:49 [post_url] => https://aceportal.com/insights/growth-of-private-company-investing-an-ace-portal-event/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/11/16891_ACE_VCE_INV_141029-350x466.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/11/16891_ACE_VCE_INV_141029.jpg [excerpt] => [post_content] => An ACE Portal hosted and VC Experts moderated panel on “How Integrating Platforms, Data, and Analytics Will Define Private Company Investing.” Panelists will include representatives from IPREO, Crowdnetic, ACE, VCE, and TAAPS. The panel will be followed by a visit to the NYSE Trading floor to see the Closing Bell ring.  After the Closing Bell, there will be a Cocktail Hour with a select audience of family offices, institutional investors, and leading investment banks.     [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [44] => stdClass Object ( [post_author] => Richard Pistilli [post_author_bio] => Richard is the COO of ACE [post_author_thumbnail] => Richard Pistilli [ID] => 1031 [post_title] => The Placement Agent's Dilemma [post_date_gmt] => 2014-10-31 17:29:08 [post_url] => https://aceportal.com/insights/the-placement-agents-dilemma/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/road-in-mountains-350x232.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/road-in-mountains.jpg [excerpt] => [post_content] => If a person is sick, they see a doctor. If a person has legal troubles, they see an attorney. Logic would then suggest that a person in need of financial planning would seek the assistance of an investment professional. This maxim however is not always adhered to within the anomaly that is the capital markets. Rather, it is tested each and every time technological innovations are made. From day-trading to house-flipping, technology advancements seeking to improve market efficiencies often drive an unintended corollary whereby individuals are tempted to disrupt or replace the entire market infrastructure. Call it hubris or ignorance, but there is something deep in the American psyche that murmurs “I am a savvy investor or entrepreneur and I don’t need professional help engaging the market!” So what are financial professionals to do? Should they shun technological innovations altogether, or perhaps lobby Washington to stop villainizing and trivializing their essential role in the free enterprise system? Unfortunately, the only remedy for this affliction seems to be a trial by fire. Only after dollars are lost and parties are harmed does the revelation take hold and the pendulum swings back. Such is the case today within the transforming landscape of the private capital markets. With the help of recent legislative changes, innovative technologies are for the first time entering the space. Private placement agents should embrace these trends instead of resisting them, and prepare for a market shift that will ultimately fine-tune their roles, not eliminate them. That's where ACE Portal comes in. This article is also closely related to Richard's discussion of whether or not private companies should seek out the services of a broker-dealer [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Richard Pistilli ) [45] => stdClass Object ( [video_url] => http://player.vimeo.com/video/90041259 [video_embed] =>

[post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 1027 [post_title] => Private Markets & Investor Verification under the JOBS Act [post_date_gmt] => 2014-10-30 16:12:16 [post_url] => https://aceportal.com/insights/private-markets-investor-verification-under-the-jobs-act/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/10/NEW-Insights-Logo-350x136.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/10/NEW-Insights-Logo.png [excerpt] => [post_content] => [embed]http://player.vimeo.com/video/90041259[/embed] In this interview, ACE Portal's CEO, Peter Williams, interviews Daniel Gorfine, the Milken Institute’s Director of Financial Markets Policy and Legal Counsel, on how the JOBS Act (and specifically the provisions around 506(c) and General Solicitation) has created a new significance around the definition of what it means to be an accredited investor. Their conversation is important for any company thinking through whether to use Rule 506(c) which allows you to mass market--or generally solicit--and some of the special considerations that need to be thought through around the heightened investor suitability requirements to be found there. This dialogue takes on added significance because the SEC is revisiting the definition of an accredited investor this year under the requirements of Dodd-Frank. This video is closely related to Joe Bartlett's discussion of suitability and verification as well as his in-depth post on how to actually certify accreditation. Some of the specifics of this conversation include: Additional Interviews with Daniel Gorfine  

The Milken Institute’s mission is to improve lives around the world by advancing innovative economic and policy solutions that create jobs, widen access to capital and   enhance health.

[post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [46] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 1024 [post_title] => The Financial Decisions Throughout the Start-Up Life Cycle [post_date_gmt] => 2014-10-29 18:10:15 [post_url] => https://aceportal.com/insights/the-financial-decisions-throughout-the-start-up-life-cycle/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/market-trends-image2.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/market-trends-image2.jpg [excerpt] => [post_content] => This post was written by Steven Eliach, a Principal of Marks Paneth & Shron LLP. and Jeanne P Goulet, CPA, a tax specialist at the firm. It originally appeared in VC Experts guide on PE and VC under the title "Road Map of a Start-Up and the Entrepreneur." In this article Steven, the principal -in-charge of his firm's Tax Practice, walks through the importance of sound financial planning in various stages of a startup's life cycle. His summary brings up a comprehensive list of issues to be aware of including IP strategy, jurisdiction and corporate structure questions, structuring of equity splits for founders, and the operational realities of running a business.  As if this was not enough, the post also highlights the issues employees must be aware of related to their non-cash compensation. This article is highly recommended for entrepreneurs at any stage of growing their business.  

The Financial Decisions & the Start-Up Life Cycle

A start-up venture is not just about product development, marketing and sales. It is a constant search for a business model that ultimately will result in a great product market fit. During the course of this endeavor, the financial needs of both the entrepreneur and the business can be complex. The financial needs of the entrepreneur and the business model run on two parallel paths and can change substantially over the life cycle of the venture. To complicate things further, few founders have an interest in dealing with financial matters. In addition, most do not have a budget for financial advice nor do they have a Chief Financial Officer as part of the founding team. There are some founders who are "Do It Yourself" CFOs. Although they are very bright, motivated and tend to focus on addressing the information and accountability needs of the venture and possibly its investors - it is less likely that they have the depth and breadth or specialized expertise needed to deal with a fast growing global business and/or interstate matters. Just as technology, such as open source software and cloud computing, are enabling entrepreneurs to develop their products in a cost effective manner with just the right amount of computing power to meet the needs of a scaling business, the start-up and the entrepreneur also require a similar scaling of CFO services in order to develop and thrive. Such "scaling CFO services" should include the multiple and complex planning issues which arise for both the start-up and the entrepreneur over the life cycle of the venture. Initially, it should also include execution or implementation of some of the more immediate financial, accounting and tax needs of the venture. Some CPA firms that are small enough to focus on small or mid-size clients but are also large enough to have centers of competency in specialty areas often have a business model that can accommodate itself to playing the role of a "scaling CFO".

Early-Stage Financial Decisions in a Startup

Negotiating the Business Agreement

At the very early stages of development, there are several issues that apply at the business or entity level. One of the very first matters that must be addressed even before the type of entity is chosen is the business agreement between the various founders and key employees. This agreement needs to be negotiated. This negotiation will focus on such questions as: At this stage, an entrepreneur could benefit from the experience of a "scalable CFO" who could offer suggestions and discuss the potential outcomes that may lie ahead under various alternatives being considered. Imagine a number of generous and well intentioned co-founders who later regretted some of their early decisions when one member of the group walked away, keeping his share and leaving the others to develop a successful business. As they initially agreed, the financial results must be shared equally at the exit regardless of individual contribution. Asking the members the right questions up front, can lead to discussions that will nip problems in the bud later on down the road. Working with a "scalable CFO" who has experience and foresight can improve an entrepreneur's chances of properly addressing early stage business issues such as those above that are critical to determining whether a venture will ultimately succeed.

Addressing Individual/Employee Financial Matters

With many of these financial issues there is some overlap with individual planning. Therefore, of equal importance to establishing a business agreement is resolving the questions that every entrepreneur should ask themselves early on in the venture regarding their financial strength and stamina. Early in the process, owners need to map out:

Choosing the Right Type of Business Entity and Jurisdiction(s)

Once the business deal has been worked out, the next question is, "what is the most tax efficient type of operating entity from a legal and financial standpoint?" The owners, along with their attorneys and accountants, need to also consider the best jurisdiction in which to organize and operate. Many factors enter into this decision: The federal tax rules will be a critical factor in many cases in the choice of entity. Although in general, a pass-through entity, such as an S corporation or Limited Liability Company (LLC) might be the most efficient structure for investors who wish to utilize losses incurred by the venture and to provide for future business flexibility, there may be overriding business reasons to use a C corporation. Generally a C corporation is chosen because the company expects to raise capital from investors in the short term or may want to carry-forward losses to offset future income. In addition, investors may want to take advantage of temporary tax incentives such as that provided by the "Small Business Jobs Act of 2010" enacted on September 27, 2010 which, if certain conditions are met, provides for 100% exclusion of the gain on the sale of qualified small business stock if held by non-corporate taxpayers for more than five years and was acquired after September 27, 2010 and before January 1, 2011. In addition, the gain is excluded from alternative minimum tax. Prior to February 2009, a 50% exclusion was provided. The American Recovery and Reinvestment Act of 2009 increased the exclusion to 75% for stock purchased from February 17, 2009 until September 27, 2010. In sum, the primary disadvantage of conducting business via a corporate structure - a double layer of taxation - is eliminated for this brief time period.  Therefore, as a result of changing business projections of growth and profitability as well as the changing tax climate, the choice of entity must be evaluated for each unique situation. If international operations are envisioned, not only must the legal entity analysis be conducted at the country level, but also from a US perspective in that it is possible to have a corporation for local foreign purposes but a pass-thru entity for US tax purposes. Due to the complexity involved, each business model and plan must be individually analyzed.

Deciding How to Efficiently Manage Intellectual Property

After the structuring and jurisdiction issues have been addressed, the next issue facing a start-up from a business perspective is the financial management of its intellectual property (IP). The team must work with an attorney with specialized skills who can protect IP both in the US and abroad, if appropriate, and also the team must determine where the IP should be owned and developed. Should the IP be developed in the same entity where other functions are performed or should the IP be owned and developed in another entity or another jurisdiction - that is, in other countries? What is the most cost effective way to proceed from a net-after-tax point of view? If the new business will be global in nature, significant international tax planning issues need to be addressed to avoid double taxation and penalties, as well as to optimize future profits. Once the IP is developed and owned in the United States, it will be difficult if not impossible to move the value of that IP outside the US tax net. In addition, if the venture is coming to the US from abroad, many unique tax issues exist because the "threshold for taxability" can be relatively low. This means that entrepreneurs risk the US tax trap of subjecting their worldwide income and assets to US taxation.

Planning and Operational Matters for Your Startup

Next on the agenda are the "first time through set-up" or accounting and bookkeeping operational matters as well as financial planning activities that are required for new ventures such as: It is not uncommon for start-ups to be lax when it comes to financial matters. However, there are various decisions involving professional judgment that must be made including the proper classification of individuals as independent contractors vs. employees - an issue which can carry hefty penalties if not properly addressed. Contrary to popular beliefs, corporations or LLC structures do not completely shield the owners from certain liabilities. Omissions and errors in the employment and sales/use tax areas can create exorbitant personal liabilities on the part of the entrepreneur or even members of the Board of Directors. The failure to act on any of these tasks, at this stage, could result in substantial costs upon tax examinations - which in turn could cause significant distractions and disrupt the core business. In addition, errors committed at this stage can give rise to large legal fees in the future when a company is sold because a future buyer will want to receive indemnifications against liabilities generated from these early missteps. When an entrepreneur looks at this list, it is easy for him or her to become overwhelmed and ask the obvious question of "how can I be a lean start-up and operate on a limited budget?" The answer is not to bury your head in the sand. The better solution is to engage "scalable CFO services" and bring expertise to bear when and to the degree required. A budget-conscious entrepreneur can create a "cocktail" of skills that blends the advanced expertise of an experienced CFO to be offset by the more inexpensive yet necessary skills of a part time bookkeeper or administrator - or even yet, one of the members of the founding team who has the interest. The benefit of doing it right the first time not only speaks to the professionalism and business savvy of the entrepreneur but also saves money in the long run.

Mid-Stage Financial Decisions in a Startup

Up until this stage, the entrepreneur may be using the services of the "scalable CFO" who has been functioning not only as a financial, accounting and tax advisor but perhaps also has been involved in launching the venture. As the global start-up zeroes in on its market plan and begins to grow and generate revenue, the business may be able to hire staff who can take over some of the day-to-day financial matters. The "scalable CFO services" now needed by the entrepreneur may morph into more strategic initiatives in terms of: In addition to the above, as the firm grows, financial reporting and the tax compliance function will become more complicated and may include multi-state filings. The expansion of the business will require more state and local tax planning as well as possible international tax planning. At this stage, parallel with the growth of the business, the entrepreneur's financial affairs may become more complex as well. If he/she has received distributions, regular tax and alternative minimum tax as well as financial planning may be in order. Cash flow management and setting aside funds for the future may be necessary as well. It may also be advisable to hire the services of a trusted investment advisor. A "scalable CFO" can assist the entrepreneur in these decisions to make sure that the best services are received at a reasonable cost.

Late-Stage Financial Decisions in a Startup

Planning an Exit Strategy

The entrepreneur may have created a viable long-term business or may be riding a "thunder lizard" up a growth path resembling a "hockey stick." In either case, the business will need assistance in identifying and implementing a long-term strategy or an exit strategy. This might involve a sale to a publicly traded company or an initial public offering. There is also the possibility of a sale to a large privately held company. No matter what the final outcome of the exit strategy, the owner will need a team of professionals to help structure the deal to achieve the best financial after tax result. [Note, to learn more about the challenges of going from private to public as a company see this video interview].

Wealth Management Strategies for the Owner

At this point, wealth management strategies including asset allocation, insurance and creditor protection need to be implemented to protect the entrepreneur from business and personal risks. If relationships with professionals have not already been created, the time has come to assemble a financial team that will assist the entrepreneur in preserving his or her well-earned funds. Money may need to be placed in a "college fund" and debt and asset management may need to be addressed. The entrepreneur may also want to consider some tax-efficient charitable giving. Of great importance to wealth preservation is estate-planning strategies. Although some of these work best if implemented before the business has become too valuable, there are nevertheless strategies that can be deployed at this stage.

The Financial Life of a Startup

As this brief summary shows, the business, tax, and financial aspects of organizing a start-up business are tightly integrated - as are the business and financial issues of the entity and the individual entrepreneur. Early planning and ongoing vigilance - assisted by a team of professionals - will help ensure a smooth process for growing the business and creating wealth for its owners and employees. At this point, it is easy to see that to fulfill the needs of a start-up and the entrepreneur, a wide range of very specialized skills are needed to maximize the financial outcome. If you are an entrepreneur thinking about starting a business - domestic or global - you are well-advised to seek the assistance of a full service accounting firm with the right size, business model and international expertise that can work with your legal team and help guide you through the process.

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VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries.

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Marks Paneth & Shron LLP

We're Marks Paneth & Shron, an accounting firm committed to our clients' success. Our priority is to help them make smart decisions at every turn. As a growing firm - now one of the largest in the New York region - our focus is on giving clients access to the best and most experienced professionals in our industry, regardless of the discipline. Even as we grow, we stick to our culture of personal attention and customized services. We aim to provide value to our clients throughout the life of the relationship and to maintaining an open dialogue. We expect and encourage ongoing communication about the changing business, tax and financial landscape.

[post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [47] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 1018 [post_title] => Investing Directly as an LP or via Fund of Funds? [post_date_gmt] => 2014-10-27 20:28:12 [post_url] => https://aceportal.com/insights/investing-as-an-lp-or-fof/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/10/fullview-350x262.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/10/fullview.png [excerpt] => [post_content] => This article, penned by Igor Sill, a Managing Director of Geneva Venture Management, was originally penned in the uptick following the 2008 crisis when investor interest in Venture Capital again started taking stage amidst high-profile names such as LinkedIn, Facebook and Twitter. It seems apt to re-air Igor's discussion of how investors can approach investing in private companies and early-stage companies in light of the recent explosion of online portals (of which ACE is one) and the re-imaging of direct investing in a fee-free model. Perhaps we will be able to track him down for a follow-up on this article, which first appeared in VC Experts article database on "Venture Capital and Private Equity."

"Investors should pursue success, not liquidity. Portfolio managers should fear failure, not illiquidity. Accepting illiquidity pays outsized dividends to the patient long-term investor." -David Swensen, CIO of Yale University

Venture Capital is Undergoing a Radical Shift

A global revolution is changing the way serious alternative asset class investors view the venture capital industry. Discarding the old rules, a new, younger era of Venture Capital Fund Managers is re-inventing the venture capital industry. The traditional seed and early stage Venture Capital investing model has changed radically and Institutional Investors are seriously re-assessing the allocation method they once used for this asset class. Many are seizing the benefits of higher returns coupled with lower investment risk by utilizing the breadth and depth of expertise, knowledge and resources that an experienced Fund of Funds (FoFs) firm provides. Simply stated, a FoFs is a multi-manager investment strategy of holding a portfolio of other investment funds rather than investing directly in private equity, shares, bonds, or other securities. There are different types of 'Fund of Funds', each investing in a different type of collective investment sectors, such as Hedge Fund FoFs, Mutual Fund FoFs, Investment Trust FoFs, Real Estate Trust FoFs, and for the purposes intended here, Venture Capital and Private Equity FoFs. Venture capital investments are, by their very nature, a long term higher risk, illiquid asset class. Its historical returns, however, have out-performed other investment types. Via a Limited Partnership (LP) arrangement, an investor is typically committing funds in the $500,000 upwards to $10 million range for 10 plus years. Redemption liquidity via after market (secondary) sales are limited and generally require prior approval by the fund's General Partner (GP), thus are generally considered illiquid during the fund's term. This suggests that venture capital fund investments are better suited for investors with much longer investment time horizons such as Foundations, Pension funds, Family Investment Offices and Endowments. The very best Venture funds have consistently out-performed the industry and, of course, it's everyone's ambition to invest in the top quartile of these funds. After all, some of the most successful public Corporations such as Apple, Amazon, AOL, Baidu, BusinessObjects (SAP), Cisco, Compaq (HP), eBay, Genentech, Google, Hewlett-Packard, HomeDepot, Informix (IBM), Intel, Linkedin, Microsoft, Netscape, NetSuite, Oracle, Salesforce.com, Skype (Microsoft), Starbucks, Sun Microsystems (Oracle), PayPal (eBay), Yahoo, YouTube (Google) and, privately-held Facebook were all financed by Silicon Valley venture capital funds. The LP investors in these funds realized significant healthy returns while Facebook's investors continue to realize tremendous value appreciation.

You Must Allocate to Alternatives in Your Portfolio

David Swensen, the visionary chief investment officer at Yale University, has also realized great investment success in the alternative asset classes. When he arrived at Yale in 1985, its endowment was worth approximately $1 billion, and today the endowment is worth nearly $17 billion. Swensen increased investments in private equity funds, venture capital, real estate and hedge funds, an investment strategy that was met with some initial skepticism. Swensen is a big believer in asset allocation and rebalancing. "Asset allocation is the tool that you use to determine the risk and return characteristics of your portfolio. It's overwhelmingly important in terms of the results you achieve." In numerous speeches, Swensen has championed such alternative investments. He argues that while beating the stock market is almost impossible due to the overwhelming available information about public companies and the subsequent valuation, astute managers can exploit inefficiencies in the value pricing of less familiar private assets. Diversification into alternatives, he added, reduces risk. He argues that keeping funds in investments that are more liquid is a tactic of short-term players versus that of endowments, which tend to hold until private equities are sold or go public. Swensen says "Investors should pursue success, not liquidity. Portfolio managers should fear failure, not illiquidity. Accepting illiquidity pays outsized dividends to the patient long-term investor." Over the past 20 years, no educational institution has achieved a better performance record than Yale. For more specific discussions of how to allocate to alternatives see this post and this one too.

Picking the Right VC or PE Fund Manager in Light of Macro Trends

Institutional investors are rightfully concerned with fulfilling their fiduciary duties by selecting specific venture funds and Fund Managers with focused market segment expertise. Understanding which market sectors are most likely to outperform, coupled with identifying capable Fund Managers to exploit those opportunities are a critical component of the investor's decision making process. Huge problems still remain to be solved and massive opportunities loom as major corporations, mid to small businesses all seek competitive advantages via new technologies. The emergence of Software-as-a-Service and Cloud computing are major tectonic shifts occurring in the global software ecosystem. Technology's self-renewing cycle of new wave innovation continues, driven mostly by cost improvements, easier use and vastly greater efficiencies. With new regulatory issues requiring compliance, transparency, privacy, security to high computational performance via cloud computing efficiencies, there's a massive opportunity for a bunch of smart people to do some incredibly great things. There exist a huge community of seasoned serial entrepreneurs with a deep-rooted passion to build new companies. Venture capital enables and to a great extent, propels this entrepreneurial innovation. Understanding how investors gain access to the Venture Capital firms leading funding for these innovations, along with their higher returns, is keenly important. Many of the brand name Venture Capital firms no longer benefit from their founder's experience, knowledge, network and impassioned mentoring of promising first time entrepreneurs--they have long since retired from active participation, though their names remain on the Fund's websites. Though there are pockets of entrepreneurial ideas globally, the epicenter of breakthrough, disruptive technology innovations continues to emerge from Silicon Valley. This is a very unique place with a supportive ecosystem ready to back entrepreneurs' requirements for launching start-ups successfully. The weather is excellent, the lifestyle is wonderful, and the scenery exquisite. Stanford University, UC Berkeley, USF and University of Santa Clara provide an abundance of superb research and continually spin-off new patents, along with a steady flow of budding intellectual entrepreneurially-driven graduates. 80% of venture capital and Angel investors operate here, and, where else will patent attorneys, new business formation attorneys, equity attorneys give you their time without payment in advance of receiving venture capital funding? Although the capital markets have been sluggish of late, investment bankers eagerly swarm Silicon Valley in order to underwrite venture backed IPO candidates. In no other locale will you find the combination of all these factors.

Advantages of the Fund of Fund Approach

In such a fast paced environment, with over 3,500 venture capital funds competing for the most promising start-ups, FoFs are a very efficient way to construct a balanced portfolio for investors seeking to participate in this market segment through the very best venture funds. Essentially, FoFs can offer an investor access to the very best performing Venture Capital fund Managers not otherwise accessible directly. Further complicating the process is the venture industry's notorious lack of transparency relative to their fund's actual value. A venture fund series financing in one invested company may report a value considerably different than the same series investment in that same company by another venture firm. Generally, a FoFs has greater leverage in scrutinizing a venture firm's financial reporting, its partner expertise relative to market sector focus resulting in a better risk-return ratio than direct investments. They're also looking for more than the conventional venture model has traditionally delivered - multiples of cash back rather than straight Internal Rate of Return (IRR). They seek a safer, more diversified investment base from which to drive reasonable returns, across shorter investment cycles, versus today's typical 10-12 years. The reasons for the impressive growth of FoFs is that they provide diversity among Venture Fund managers, reduce risk and hold out the promise of net returns higher than the average venture capital return rates. Investors are more willing to invest in FoFs for the benefits provided by this pooled investment structure, continual due diligence and on-going oversight compared to investing in a single strategy venture fund. The most common FoFs fee structure is a management fee of 1% and an incentive fee of 10% above that of the underlying Venture Capital fee structure. The additional fee layer is relatively small with returns generally more than offsetting the added expense. A balanced, properly allocated venture capital/private equity portfolio generally tends to provide higher returns with less inherent risk. An industry focused FoFs is well experienced in assessing the most promising Venture Capitalists, both the Emerging Venture Fund Managers as well as the historical brand name Venture Capitalists. The brand name Venture firms provide a low-risk foundation for consistent top-quartile performance albeit with higher fees to their LPs. Emerging Fund Managers focused on rapidly growing market sectors offer outsized return potential for their portfolios. But, Emerging Venture Fund Managers who follow a more capital-efficient investment model can deliver industry-leading returns while reducing risk with shortened investment cycles at competitive fees to LPs.

The Process of Selecting a Fund of Fund

The selection process of either brand name Venture firms or Emerging Fund Managers should entail research of their respective track record of investments, actual hands-on involvement of their investments, the firm or Emerging Fund Managers' lure and stature within the entrepreneurial community (deal flow source), and most importantly, the ethical reputation and transparency in reporting accurate market valuations. Do some serious research here, as the term "success has many fathers" applies in spades to promotional materials. There are essentially three high potential appreciation types of technology investments which Venture Capitalist traditionally focuses on: seed & early, development stage and late-stage expansion. And, within these 3 categories, there are 3 sub classes: disruptive innovation, enabling technologies and special situations. Market trends and dynamics coupled with technical challenges are very often industry specific. Understanding these issues is critical to the successful mentoring and value creation guidance of start-ups. Consistently successful returns are achieved from only a few select firms who diligently study, identify and invest in technologies and markets on the leading edge of disruption. They tend to focus on building companies at the forefront of market forces creating outstanding growth and exit opportunities. These particular Venture Capitalists are notorious for sourcing and developing fast-growing companies in large market growth sectors. Look for a FoFs Manager with investments in venture capital funds possessing the demonstrated expertise, deep experience and qualifying techniques in specific areas of their investment focus. A top tier Venture Capital firm will utilize extensive analytical techniques to evaluate and compare each investment prospect. They will benefit from extensive industry contacts and global business leader connections. These relationships help provide the foundation for executive team recruitment in their portfolio companies, follow-on financings, facilitating strategic corporate alliances, new partnership opportunities and most importantly, exit strategies whether through leading Investment Banking underwriters for IPOs or M&A activity. Doing your homework upfront and placing your bets wisely can result in significant healthy returns whether through a FoFs or direct LP participation in a Venture Capital fund. Of course, past performance is no guarantee of future results.  
  VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [48] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 1010 [post_title] => Strategies for Small and Midsized Businesses Seeking Capital [post_date_gmt] => 2014-10-20 17:59:16 [post_url] => https://aceportal.com/insights/simple-strategies-for-small-and-midsized-businesses-seeking-capital/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/0710_DimLights_630x420-350x233.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/0710_DimLights_630x420.jpg [excerpt] => [post_content] =>

This original version of this article  appeared in VC Experts, Private Equity and Venture Capital Articles. It was written by Christopher S. Connell of Stradley Ronon LLP. While the macroeconomic context has improved somewhat since it was penned, these deceptively simple tips remain extremely relevant in making sure your business can weather any financial storm. All small or medium sized business owners that are looking to access capital or ensure their business is on sound financial footing should take a quick look.

The financial crisis facing the United States is front-page news on a daily basis. Although the tone of the message has improved in recent weeks, we can't escape the reminders of the financial pressures on all levels of our economy. Homeowners are experiencing decreased buying power due to the housing downturn, high unemployment and tightened credit standards. Local governments are dealing with budget cuts and lower tax revenues. Small-business owners, those who are most likely to stimulate the economy by growing their businesses and hiring more employees, are having difficulty obtaining the capital necessary to drive that growth. But why is it that so many solid businesses can't get their hands on the capital they so desperately need? And how should these businesses approach the current lending environment to enhance their chances of success? Let's first take a look at some of the basic reasons the financial markets have tightened so much. Starting in September 2008 with the collapse of Lehman Brothers (and many would argue that the seeds were planted much earlier), the financial industry suffered a crisis unseen since the Great Depression. At the forefront was the precipitous drop in the real estate industry. Throughout the early part of the decade, credit was plentiful, easy to obtain and at historically low interest rates. As a result, property values became artificially inflated, and when the house of cards began to fall, due in part to the demise of the subprime lending market, a ripple effect was felt across the broader economy. The knee-jerk reaction from lenders has been to pull back significantly from the lending market, to tighten credit standards and to take a much more conservative approach to extending credit. Congress and bank regulators have increased their scrutiny of bank balance sheets and lending practices. The potential financial industry reform may also be having a chilling impact on lending practices, as lenders aren't quite sure what their new regulatory environment will look like. On the other hand, the various stimulus packages that have been passed include special programs designed to encourage and promote lending. Banks are getting crunched between the competing interests - should they be increasing lending to small businesses in accordance with the stimulus plans, or should they be pulling back as is being encouraged (demanded?) by their regulators. Ultimately, banks need to do whatever is best for the financial health of their respective institutions, but the answer may actually be a combination, resulting in increased lending, albeit on a much more prudent basis. So how can small businesses strengthen their position in the credit markets? Consider the following five keys: Lenders and borrowers are still feeling their way through the new lending environment, and the rules of engagement aren't yet clear. With financial regulatory reform on the horizon, more changes are likely. Business owners who are proactive, focused and organized should do well in their quest to succeed in the current capital markets.

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VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [49] => stdClass Object ( [post_author] => Dwight Stocker [post_author_bio] => Dwight has spent over 10 years in the Alternative Fund space, currently at the DTCC - Alternative Investments Product [post_author_thumbnail] => Dwight Stocker [ID] => 1007 [post_title] => Top Ten Sources of Data, News, and Research on Alternatives [post_date_gmt] => 2014-10-15 16:08:58 [post_url] => https://aceportal.com/insights/ten-great-sources-of-data-for-the-alternative-asset-class/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/road-in-mountains-350x232.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/road-in-mountains.jpg [excerpt] => [post_content] => As the Alternative Asset Class continues to mature and evolve, the increased interest and scrutiny on the sector has led to more transparency.  But data is still more difficult to come by than it is for the public securities. As a result, professionals rely on certain key information resources on an almost daily basis. From our perspective at the DTCC - Alternative Investment Products Division, we are constantly analyzing and evaluating these informational news digests and data feeds in depth.  We have found that there are many pretenders, and only a few resources that have stood the test of time (or show promise). What follows is our/my go-to list for real value-add information for news, research, and data.

Sources For News and Research

PE Hub (formerly of Thomson Reuters) PE Hub is the original daily news digest for Private Equity related headlines, VC deals, PE deals, IPOs, M&A deals, Firms & Funds, and Human Resources. Dan Primack's Term Sheet (Fortune) This daily newsletter is written by Dan Primack, a Fortune writer and industry leader. The Term Sheet features updates on deals, movement of senior personnel, and insightful commentary. You can subscribe here. WSJ - Venture Wire This Dow Jones and Wall Street Journal publication pulls feeds associated with their roster of industry coverage including Venturewire, LBO Wire, Private Equity Analyst, Venture Source, LP Source and more to offer a comprehensive one-stop-shop for leading news across the alternatives sector. FT - Fund Fire Brought to us by the Financial Times, Fund Fire focuses on the alternative fund industry with a particular focus on investors, managers, consultants, financial advisors, pension plans, endowments and foundations. It is a paid subscription. Pension & Investments - Alternatives Digest Part of Crane's, P&I calls itself the industry's premier daily newsletter.  Their research and analytical pieces are often useful to get inside how industry experts are thinking about the space.You can subscribe to the letter here. Hedgeweek Hedgeweek is part of a family of publications including Private Equity Wire, Wealth Advisor, Property Funds World, etc.  Of particular interest is their listing of conferences and events around the globe. SecondaryLink SecondaryLink is a newer offering focused on secondaries. They offer broad-based news​ on secondary markets in private equity, real estate, hedge funds and other alternative investments.

Data Resources

VC Experts VC Experts provides verified data, reports and analytics on private companies in order to help private market investors.  Further, they provide powerful data on the financing of private companies, along with fundraising updates and statistics.  They exhaustively collect all state and regulatory filings to compile their library of valuations, shares prices, terms & conditions, capitalization tables, etc.​ Full disclosure: VC Experts is a partner of ACE Portal. Preqin Preqin provides comprehensive data on private equity, hedge fund, real estate and most other alternative investments.  One can access fund manager information about performance, AUM, LPs and more.  They also provide research reports. Note: a majority of their resources are behind a paywall. HedgeCo HedgeCo is a database of over 7,500 hedge fund with a target focus on content and data relevant to accredited investors. ThomsonReuters This one should be no surprise. The PE Module includes 30 years of data covering buyouts, private equity funds, firms, executives, portfolio companies and limited partners. Bloomberg Bloomberg has data on over 8,000 hedge funds on their terminal.  Data records are constantly being updated.  Similar efforts are being made on the private equity side, targeted to their 400,000 subscribers. Clearly access to the terminal is expensive and exclusive.   [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Dwight Stocker ) [50] => stdClass Object ( [post_author] => George Isaac [post_author_bio] => George Isaac has 30 years of CEO and boardroom family enterprise experience, has served on 14 public and private corporate boards, and consults for mid-market private family-owned businesses [post_author_thumbnail] => George Isaac [ID] => 986 [post_title] => Is your Private Company Really Managing For Shareholder Value? [post_date_gmt] => 2014-10-14 15:52:18 [post_url] => https://aceportal.com/insights/is-your-private-company-really-managing-for-shareholder-value/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/business-chimneys-dirty-2391-13-e1413375656536.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/business-chimneys-dirty-2391-13-e1413375656536.jpg [excerpt] => [post_content] => In privately-held companies, realizing previously created equity value is often a secondary strategy until a succession planning, estate planning, or a business-ending liquidity event is under consideration. Cash, or other assets, must be distributed to your shareholders to “realize” shareholder value. In public companies, this is easy to accomplish: sell your stock in the market! This strategy is not available for privately-held companies--particularly family enterprises. In fact, the topic of realizing shareholder value is seldom addressed. I know this from my experience as a family enterprise business consultant and prior board member of 14 such companies. The focus by such enterprises is always on creating shareholder value. The big disconnect is, until shareholder value is realized, any created value is just a paper gain; these are unrealized paper stock gains that can disappear in your investment portfolio like paper into a wastebasket. The fundamental question CEOs and board members need to ask is “are you spending your most valuable resource -- your senior executive team’s time -- addressing issues that both create and realize equity returns to your shareholders?”  An understanding of the key levers that impact shareholder value is critical to developing the right business strategy, operational focus, and prioritization of work assignments among the senior management team. Any other focus results in suboptimal financial returns and increased investment risk for your shareholders.

Shareholder Value: Realized vs. Non-Realized

An investment is only as good as its ability to generate current and future cash. As CEO of my family’s business, our board focused on company return on equity (ROE). Under that metric, we were successful, posting double-digit returns over several consecutive years. While we were successful within this metric, we failed to recognize the significant difference between ROE for the company versus ROE for the shareholders as illustrated in Chart 1. Like many family businesses, we opted not to distribute earnings except for tax liabilities so we wouldn’t need to borrow money to grow our business.

Chart 1: Company ROE vs. Shareholder ROE

Company Shareholder ROE

As a result, we missed the critical point: increases in a company’s shareholder equity do not create investor return until cash is distributed; then it is realized - the earlier, the better -due to the time value of money. Until then, shareholder value is exposed to unforeseen tail risks and risk of loss. The unfortunate lessons learned from the economic implosion of 2008 resulted in many businesses’ shareholder equity destroyed. Because realizing shareholder value requires cash distributions, private company CEOs and their boards should focus on current and future cash generation and realization strategies. The three primary ways a company distributes cash to its shareholders, as illustrated in Chart 2, are:
  1. Regular distribution of cash - generated from ongoing operating profits plus depreciation.
  2. One-time or periodic distribution of cash – derived from improvements in working capital management and restructuring of the business’ capital structure.
  3. Cash from sale of business – based on increasing the company’s valuation and net after tax sales proceeds.

Chart 2: Realizing Shareholder Value

The goal, then, is maximizing shareholder ROE while minimizing the exposure to risks – that is, optimizing risk-adjusted returns. Following are detailed explanations of these three distribution methods.

Regular Cash Distributions

The primary generator for regular cash distributions is operating profits plus non-cash- based depreciation expenses. Operating profits, often called Operating Income, can be analyzed through the following sub-elements:
  1. Revenues X Gross Margin % = Gross Profits
  2. Gross Profits – S.G. & A.(1) = Operating Profits
  3. Operating Profits + Depreciation/Amortization = Operating Cash Flow(2)
The successful executive evaluates these sub elements to identify significant opportunities when operating profits can be improved through increases in revenues, expansion of gross margins and reduction in S.G.&A. expenses. The focus needs to expand beyond current-year operating results against budget to include strategies that create longer-term sustainable improvements in operating profits. The evaluation must address a multitude of factors, including current and future business and marketing strategies, product line profitability, customer profitability, reduction in operating, materials and logistics costs, labor productivity, outsourcing opportunities, distribution channel alternatives, administrative efficiency, discretionary spending, value engineering, etc.

Periodic Cash Distributions

Businesses can generate one-time or periodic cash distributions to their shareholders in two ways: (1) improvement in working capital management and (2) revisions to the business’ capital structure. The objectives in working capital management are decreasing the working capital required to support the business and increasing the working capital lines to eliminate using shareholder equity when financing receivables and inventories. Successfully achieving these objectives results in freeing up cash for potential shareholder distribution. To accomplish these goals, consider evaluating the following levers: accounts receivables, inventories, accounts payable and working capital lines of credit. There are many ways to impact each, for example: For Accounts Receivables: For Inventories For Account Payables: For Working Capital Line of Credit: Another source for generating cash, in addition to working capital management, is revising a business’ capital structure. For example, you could expand the use of debt or lease financing, organize the sale of non-essential assets, and initiate the sale and leaseback or financing of real property. Prior to revising the business’ capital structure, many trades-offs need to be considered, such as:

Sale of the Business

Creating long-term shareholder value from the sale of the business requires careful planning, usually over two to three years, to maximize the company’s valuation. In addition to operating profits, other factors can impact the company’s valuation, including revenue and earnings growth rates, operating margins, working capital consumption, capital structure, and general asset/liability management. The basic formula for business valuation is EBITDA multiplied by a valuation multiple less interest-bearing debt and preferred stock, as depicted in Chart 3.

Chart 3: Company Valuation Model

shareholder valuation model

It’s the CEO’s job to analyze each attribute in the shareholder valuation model when deciding which levers create the greatest opportunity for improvement, while also considering the time scenario of a sale transaction. The four levers that impact shareholder value are: Interestingly, working capital lines are typically not counted as permanent debt and therefore do not reduce shareholder valuations. With that understanding, a strategy I have used successfully to increase proceeds to shareholders from the sale of a business is to: (1) decrease working capital assets and (2) increase working capital line of credit usage to its full extent. It should be implemented in advance of a company sale so the company has time to demonstrate it can satisfactorily operate with less working capital. Other options to improve a business’ capital structure include selling off non-productive or economically unattractive assets.  And, sometimes, alternative financing arrangements such as sale and leaseback of facilities can increase shareholder value, particularly when considering the difference in valuation multiples between real estate and operating businesses.

Summary

By carefully examining the levers that create shareholder value, the CEO can significantly increase both created and realized shareholder returns without negatively impacting the long-term prospects of the business. When the CEO is not focused on realizing shareholder returns, the risk to the shareholders’ investment increases since the shareholders’ return is based solely upon a future sale. In this instance, many unexpected or non-controllable factors may impact the future business’ valuation. If this article was of interest, you may also enjoy The Roadmap of Financial Decisions for A Startup
(1) Selling, general & administrative expenses. (2) Debt service, taxes, & capital expenditure requirements must be also considered prior to cash distributions.
About the Author: George Isaac has 30 years of CEO and boardroom family enterprise experience as well as having served on 14 public and private corporate boards and consulted on over 100 client engagements. His firm, George Isaac Consulting, a division of GAI Capital LTD., provides board and management consulting services to mid-market private and family-owned businesses, typically addressing issues associated with succession planning, corporate/family governance, realization of captive family business wealth, business strategy and operating performance improvement, and M&A transactions. See www.GeorgeIsaac.com for details or contact Mr. Isaac at 805.969.6602 or gisaac@gaicapital.com.   [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from George Isaac ) [51] => stdClass Object ( [video_url] => http://player.vimeo.com/video/108252217 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 936 [post_title] => The Role of the Internet in Private Capital Markets [post_date_gmt] => 2014-10-08 15:57:29 [post_url] => https://aceportal.com/insights/the-role-of-the-internet-in-private-capital-markets/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/08/Insights1-350x196.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/08/Insights1.png [excerpt] => [post_content] => http://player.vimeo.com/video/108252217 In this video ACE CEO Peter Williams questions Daniel Gorfine, the Milken Institute's Director of Financial Markets Policy and Legal Counsel, on the new role of the internet in capital raising. They cover: Additional Interviews with Daniel Gorfine
The Milken Institute's mission is to improve lives around the world by advancing innovative economic and policy solutions that create jobs, widen access to capital and   enhance health.     [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [52] => stdClass Object ( [video_url] => http://player.vimeo.com/video/103526242 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 933 [post_title] => Raising Capital in Today's Environment [post_date_gmt] => 2014-10-06 15:17:53 [post_url] => https://aceportal.com/insights/raising-capital-in-todays-environment/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/08/Insights1-350x196.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/08/Insights1.png [excerpt] => [post_content] => http://player.vimeo.com/video/103526242 David Garrity, Principal at GVA Research and a Managing Partner at Whitemarsh Capital, talks with Jason Behrens, the ACE Portal General Counsel, about the evolving paradigm in today's capital raising environment. They cover: See David Discuss the transition from a Private Company to a Public Company   [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [53] => stdClass Object ( [video_embed] =>
topq graph

Analyzing private equity performance with TopQ

[post_author] => Cameron Nicol [post_author_bio] => Cameron Nicol is the Marketing Executive at TopQ [post_author_thumbnail] => Cameron Nicol [ID] => 928 [post_title] => 5 Ways to Improve Your Private Equity Fund Manager Selection [post_date_gmt] => 2014-10-06 13:33:33 [post_url] => https://aceportal.com/insights/5-ways-to-improve-your-private-equity-fund-manager-selection/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/city-grid-manhattan-25151-350x256.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/city-grid-manhattan-25151.jpg [excerpt] => [post_content] => When it comes to allocating your capital to private equity, like any other asset class, you’re looking for the best returns possible, which ultimately depend on fund manager selection. Choosing a guardian for your capital requires thorough due diligence to ensure minimal risk and the best chance of securing your expected level of return. But how can you predict top performing private equity fund managers? As the saying goes, past performance is not a guarantee of future performance but a private equity firm’s historical performance data is undoubtedly the most important place to start the due diligence process. If you look beyond headline performance numbers and dig into the underlying data, track record analysis can provide you with the questions you need to ask to evaluate the likelihood of future success. Here are five of the most important areas of a track record you need to scrutinize as a potential investor
1. Performance
A well-known fact in the industry is that IRR is a nice, easy number to evaluate performance on but it is not always a true representation of value, especially when it comes to negative IRRs. Because IRR is a time-sensitive calculation, it is relatively easy for a high IRR to be “baked-in” early in the investment through things like dividend recapitalisations, for example. This is why it can’t be relied upon in isolation, but should be viewed in conjunction with TVPI to give a better representation of performance. For an exhaustive discussion of the limits of IRR see this post. Another area of performance to investigate is what deals have contributed to stellar performance. You may often find that a few outliers have boosted performance of the whole fund. If so, it’s important to dig into these deals and understand how likely replication in the future is. Stripping out these outliers can also give an interesting view of how the portfolio would have performed without them. An increasingly popular area of performance is comparing private equity performance to public markets, achieved through public market equivalent (PME) calculations. As an investor it is important to know how a firm’s returns have fared against listed equities, whether this is then used to identify manager generated alpha or as an opportunity cost calculation, to name a few uses, is up to the specific investor.
2. Value Creation
Once you understand and decipher the performance numbers, it is worth understanding the catalysts of the performance: how exactly has this firm created value within their portfolio? A value creation or valuation bridge is the most common way to analyze this aspect of a fund. It breaks down value into a range of factors to let you see where value has been generated, as shown in the image below. [caption id="attachment_932" align="aligncenter" width="600" class=" "]topq graph Analyzing private equity performance with TopQ[/caption]
 3. Unrealized Deals
What % of their portfolio is still unrealized? A high percentage of unrealized deals will greatly affect the level of confidence in the portfolio as NAVs may not reflect the final exit price and so will have a bigger impact on returns. It’s also worth noting that it’s not uncommon for NAVs to peak before a firm goes out to market. This is why investigating unrealized deals and seeing what impact changes in exit date, multiples, and valuations will have on the portfolio is worthwhile.
4. Specialization vs. General
Another element to consider is the industry or region focus of the firm. When looking at a specialist fund, it is worth comparing it side-by-side to a generalist fund to see whether or not this focus produced market-beating benefits. If not, then it may be worth looking elsewhere. [For a pro/con discussion of a Fund of Fund approach see this post].
5. The Team
Potentially the most critical aspect of any firm: the team. These are the individuals who are out their putting capital (potentially yours) to work. Investigate who have been the key players in leading successful deals. Has performance been largely dependent due to just one or two star players? Once you have figured this out, find out if this team still exists in a similar dynamic. Changes in team members, especially the key players, will have a different effect on future performance. The Bottom Line: Track record analysis does not provide all the answers. It is not the panacea of due diligence. However, by really getting into the details of performance, you can understand how the factors that led to previous success align with the firm’s future fund strategy and uncover the questions you need to ask to make your due diligence meaningful, your fund manager selection effective, and your returns top quartile.
TopQ is a web-based suite of private equity performance analysis tools that makes due diligence and portfolio monitoring faster, more accurate, and more effective. By saving investors valuable time and resource in preparing analysis, TopQ allows for more time to be spent carrying out deep, meaningful analysis for informed decision making and improved returns. Visit www.topquartile.com to find out more. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Cameron Nicol ) [54] => stdClass Object ( [post_author] => Victor Sowers [post_author_bio] => [post_author_thumbnail] => [ID] => 926 [post_title] => Allocating Your Portfolio to Alternative Investments [post_date_gmt] => 2014-10-01 15:19:33 [post_url] => https://aceportal.com/insights/allocating-to-alternatives/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/Grey-ocean-350x233.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/Grey-ocean.jpg [excerpt] => [post_content] => Reports of how leading asset-allocators such as the Yale endowment have increased their returns while lowering risk has generated widespread investor interest in alternative asset classes. This should come as no surprise: the concept of achieving superior risk-reward combinations through diversification into different, uncorrelated asset classes certainly extends to adding private investments to one’s portfolio. But understanding that alternative investments might benefit your portfolio is very different than actually investing in them. Even on the more macro/portfolio level thinking through exactly what percentage of your portfolio to allocate to alternative investment opportunities is a very complicated endeavor. Why? Most asset allocation strategies are rooted in Modern Portfolio Theory (MPT) where portfolio allocations are derived from estimated risk and return parameters. But mathematical approximations of risk and return are more complicated in most alternative investments due largely to a lack of unified data. This is caused by three primary factors:
  1. Private companies and funds, by definition, do not have regularly observed market values. Periodic investment returns therefore have to be estimated from the rare exit values of specific investments.[1]
  2. Much like hedge fund indexes, private benchmarks tend to suffer from survivorship bias, in which successful companies and funds are more likely to report results than those that fail. This skews estimated returns and distorts us from getting an accurate picture of the true risks associated with these investments.
  3. It is difficult to obtain precise quantifiable metrics for adjustments for illiquidity, idiosyncratic (business-specific) risk, funding risk, and all the other various nuances that are present in private investments. Over time as the private capital markets evolve we will likely see the entire asset class transition from a skill-based alpha strategy to a more beta exposure/allocation play within portfolios. While this transition is being facilitated by online portals and the growth in secondary trading, this movement is still in its very early days.
The end result of this is that figuring out a specific percentage of your portfolio to allocate to this asset class defies pure quantitative determinations. Instead it greatly depends on individual risk preferences and investing expertise. Then there is the fact that thinking about private investments as an ‘asset class’ can also obscure the specific business risks investors take on in any given investment. When an investor allocates an investment to a specific company or fund, it is “not a passive investment in a basket of all private companies” but rather “a skill based strategy” representing a very specific investment opportunity.”[2] Basically the risks of each opportunity are extremely unique and should be considered independently as well as within the context of the pure asset allocation decision. Clearly adding alternative investments to your portfolio can have enormous benefits in enhancing return and reducing risk, but due to the inherent complexity of the asset class investors should take adequate precautions in allocating their portfolios to alternatives and private investments. I will leave you with some key questions to ask before investing in the asset class: For another take on allocating to alternative investments, see Jonathan Friedland's post: Allocating Assets to Alternatives [1] Link [2] Link [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Victor Sowers ) [55] => stdClass Object ( [video_url] => http://player.vimeo.com/video/97787631 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 923 [post_title] => The Role of Placement Agents in Fund Formation [post_date_gmt] => 2014-09-30 13:55:22 [post_url] => https://aceportal.com/insights/placement-agents-and-fund-formation/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/08/Insights1-350x196.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/08/Insights1.png [excerpt] => [post_content] => http://player.vimeo.com/video/97787631 ACE Portal CEO, Peter Williams, interviews Joseph A Smith, a Partner at Schulte Roth & Zabel LLP, about the role of placement agents in fund formation. Key topics of discussion include: You can also see Joe discuss Trends in Private Fund Formation
Schulte Roth & Zabel LLP is a multidisciplinary firm with offices in New York, Washington, D.C. and London. As one of the leading law firms serving the financial services sector, SRZ regularly advises clients on investment management, corporate and transactional matters, as well as providing counsel on securities regulatory compliance, enforcement and investigative issues. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [56] => stdClass Object ( [post_author] => Richard Pistilli [post_author_bio] => Richard is the COO of ACE [post_author_thumbnail] => Richard Pistilli [ID] => 917 [post_title] => Private Portals are Here: Proceed with Caution [post_date_gmt] => 2014-09-29 17:12:14 [post_url] => https://aceportal.com/insights/private-portals-are-here-proceed-with-caution/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/road-in-mountains-350x232.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/road-in-mountains.jpg [excerpt] => [post_content] => Want to hear a very poorly kept secret? Access to private investment opportunities is extremely limited and inequitable. This has been true on Wall Street for decades due to some rather stringent regulatory hurdles governing the marketing of private offerings, as well as the critical need to keep private deal information, well, private. Historically this has meant that investment banks hired on behalf of private companies and funds to raise capital have been left to manage closed, manually-driven processes where only their small roster of “known investors” were even contacted about the opportunities. Given the size of the new issue private markets (roughly $1 trillion per annum), this is quite remarkable. Fortunately, the tides are now turning. Thanks to new legislation under the JOBS Act, as well as the advent of some innovative technology, the private capital markets are opening up. Qualified investors now have an opportunity to access the marketplace without having to be on a “preferred investor” list, and can more easily navigate the entire private capital spectrum - from seed investments to seasoned corporate issuers-using new online portals. While this is certainly a positive step towards more efficient markets, investors should proceed with caution as the business models of these portals vary. Take Crowdfunding platforms as one example. These platforms have the potential to greatly expand capital flow for early-stage companies at reduced costs. For the most part, however, crowdfunding platforms do not require third-party professional intermediaries to prepare and diligence their offerings, which results in an un-curated and possibly high risk marketplace. Other private platforms can reduce transaction costs and improve market transparency. Here too investors need to understand each platform’s perspective on a number of factors including: Some of these factors clearly have the potential to create conflicts of interest. Bottom Line: The world of direct private investments is changing. Qualified investors of all stripes have never had such a broad opportunity to participate. Various business models are now in place to capitalize on this transformation, but the jury is still out on which will succeed in delivering sustainable value to investors. As always, buyer beware!   [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Richard Pistilli ) [57] => stdClass Object ( [post_author] => Jonathan Friedland [post_author_bio] => Jonathan Friedland is a partner with the Levenfeld Pearlstein law firm, the founder and publisher of AIMkts, and the author of the best selling book, The Investor’s Guide to Alternative Assets. [post_author_thumbnail] => Jonathan Friedland [ID] => 914 [post_title] => Asset Allocation into Alternatives [post_date_gmt] => 2014-09-25 16:25:58 [post_url] => https://aceportal.com/insights/asset-allocation-into-alternatives/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/subway-sunset-350x232.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/subway-sunset.jpg [excerpt] => [post_content] => The appropriateness of alternative assets in an investment portfolio has been in the news a lot lately. The August 16-17th edition of the Wall Street Journal, alone, had two articles on the subject. One, Do Hedge Funds Belong in a 401(k)? by Jason Zweig presents arguments by experts who have differing views on the subject. The other, Is Your Portfolio Too Diversfied? by Walter Updegrave answers the title’s question by preaching moderation. That is, Updegrave counsels that although diversification is appropriate, taking it to an extreme can be counterproductive. Both articles are worth a read. Before reading them, however, it’s important to make sure you don’t suffer from the common misperception that adding alternative assets (i.e. anything other than publicly traded stocks and bonds) will make your investment portfolio more risky. But risk is a relative question. That is, when we say something is more risky, you need to ask: more risky than what? Of course the answer is that we’re comparing the riskiness of stocks and bonds, on the one hand, with alternative assets, on the other. But wait. We’re not really talking about a single investment. Rather, we’re talking about the risk that the value of your investment portfolio will go down. Stated another way, even though a particular alternative asset (say, for example, an investment in a private placement) may be more risky than a particular more mainstream assets (say, for example, an investment in a blue chip stock), a portfolio consisting of only blue chip stocks is more risky than is a portfolio consisting of a mix of blue chip stocks and alternative assets. Investment professionals refer to the selection of a mix of assets as “asset allocation.” Allocating some of your money into blue chip stocks and some of your other money into alternative assets is just an example of a broader concept: dividing your savings into multiple classes of investments which are not likely to be impacted the same way as each other by various events is a key to lowering the risk that your overall investment portfolio will go down. Note the distinction generally made between the words “allocation” and “diversification.” When you pick investment classes (i.e. public stocks, bonds, private companies, gold, land, etc) that is allocation whereas the investments you make within a particular asset class (i.e. specific public companies) speaks to diversification. The old wisdom was that a mix of stocks and bonds would provide appropriate diversification. Indeed, until the 1970s, U.S. investors were typically invested in U.S. stocks, bonds, and cash. By the 1980s, some investors began to allocate some money into publicly traded foreign securities, PE, VC, commodities, and real estate. The trend of more diverse asset allocation has continued to this day. Why? Experience. Study after study has shown that good asset allocation among investment classes is much more important on overall performance of most peoples’ portfolios than is the way you diversify within each asset class. Depending on your circumstances, allocating into alternatives may make sense. Keep in mind, however, that the very notion of the “alternative” asset class is a misnomer because the wide range of alternative assets is way too broad to be considered a single asset class. Instead, if and when you decide to allocate some investment dollars into alternatives, you next will need to decide which alternatives to invest into. Alternative assets are not for everyone. And even when they are appropriate, the percentage of one’s total portfolio that should be invested in alternatives should generally be very low (think low single digits). However, if you have more than a million dollars invested then, as a rule of thumb, you should at least take the time to consider whether allocating some of your portfolio into one or more alternative asset classes makes sense for you. For an article on thinking through your asset allocation strategy relative to the specific risks posed by alternatives see Allocating Your Portfolio to Alternative Investments
Accredited Investor Markets (AIMkts) is a source where accredited investors can find news, analysis, and resources about investing in private equity, venture capital, hedge funds, tangible assets, and pre-IPO shares.   [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Jonathan Friedland ) [58] => stdClass Object ( [post_author] => Frank R. Suess [post_author_bio] => Frank is the CEO & Chairman of BFI Wealth Management (International) [post_author_thumbnail] => Frank R. Suess [ID] => 899 [post_title] => Years After Lehman, Is the Financial System Safer? [post_date_gmt] => 2014-09-24 13:19:04 [post_url] => https://aceportal.com/insights/post-lehman-is-system-safer/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/money_gold_bars_hd_wallpaper-350x262.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/money_gold_bars_hd_wallpaper.jpg [excerpt] => [post_content] =>

I don't really understand why there needs to be so much tension about this. The country is facing the worst economy since the Great Depression. If the financial system collapses, it will take every one of you down.

~ Ben Bernanke, Fall 2008

It’s been well over 5 years now since the most powerful bankers of the Western world, in the wood-paneled boardroom of the Federal Reserve Bank of New York in downtown Manhattan, convened to debate over the fate of Lehman Brothers. Henry Paulson, then the Head of the US Treasury, had called the meeting. Today, we all clearly remember what happened. Barclays was interested in the takeover of Lehman. However, Hank Paulson was not willing to afford any kinds of financial guarantees and the British financial authorities did not allow Barclays to proceed without those guarantees. Monday, September 15th, 2008, came along and Lehman Brothers went into Chapter 11. Soon after, the world’s financial system – and with it the global economy – went into a free fall. What followed - and continues to this day - was what will presumably go down in history as the greatest internationally concerted “rescue plan”, the biggest monetary and fiscal intervention of all times. Today, years later, we find ourselves wondering if anything has been gained? Is the financial system any safer than it was before 2008? Or, is the system just as fragile and loaded with risk as it ever was? Simon Johnson, economic professor at MIT and former chief economist of the IMF, says “No”, it isn’t safer at all. In a recent interview with Swiss journalist Mark Dittli, Mr. Johnson stated that the incentive systems of banks had hardly changed and that at the regulatory level, hardly anything has been achieved since 2008.

Regulatory Changes

There has been a regulatory flood since 2008. We’ve seen the likes of Dodd-Frank, FATCA, MIFID, and AIFMD. The Europeans are now feverishly pushing for an international standard of AIE, or Automatic Information Exchange. However, these regulatory beauties largely target the taxpayer and the smaller financial advisors and institutions. None of these regulations really attack the root of the problem: money that is too cheap, i.e. increasingly low interest rates that are out of sync with true risk, and too-big-to-fail banks that benefit from access to these very low interest rates via their implicit state guarantees. The big banks were already regulated heavily before 2008. It did not help. And now, the additional muck of new grand regulations is helping the big banks increasingly crowd out the smaller players.

 Basel III

But, what about Basel III? Yes, the Basel III capital standards were defined and put in place to address the issue of too-big-to-fail banks that are not sufficiently capitalized. Presumably, higher capital requirements, i.e. more conservative leverage ratios, were defined to make such banks more resistant to a financial crisis. However, the bankers’ lobby is probably the most powerful worldwide and Basel III turned out to be nothing more than mere window dressing. Today, the big banks are not really capitalized any better than in 2008. They don’t have enough equity in their balance sheets. Basel III allows them to use a “risk-adjusted valuation” of assets which results in capital ratios that “look too good”.

Regulations based on logical fallacies

The term “risk-adjusted valuation” in essence means that the assets and liabilities of a bank’s balance sheet are weighted according to their risk. The rules of weighting and valuation are complex and, as often is the case, more of an art than a precise function. Last fall, these rules were reviewed and presented thoroughly in a speech by Thomas Hoenig, FDIC Vice Chairman and former President of the Federal Reserve Bank of Kansas City. Mr. Hoenig started his speech as follows: “Aristotle is credited with being the first philosopher to systematically study logical fallacies, which he defined as arguments that appear valid but, in fact, are not. I call them well-intended illusions. “One such illusion of precision is the Basel capital standards in which world supervisory authorities rely principally on a Tier 1 capital ratio to judge the adequacy of bank capital and balance sheet strength. For the largest of these firms, each dollar of risk-weighted assets is funded with 12 to 15 cents in equity capital, projecting the illusion that these firms are well capitalized. The reality is that each dollar of their total assets is funded with far less equity capital, leaving open the matter of how well capitalized they might be.” To drive home his critical views on risk weighting, Hoenig used some powerful charts. For example, as portrayed in the following chart, he made the point that in a long-term context, the current capitalization of banks is at an historic low. The chart shows the average equity as a percent of assets for U.S. commercial banks from 1840 to 1993. In the 19th century, it appears that capitalization ranged from 30% to 40%. After the creation of the Federal Reserve as a lender of last resort for the banks, the ratio continuously retreated as banks would increasingly depend on state support in the case of an emergency. After the World War II, a capital ratio of about 10% became the norm. Then, with further deregulation starting in the early eighties, lower and lower “risk-free” interest, and the “creativity” of bankers, the ratio went even lower in the 90’s. Equity as Percent of Assets It is important to note that Chart 5 can be misleading though. It portrays the average of all commercial banks. Many smaller, regional commercial banks to this day still have higher capital ratios, which of course lifts the average ratio. Giant banks like Citibank or J.P. Morgan Chase have less than 4% and had less than 3% prior to the Lehman debacle. Bankers, of course, argue that risk-adjusted weighting of assets gives you a more precise picture of the “true risk” on the balance sheet. Can we trust this “more precise picture”? To this, Thomas Hoenig gives a resounding “No”. Common sense would tell us that a bank with higher capitalization will have less risk of defaulting. And, we would logically expect investors to afford a bank with higher capitalization a higher valuation premium. However, in his speech and via a series of charts, Hoenig is able to show how common sense and economic logic is basically removed by Basel III-style risk-weighting rules.

Risk-weighted ratios are like camouflage

The following charts and discussion are going to get a bit technical. In essence, they depict the statistical relationship, the correlation, of two variables shown on the axes of the graphs. In the left chart, the horizontal axis is the “leverage ratio”, the ratio of Tier 1 equity as a percentage of total assets, without risk-weighting. The vertical axis depicts the price-to-book ratio, i.e. the premium that financial markets afford the price of a bank’s stock. The result appears logical: the graph shows a positive correlation of a bank’s balance sheet strength (leverage ratio) and its price-to-book ratio. In other words, a bank with a higher capitalization will tend to be seen as “more valuable” and given a higher price premium. Therefore, bank managers should actually have a fundamental self-interest of increasing the capital of their banks. Right? Well, let’s look at the other chart, the one on the right.  
Leverage Ratio       Tier1 Capital

It depicts the “Tier 1 Capital Ratio”, i.e. the capital ratio that is based on risk-weighted numbers. Interestingly, we can only recognize a minimal, if any, correlation of capitalization and price-to-book-ratio. Risk-weighting removes the logic of “safety-premiums” and implicitly removes any incentive to raise capital.

The message in the following charts is even more pronounced. In these charts, the correlation of a bank’s risk to default (one-year estimated default frequency) is compared with its capitalization, with the one on the left again being without risk weighting, the one on the right with. In looking at the left chart, derived from data without risk weighting, common sense logic again appears to exist. There’s a negative correlation between a bank’s capitalization and its default probability. In other words, the better a bank is capitalized, the lower its risk to default is.

We would all agree that a bank that has a lot of equity and, vice versa, little debt exposures should be expected to be the safer bank. Right? Well, again, the second chart on the right, tells a different story. In this case, there is practically a zero correlation!?!?

 leverage ratio 2tier 1 capital 2

The graph on the right tells us the following: whether a bank has a Tier 1 Capital Ratio (a risk-weighted equity to assets ratio) of 10% or 20% has no inference to whether that bank has a higher risk to default. It also implies that a bank with a Tier 1 Capital Ratio of 20% can go into insolvency as easily as a bank with a Tier 1 Capital Ratio of 10%. That was the case with Lehman Brothers. They had a Tier 1 Capital Ratio of 11.6% the night before the announced bankruptcy. To put it more bluntly, these Tier 1 Capital Ratios are useless…they don’t mean anything! Or to put it in Hoenigs words: “While such findings are not conclusive, they suggest strongly that investors, when deciding where to place their money, rely upon the information provided by the leverage ratio”. If you believe the official spin that “banks are much safer and highly capitalized today”, you are being fooled by just one more accounting shenanigan and set of bogus numbers. The rules of Basel III were constructed by bankers, for bankers. The incentive system is still skewed, leaning toward less capital, greater size, and more state-subsidized, too-big-to-fail cheap money. Regulators, politicians, the media and the public have accepted the farcical solutions served to us. We have thereby accepted the reality that 2008 can, and will, happen again. In conclusion, if you’re interested in wealth preservation, you need to ask the following questions: with ever-rising sovereign debt, a continuously growing block of derivatives and too-big-to-fail banks that are back to the game of pre-subprime, should I trust the official numbers and recovery storyline? What can I do to protect myself from a repeat of 2008 and the certainty of heavy-handed interventions that will follow?

 Sincerely,

Frank Suess

BFI Wealth Management (International) is an independent wealth management and investment advisory firm with offices in Switzerland. BFI specializes in providing their upscale international clientele with a single point of contact for an array of multi-jurisdictional wealth services and solutions. BFI Wealth Management is a subsidiary of BFI Capital Group, a company with 20 years experience in offering a unique array of premium risk and wealth management services to private and institutional clients. ___________________________________________________________________________ © Copyright, BFI Wealth Management (International) Ltd., Bergstrasse 21, 8044 Zürich, Switzerland. Quotation is allowed if credit is given. Although every care has been taken in the preparation of this report, BFI does not guarantee and cannot be held responsible for the accuracy of any statistic, statement or representation made. We recommend that you consult qualified professional advisors to determine the applicability of this information and opinion. Readers should not view this report as offering personalized legal or investment advice. www.bfiwealth.com [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Frank R. Suess ) [59] => stdClass Object ( [post_author] => Joe Bartlett [post_author_bio] => Founder and Chairman of VC Experts, [post_author_thumbnail] => Joe Bartlett [ID] => 910 [post_title] => Reasonable Steps to Verify Accredited Investor Status [post_date_gmt] => 2014-09-23 20:06:53 [post_url] => https://aceportal.com/insights/reasonable-steps-to-verify-accredited-investor-status/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] =>

This article first appeared in VC Experts' excellent comprehensive summary of the JOBS Act on March 31, 2013. While over a year old, the guidance below still stands to the best of ACE Portal's knowledge. You can also see Joe's video interview discussing the topic as well as the video from Dan Gorfine of the Milken Institute.

The following discussion fleshes out a checklist of 'safe harbors' when the issuer and its counsel are faced with a requirement that they take "reasonable steps to verify" accredited investor status. The pending SEC Regulations on the JOBS Act, Title II may list a safe harbor or two; but, if so, the same are not likely to be exclusive. Hence, my personal contribution. The list is designed as guidance ("Guidance") for practitioners; it is not either a formal or informal legal opinion and it is a work-in-progress in the sense that it can and will be amended when, as and if we are educated by precedents … court decisions, No-Action letters, regulations and rules from a government agency, including State Securities Commissioners the SEC Staff and FINRA plus opinions from other commentators experienced in the sector. Pending such precedents, and in view of the apparent need, the hope (there is no guarantee, of course) is that the Guidance will attract enough of a consensus in the marketplace that it will protect those parties which adopt the same as the current canon against penalties for allegedly willful, reckless, grossly negligent, i.e., actionable, violations of the Securities laws. The idea is that, given adherence to the Guidance in the event of complaints based on the allegation that one of the investors in a 506(c) offering was not in in fact accredited, [1] the trier of fact will conclude that defendant issuer … compliant with one or more of the steps in the Guidance in fact acted reasonably,a test which is necessarily defined by common sense. The underlying thesis of the Guidance vis-à-vis "reasonable steps" can be encapsulated in the slang phrase: "if it looks like a duck, walks like a duck and quacks like a duck … it's a duck." The premise is that there could be a number of safe harbors which meet that test. The absence of any one or more does not mean, according to the principle of conspicuous omission, that "reasonable steps" have not been taken; any one of the safe harbors (absent a red flag to the contrary, of course) is sufficient, as per the Guidance, to insulate the issuer from attack by a private or public accusers. And, the list itself is not exclusive; clearly, other fact situations can and will prove to be safe harbors based on the overriding principle that common sense controls when the qualifier "reasonable" is enshrined in the language of the statute or rule. Many roads, in short, lead to Rome. I expect that the list can be expanded sequentially since the critical objective is to reduce, to the extent possible, the frictional costs imposed on small business financings in aid of the objective of the JOBS Act … to foster job creation through such financings rather than to narrow the incidence of emerging growth companies successfully soliciting capital infusions. The second premise is that, while self certification is not, of and by itself, a safe harbor in 506(c) (versus the universal practice of 506(b) offerings), investors claiming accredited status will initially be required to fill out a questionnaire. For purposes of the Guidance, the questionnaire is substantially more extensive than often seen in the "quiet 506" offerings. [2] A sample questionnaire, long version, is attached. As circumstance vary, the questions of course, can vary but one item is strongly recommended … namely that the questionnaire be headed by a reminder in capital letters (in order to attract attention of the investor) to the effect that filing a false statement with an agency of the Federal government is a crime under 18 U.S.C. 1001 and that the questionnaires will be maintained by the issuers in a file which is available for inspection by the appropriate Federal agency. The common sense idea, of course, is to impress upon any and all investors the seriousness of the answers they are asked to give. Herewith a checklist of the safe harbors established by the Guidance, together with discussion accompanying each; the list assumes the investor has self-certified and filled out the questionnaire. The test is whether, as a matter of common sense, his or her word should be believed.

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VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Joe Bartlett ) [60] => stdClass Object ( [video_url] => http://player.vimeo.com/video/102957534 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 907 [post_title] => Family Offices and Investing in Private Securities [post_date_gmt] => 2014-09-23 17:47:28 [post_url] => https://aceportal.com/insights/family-offices-in-private-securities/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/Angelo-and-Peter-350x235.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/Angelo-and-Peter.png [excerpt] => [post_content] => http://player.vimeo.com/video/102957534 Peter Williams, ACE Founder and CEO, speaks with Angelo Robles, the CEO and Founder of the Family Office Association (FOA). This is a can't miss interview for families interested in private securities and those interested in understanding how family offices look to source and diligence opportunities. Specific topics include: For more from Angelo, see his interview on defining exactly what a family office is and how it works
  The Family Office Association is a global membership community dedicated to providing UHNW families the resources to solve their most difficult challenges and achieve their respective and collective goals. Their strategic meetings and forums offer insight to grow wealth, strengthen legacy, and unite multiple generations through shared interests and passions. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [61] => stdClass Object ( [video_url] => http://player.vimeo.com/video/90041258 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 896 [post_title] => The JOBS Act Two Years Later [post_date_gmt] => 2014-09-18 15:34:03 [post_url] => https://aceportal.com/insights/the-jobs-act-two-years-later/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/08/Insights1-350x196.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/08/Insights1.png [excerpt] => [post_content] => http://player.vimeo.com/video/90041258 In this video ACE CEO Peter Williams questions Daniel Gorfine, the Milken Institute's Director of Financial Markets Policy and Legal Counsel, on what he has seen regarding the evolution and implementation of the JOBS Act over the last two years. They cover: Additional Interviews with Daniel Gorfine  
The Milken Institute's mission is to improve lives around the world by advancing innovative economic and policy solutions that create jobs, widen access to capital and enhance health. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [62] => stdClass Object ( [video_url] => http://player.vimeo.com/video/101089346 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 866 [post_title] => Fundraising for Emerging Growth Companies Post JOBS Act [post_date_gmt] => 2014-09-15 15:42:27 [post_url] => https://aceportal.com/insights/fundraising-for-emerging-growth-companies-post-jobs-act/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/bartlett-insights-350x172.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/bartlett-insights.png [excerpt] => [post_content] => http://player.vimeo.com/video/101089346 ACE General Counsel, Jason Behrens, interviews Joe Bartlett, a Co-Founder of our partner VC Experts and Special Counsel to McCarter and English on the fundraising environment for Emerging Growth Companies following the passage of the JOBS Act. In the video they first discuss nuances of the current legal environment with respect to IPOs relative to the entire JOBS Act. They then focus on whether the overall JOBS Act, which encourages companies to stay private longer, will have a greater impact than the IPO on-ramp provision found in Title 1 of the Act. Will the end result will be more IPOs or fewer? The second half of the video focuses on the change to the maximum number of shareholders and the potential for secondary trading and new liquidity programs in this new environment as well as the role of registered (and unregistered) finders in the capital raising process. For more video interviews with Joe see: VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [63] => stdClass Object ( [video_url] => http://player.vimeo.com/video/103525586 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 847 [post_title] => Transitioning from a Private to Public Company [post_date_gmt] => 2014-09-15 14:45:36 [post_url] => https://aceportal.com/insights/transitioning-from-a-private-to-public-company/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/08/Insights1-350x196.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/08/Insights1.png [excerpt] => [post_content] => http://player.vimeo.com/video/103525586 ACE General Counsel Jason Behrens interviews David Garrity, a principal at GVA Research and a Managing Partner at Whitemarsh Capital. David and Jason spend this interview discussing David’s experience taking two companies public. Their discussion is wide-ranging. Not only do they talk about the broad spectrum of why to go public and when relative to the passing of the JOBS Act and Sarbanes-Oxley, but they also drill down on key challenges in the process, what aspects of the CFO’s role changes, which stay the same, and questions around due diligence criteria for investors considering private companies. This interview is not to be missed. You can also see David discuss Raising Capital in Today's Markets. For a related piece on the financial decisions facing a private company throughout it's life cycle see https://aceportal.com/insights/the-financial-decisions-throughout-the-start-up-life-cycle/ [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [64] => stdClass Object ( [video_url] => http://player.vimeo.com/video/102955784 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 785 [post_title] => Defining a Family Office: Common Traits & Key Differences [post_date_gmt] => 2014-08-08 19:41:39 [post_url] => https://aceportal.com/insights/defining-a-family-office-common-traits-key-differences/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/08/Insights1-350x196.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/08/Insights1.png [excerpt] => [post_content] => http://player.vimeo.com/video/102955784 Peter Williams, ACE Founder and CEO, speaks with Angelo Robles, the CEO and Founder of the Family Office Association (FOA). Their discussion ranges across: For more from Angelo, see his other video on direct investing in private securities.
  The Family Office Association is a global membership community dedicated to providing UHNW families the resources to solve their most difficult challenges and achieve their respective and collective goals. Their strategic meetings and forums offer insight to grow wealth, strengthen legacy, and unite multiple generations through shared interests and passions. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [65] => stdClass Object ( [video_url] => http://player.vimeo.com/video/86353282 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 775 [post_title] => The Relationship between UHNW Investors and RIAs [post_date_gmt] => 2014-08-05 13:32:58 [post_url] => https://aceportal.com/insights/the-relationship-between-uhnw-investors-and-rias/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/08/Insights-xxl-350x201.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/08/Insights-xxl.png [excerpt] => [post_content] => http://player.vimeo.com/video/86353282 Peter Williams, CEO and founder of ACE, and Tom Petrone, director of capital markets at Dynasty Financial Partners, discuss why a high net worth investor would look to Registered Investor Advisors for help, how the process of accessing an RIA is different in the public versus private markets, and what challenges investors should be ready to face when it comes to direct private investments. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [66] => stdClass Object ( [video_url] => http://player.vimeo.com/video/86353284 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 771 [post_title] => Placement Agents & Capital Raising: Value & Conflicts [post_date_gmt] => 2014-08-04 17:45:23 [post_url] => https://aceportal.com/insights/placement-agents-capital-raising-value-conflicts/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/08/Insights1-350x196.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/08/Insights1.png [excerpt] => [post_content] => http://player.vimeo.com/video/86353284 Peter Williams, CEO and founder of ACE, interviews Jonathan Cunningham,a principal at Aequitas Advisors, about the critical role of placement agents. Peter and Jonathan talk about the role of placement agents in transactions and discuss at length the nuanced conflicts issuers should be aware of in capital market transactions. Finally they touch on how the JOBS Act may (or may not) alleviate some of these problems moving forward. This post is related to Richard Pistilli's discussion of the role of agents. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [67] => stdClass Object ( [video_url] => http://player.vimeo.com/video/101089347 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 761 [post_title] => Joe Bartlett on the role of VC Experts and Private Market Data [post_date_gmt] => 2014-07-28 18:03:23 [post_url] => https://aceportal.com/insights/joe-bartlett-on-vc-experts/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/NYSE_Image3-350x233.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/NYSE_Image3.jpg [excerpt] => [post_content] => http://player.vimeo.com/video/101089347 Joe Bartlett, a Co-Founder of VC Experts, speaks with ACE General Counsel Jason Behrens on the company's origins, mission, and importance. In particular he focuses on the role of comparable data in facilitating efficient market decisions and the unique niche VC Experts fills in providing that data. For another video with Joe see his discussion on Fundraising post JOBS Act VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [68] => stdClass Object ( [video_url] => http://player.vimeo.com/video/86061180 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 735 [post_title] => Current Trends in Private Fund Capital Raising [post_date_gmt] => 2014-07-22 21:19:08 [post_url] => https://aceportal.com/insights/current-trends-in-private-fund-capital-raising/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/08/Insights1-350x196.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/08/Insights1.png [excerpt] => [post_content] => http://player.vimeo.com/video/86061180 Peter Williams, CEO and founder of ACE, and Joseph Smith, a Partner in the investment funds group at Schulte Roth & Zabel, discuss the current landscape around clients raising alternative funds. Topics of conversation include: For a similar discussion as this video but focused on companies not funds see Raising Capital in Today's Climate and Post JOBS Act Funding
Schulte Roth & Zabel LLP is a multidisciplinary firm with offices in New York, Washington, D.C. and London. As one of the leading law firms serving the financial services sector, SRZ regularly advises clients on investment management, corporate and transactional matters, as well as providing counsel on securities regulatory compliance, enforcement and investigative issues. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [69] => stdClass Object ( [video_url] => http://player.vimeo.com/video/90041256 [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 733 [post_title] => Efficient Capital Flows Necessary [post_date_gmt] => 2014-07-22 19:07:22 [post_url] => https://aceportal.com/insights/efficient-capital-flows-necessary/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/shutterstock_41264950-350x233.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/shutterstock_41264950.jpg [excerpt] => [post_content] => http://player.vimeo.com/video/90041256 Peter Williams, CEO and founder of ACE, interviews Daniel Gorfine, Director of Financial Markets Policy at the Milken Institute (www.milkeninstitute.org), on capital market efficiency. Among the topics of conversation, Peter and Daniel discuss why financial markets are important and why the efficient flow of capital is essential to maintain a prosperous economy. They also address how the private and public markets are different from a regulatory perspective and how efficiency can be increased in the private market by leveraging more technology. Additional Interviews with Daniel Gorfine [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [70] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 721 [post_title] => Navigating Change in the Private Capital Markets [post_date_gmt] => 2014-07-22 18:49:17 [post_url] => https://aceportal.com/insights/navigating-change-in-the-private-capital-markets-2/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/shutterstock_139955497-350x233.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/shutterstock_139955497.jpg [excerpt] => [post_content] => With over $1 trillion in annual offerings, the U.S. market for issuing private securities is an exceptionally large, yet relatively unfamiliar asset class. What is a private security?  How does this market operate and why don’t I know more about it?  The following White Paper attempts to shed some light on this opaque marketplace for both issuers seeking to raise capital and investors looking for new opportunities.  So why now?  Because the private capital markets are in a transformative state.  Understanding the dynamics behind this asset class is an imperative for all market participants. This ACE Portal White Paper covers the following topics: Click here to download the full paper: Navigating Change in the Private Capital Markets.

Private Markets Overview

With over $1 trillion in annual offerings, the U.S. market for selling private securities is an exceptionally large yet relatively unfamiliar asset class.  This paper attempts to shed some light on an opaque marketplace by answering some common questions: The sector has been growing at a 15% compound annual growth rate, while public alternatives have plateaued.  These developments are due in part to the first significant regulatory changes made to the sector in more than 30 years.  As the transformation takes form, new innovations are emerging that will enhance the marketplace while also evoking some new concerns.  Understanding these dynamics will enable issuers, investors, and agents to take advantage of the opportunities this growing asset class presents. With over $1 trillion in annual offerings, the U.S. market for selling private securities is an exceptionally large yet relatively unfamiliar asset class.[1] What is a private security? How does this market operate, and why don’t I know more about it? The following paper attempts to shed some light on this opaque marketplace for both companies seeking to raise capital (“Issuers”) and investors looking for new opportunities. So why now? Because the private capital markets are in a transformative state. Understanding the dynamics behind this asset class is an imperative for all market participants.

What is a Private Security?

Generally, any sale of securities that is not registered with the SEC. In the U.S., any offer to sell securities must either be registered with the SEC (i.e., a “public offering”) or satisfy certain exempt qualifications in order to remain unregistered, or “private.” The most commonly cited private exemptions are outlined under Regulation D (“Reg D”).[1] Reg D consists of various rules that govern the qualifications needed to meet SEC exemptions and are available to any issuer without regard to public status. The majority of Reg D offerings are filed under the following rules: Reg D Summary A blue sky law is a state law that regulates the offering and sale of securities. They are designed to protect the public from fraud. The specific provisions of these laws vary, but they all require the registration of securities offerings and sales. As can be seen in the chart below, Rule 506 is by far the most commonly cited exemption because it pre-empts compliance with these disparate requirements. Reg D Exemption Claims

Why Are Private Securities Important?

Because private securities are a growing asset class with an attractive track record. Private securities offerings represent an exceptionally large asset class. In 2012, the market for Reg D offerings alone was approximately $905 billion.[1] These offerings run the gamut from small, early-stage seed rounds to multi-billion dollar corporate issuances and alternative investment funds (e.g., Private Equity Funds, Hedge Funds, and Venture Capital Funds). In the U.S. alone, there are approximately 128,000 private companies with more than $10 million in revenue and over 17,000 private funds.[2] From an issuer’s perspective, the addressable investor universe for private offerings in the U.S. includes more than 40,000 institutional buyers, over 3,000 single family offices, and nearly 8.6 million other qualified purchasers and individual accredited investors.[3] Aggregate Capital According to a study conducted by Duke University and Ohio State University, private equity returns have surpassed the broader public market by double digits over the last 25 years.[1] Some would argue that such performance is due to the fact that private companies are unburdened by public administrative costs, free from the volatility and distortion generated by high speed trading platforms and dark pools, and more focused on generating long term value instead of managing to quarterly performance estimates. Others might suggest that more structural influences are at play, such as buying in at a liquidity discount and selling at an M&A/IPO premium. In either case, the results have endured. From an issuer’s perspective, private capital markets are an increasingly attractive alternative for capital formation. This is due in part to a combination of legislative and regulatory changes (including Dodd-Frank and Sarbanes-Oxley legislation) that are compounding the already significant costs associated with issuing public securities. These changes increase uncertainty and create a barrier to entry for small to mid-cap companies that cannot absorb the legal, financial, and administrative overhead associated with public compliance. In addition, these companies receive limited attention from public research analysts and large investors, which reduces demand for their securities. As a result, companies are seeking alternatives to raising capital in the traditional public forums. Priv Securities

What are some of the Key Private Market Challenges?

Private securities are usually sold to a restricted investor community, which limits funding sources. Until recently (i.e., prior to the JOBS Act), in order for a securities offering to remain “private,” Issuers had to be careful not to engage in a “general solicitation" of their securities. So what is a general solicitation? While the SEC has actually never defined this term, a series of SEC no-action letters indicate a staff view that general solicitation occurs when a nexus between an issuer and its potential investors does not exist, or as the SEC puts it, a "substantive pre-existing" relationship does not exist. Additionally, with limited exception, only “Accredited Investors” are permitted to invest in a private placement. Finally, prior to the JOBS Act, the total number of investors in a private company generally was limited to 500 before such company became a public reporting company. These restrictions have limited the size of the potential investor community, making it more difficult to raise private capital. accreditation classifications Restricting access to financial professionals and sophisticated investors makes sense given the intrinsic risks in private securities. What are these risks? First, private securities possess an information gap. Without the degree of formal oversight that exists in the public markets, transparency is limited, and there is increased potential for asymmetric information between buyers and sellers. Basically, sellers are in control of what information they share with buyers. This makes conducting proper investment due diligence challenging and often requires professional assistance. Second, private securities do not trade openly in a large secondary market. This means that investors are unable to look to the market for price discovery and have limited liquidity available to them should they choose to sell their private securities. Finally, private securities are not sold through a centralized market infrastructure. This makes it very difficult for investors to compare pricing and other deal terms across different offerings. As can be seen in the diagram below, private companies tend to be smaller firms with shorter operating histories and limited available information. These factors increase the cost of capital and limit funding sources for private companies. capital life cycle

How Does a Private Offering Work?

Typically through an inefficient, labor-intensive, and opaque process. Until recently, Issuers were restricted from making general solicitations, or engaging in public marketing efforts. Instead, a closed process has been run, often by enlisting the services and guidance of financial professionals (“Placement Agents”). These Agents conduct due diligence on the Issuers, structure the offering terms, prepare marketing materials, contact a limited number of targeted investors, manage the investor diligence process, and ultimately negotiate the entire capital raise. While Placement Agents add expertise to this capital raising process, they are not required to manage a private issuance. Large alternative investment funds for example, often possess their own internal resources and bypass Agents altogether. Whether using a Placement Agent or internal resources, all Issuers rely on a very manual process. They must individually contact each targeted investor, confidentially brief them on the proposed offering, and then guide interested investors through a series of administrative / regulatory hurdles before revealing specific offering details (including the name of the Issuer). Only then do investors receive formal investment materials to review and begin their diligence. This entire process is managed through a series of phone calls and emails, all of which must be tracked and recorded. Given the labor-intensity of this process, investor reach is inherently limited and success rates are lower than they might otherwise be. For investors the situation is even worse. First, they must network with every investment bank and broker/dealer they know just to find private deals in the market. This requires navigating some very large institutions in an effort to find the “privates guy.” Depending on the firm, this could be someone in capital markets, industry coverage, or both. Then, the investor has to describe their investment objectives, and see if the firm currently has anything in market that fits. Finally, the investor must sit back and wait for the phone to ring. Some investors will receive many opportunities and some will not even receive a return phone call. The entire process is riddled with inefficiencies and lost opportunities. Given all the technological advances made in most other industries and the trillion dollar size of this asset class, this inefficiency is quite remarkable.

What is the Impact of Such Inefficiency on Private Markets and Companies?

More limited access, higher costs, and lower success rates. The aforementioned labor-intensive, one-to-one marketing efforts are a byproduct of these regulatory impediments. As shown in the chart below, the result is that a large universe of qualified investors are never introduced to private placements. Investors miss out on attractive opportunities, and companies have a harder time raising capital. In effect, the private securities market has been left to depend upon the telephone as the state-of-the-art technology for raising capital. This limits market reach, increases transaction costs (i.e., no effective leveraging of technology), reduces chances of success, and ultimately constricts capital flows. These factors have also driven a bifurcation in the marketplace where only large institutional investors capable of writing big checks are ever contacted by the Agents on an offering.  Access to Priv Securities

How Have Private Markets Remained So Inefficient?

Because restrictions governing the marketing of private offerings have deterred innovation. As previously mentioned, both Agents and Issuers are restricted by the safe harbor guidelines under Reg D. Prior to the JOBS Act, these guidelines prohibited general solicitation, (i.e., soliciting investors with whom a substantive pre-existing relationship did not exist), and limited private company shareholders of record to 500 before having to make public filings. Changes to these regulations have been slow. In fact, prior to the passing of the JOBS Act in 2012, no significant change had been made to these regulations for more than 30 years! During this time, securities laws surrounding the marketing of private securities were very unclear. Specifically, they were (1) based on numerous no-action letters, (2) subject to the current thinking at the SEC, and (3) subject to a facts and circumstances based analysis. This uncertainty has lead most Agents to deploy limited, direct marketing campaigns where they can control dissemination, rather than building out widespread distribution networks. The ultimate ability of the JOBS Act to alleviate these issues remains to be seen.

 What's Changing In Private Markets?

The private capital markets are in a transformative state. New legislation addressing the capital raising process for private companies has been passed with the intention of alleviating certain regulatory hurdles and removing marketing limitations that have heretofore restricted market access. This is a sea change that, combined with market trends towards seeking alternatives to public capital, will drive the adoption of new technologies and innovations. On April 5, 2012, the Jumpstart our Business Startups Act (“JOBS Act” or “Act”) was signed into law. The objective of the legislation is to stimulate growth of small to mid-sized companies by facilitating access to capital. Changes under the Act include: (i) raising the threshold for mandatory registration and public reporting (under the Securities Exchange Act of 1934) from 500 shareholders of record to 2,000; (ii) permitting general solicitation (i.e., ability to contact investors who you do not already know) in connection with Reg D offerings made under new rule 506(c), and (iii) registration exemptions for limited-size offerings sold in small amounts to a large number of investors (“crowdfunding”).

 New Opportunities for Private Issuers and Investors?

New opportunities yes, but also new risks. The alleviation of certain regulations under the JOBS Act has helped stimulate new business models in the private securities market. While this trend is a positive step towards more efficient markets, investors should proceed with caution when evaluating new opportunities. Early stage, start-up companies for example, are being acquainted with a multitude of crowdfunding platforms. These innovative models have the potential to greatly expand capital flow at reduced costs. Crowdfunding platforms, however, do not require regulated third party intermediaries to prepare and diligence the companies raising money on these platforms. This has the potential to introduce bad actors and fraudulent offerings on an unsuspecting public. For larger, more established private companies and alternative investment funds, online fundraising platforms have emerged with the goal of improving market access and efficiency by establishing the much-needed centralized technology infrastructure. Private platforms can reduce the search costs for both investors and Issuers, automate the compliance and tracking portions of the process, facilitate timely disclosure of information, and create economies of scale that bring efficiency to private capital markets. However, not all platforms are created equally, as each adheres to different philosophies and business models. In evaluating the alternatives, both Issuers and investors need to understand the platform’s perspective on a number of factors, including transaction independence, the role of Placement Agents, the due diligence process, confidentiality, and transparency. Some of these factors have the potential to create conflicts of interest.

Summary

The private capital markets are opening up and market participants are taking note. The sector has been growing at a 15% compound annual growth rate, while public alternatives have plateaued.[1] These developments are due in part to the first significant regulatory changes made to the sector in more than 30 years. As the transformation takes form, new innovations are emerging that will enhance the marketplace while also evoking some new concerns. Understanding these dynamics will enable Issuers, Investors, and Agents to take advantage of the opportunities this growing asset class presents. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [71] => stdClass Object ( [post_author] => Abe Nixon [post_author_bio] => Abe Nixon is a General Partner with the Sapling Fund [post_author_thumbnail] => Abe Nixon [ID] => 695 [post_title] => A New Asset Class: Start-ups & Early Stage Companies [post_date_gmt] => 2014-07-21 17:59:09 [post_url] => https://aceportal.com/insights/a-new-asset-class-start-ups-early-stage-companies/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => What do Facebook, GoPro, Twitter, Walmart, Microsoft, Chipotle have in common?  All of these businesses are now publicly traded multi-billion dollar companies.  Before September of 2013, the first chance that 99.9% of investors would have had to invest in these companies would have been their IPO. But everything you knew about investing completely changed in September 2013.  This is when the 80+ year old ban on General Solicitation for Private fundraising was lifted.  The Jumpstart Our Business Startups Act (JOBS Act) now allows entrepreneurs and business owners to raise capital to launch or grow their businesses online - without going public.  But, what does this actually mean? Let’s use Microsoft as an example.   Several private investors bought into the company for less than a $5 per share, depending on how early they got involved. A little later, then-obscure Microsoft issued shares at $21 in an initial offering in March 1986.  After nine stock splits, that 1 share became 288 shares with a present-day value of $7,200. If a person was fortunate to have invested while Microsoft was still private, at say $5 per share, those same 100 shares ($500) would be worth over $28 million.  Even at the IPO price of $21 per share, 100 shares would be worth $7.2 million.  Now, with general solicitation being rolled out, Microsoft could advertise its private offering on the internet, which means you, your friends, and I would have all had access to the deal. But you say, Microsoft is a “unicorn”, and there are only so many companies that ever become as big and valuable as Microsoft.  So, let’s look at another end of the spectrum, which happens more regularly, and see how investments there can work out.  “ABC Company” is a start-up with a strong team, traction, social proof, and large total addressable market.  They have bootstrapped their business for 8 months, have good trajectory, and decide to raise capital online.  Say the company is raising $600,000 on a $5 million valuation (there are thousands of similar private fundraises happening right now). Fast forward 5 years when ABC Company is sold for $50 million.  Here is how that investment played out for the early investors:

  Abe Nixon chart

Here is a summary of the additional impacts that most people don’t think about and likely never make it into major news outlets, i.e. all the other positive economic ripples that are created by this event: There are already private funds and syndicates being set up around this ecosystem.  If I were a betting man, I would bet there will eventually be multiple, well known, publicly traded vehicles to capitalize on this NEW ASSET CLASS. Stay tuned for more from Abe on this topic

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The Sapling Fund LP (www.SaplingFund.com)  targets best of class, early stage companies with a 3x-15x ROI profile on a 5 year horizon. It invests both capital and strategic mentorship into portfolio companies. Our target Sapling companies have a strong team, strong traction, strong social proof, strong scalability, and usually a multi-billion dollar total addressable market. Targets also typically leverage technology to create major, disruptive improvements in the marketplace.   Specific verticals of interest are:  Internet of Things, Healthcare Innovation, and FinTech.  The Sapling Fund LP team seeks to multiply the growth trajectory of great businesses using data, technology, mentorship, our strong network of relationships, and smart capital in early stage funding rounds less than $1M.

Abe Nixon is a General Partner with the Sapling Fund LP.  He specializes in Early and Growth Stage Venture Capital.  As an expert in early/growth stage business due diligence, funding, and growth strategy, he has reviewed more than 10,000 business plans, and consulted with hundreds of companies ranging from startups to billion dollar companies.  He also consults with private accredited investors and institutions.  One of Abe's core missions is to improve the world through the support of great entrepreneurs, business owners, and private funding sources.  He believes that innovation and private enterprise are fundamental keys to sustained growth and prosperity of the US economy.

[post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Abe Nixon ) [72] => stdClass Object ( [post_author] => Joe Bartlett [post_author_bio] => Founder and Chairman of VC Experts, [post_author_thumbnail] => Joe Bartlett [ID] => 654 [post_title] => The Dividing Line Between Public and Private Markets Has Been Breached [post_date_gmt] => 2014-07-16 18:31:20 [post_url] => https://aceportal.com/insights/the-dividing-line-between-public-and-private-markets-has-been-breached/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/0710_DimLights_630x420-350x233.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/0710_DimLights_630x420.jpg [excerpt] => [post_content] => This article, originally titled "The 180 Degree Turnaround in the U.S. Equity Markets: The Dividing Line Between Public and Private Has Been Breached" first appeared in the "Jumpstart our Business Startups Act (JOBS ACT) Guide compiled by VC Experts

Public and Private Market Divisions Blurring

For 75 years, the rules in this country governing capital formation for high growth enterprises have not changed. There are two categories ... (i) public companies which float equity securities e.g., common stock in public offerings with shares publicly traded on various exchanges; and (ii) private companies financed by placements to a limited group of investors pursuant to exemptions from federal and state registration requirements, the shares changing hands infrequently until and unless the company goes public. The division between public companies and private companies is no longer a bright line. A new entrant … HPPOs (hybrid public private companies)… has approved HPPO shares are not listed on the NYSE or NASDAQ but are traded on secondary exchanges. Companies, holding shareholders "of record" to under 2000 (up from 500), can remain HPPOs. Per JOBS Act, Title II, private companies can go "public" online without filing any paperwork other than their pitch materials and, if an Advance Form D 15 days before the PPO (my word for a "private public offering") launches on the web. The distinction between public and private is fuzzed over in the case of both the HPPOs and the investment process ... PPOs vs. IPOs, the enabling Rule for PPOs being 506(c). In fact when and as the Reg A+ regulations are finalized, there will be three ways to go public and only one of the same, the conventional IPO model, involves filing Form S-1, etc. The census of U.S. start-ups setting sail (nicknamed Gazelles) could triple in my view if each and all could access early stage capital, empowering them to make it to the next stage of the Conveyor Belt and then beyond, meaning into those precincts to which institutional investors have retreated.

The Internet is Redefining Private Opportunities

As a force of nature, the Internet is like the Mississippi River which finds its own way to the Gulf regardless of the Corps of Engineers' attempts to influence the river bed with dikes, dams, channels, etc. Post a business plan and pitch book online and the Gazelles are immediately in front of millions of pocketbooks. Can it be imagined that sophisticated investors would find it "dignified" to patrol the Internet for deal flow? Why not, given that VCs with access to the largest deal flow are the most successful? But, would anyone with connections in the innovation space waste time looking at deals on the Internet, where anyone can present? "Undignified" is too mild an epithet, as I pointed out to an asset manager who laughed: "Joe! 20 years ago, looking for a romantic partner on the Internet was undignified. Now everyone over 30 goes to online dating services to find a soul mate." His response was prescient; platforms are lining up to chaperone Internet-enabled deal flow, functioning like dating services … like-to-like. [For the latest on online platforms see this webinar discussion]. The web will (presumably) be cluttered with deal flow but the smart guys will look for dating services focused on aggregating and packaging quality deal flow into buckets and arranging like-to-like exposure ... the buy and sell side. Industry sector buckets will be comprised of, e.g., medical devices; solar and wind; digital media; foreign high tech companies moving to the United States; spin outs from academic labs; the back ends of syndicated angel deals.

Where do the skeptics come from?

Skeptics fall into two categories. The first, conventional scandal starved media forecasting that Rule 506(c) will become an avenue for fraudsters… the Nigerian Royal Family. Every time a deal craters, as many if not most do even in the best managed portfolios, that will be evidence that the retirement savings of Grandma and Grandpa have been wiped out. That forecast of doom will, however, be counteracted by news of a 10x return … evidence that investing in deals chaperoned and curated by platforms staffed with experienced personnel is significantly better than playing the lottery. And secondly, the nay-sayers are also forecasting strangulation by regulation. They are particularly focused on the statutory requirement that issuers online take "reasonable steps to verify" that each investor in fact qualifies as accredited. Self-certification by investors no longer qualifies of and by itself as "reasonable." Each investor will fill out a questionnaire but the parties undertaking a PPO need to undertake "steps" in one of two categories … three SEC-blessed safe harbors which call for proof of financial status … e.g., federal income tax returns from the investor or verification from their tax preparers, accountants, brokers and investment managers. There are also "principles based" steps and those are not outlined specifically. To many this barnacle may drive issuers away from 506(c) because it is too onerous and/or risky. Review my tax returns? Fuhgeddaboudit! There are also extensive complaints about the requirement (if it becomes a requirement) that Advance Form D be filed and that pitch material be contemporaneously sent to the SEC. Further, there are administrative issues … custody of cash and securities, for example; insuring that filings are timely made; specified legends applied to the pitch materials as they are circulated. And negligent violations threaten to put the issuer in the penalty box, unable to raise money per Reg D for 12 months.

Change is Still A-Coming

The fact, however, is that nature abhors a vacuum. To meet 506(c) challenges service providers are coming to the web and managing the processes on behalf of customers at prices which appear realistic and reasonable. Such resources, e.g. CrowdClear http://www.crowdclear.com, deploy computer aided tools which verify accredited status; take custody of securities; manage back office procedures such as filing forms on time, attaching required legends and so forth. They are equipped with complementary tools, VC Experts' deal terms and valuation https://vcexperts.com/intelligence, which can lift the Gazelle above the crowd; empowering investors to find the Gazelles which fit their preferences, and vice versa. Moreover, both the U.S. and international stock exchanges are welcoming customers, both public companies and HPPOs, each operating the third leg of the stool … secondary trading exchanges for private companies. The NASDAQ acquired SharesPost and the NYSE is partnered with ACE Portal. My forecast. A huge economic impact once the beta test, now underway, winds up positive. Assuming it is, who can afford to hold out? For a related video interview see 'The Role of the Internet in Capital Markets'   [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Joe Bartlett ) [73] => stdClass Object ( [post_author] => Day Pitney LLP [post_author_bio] => [post_author_thumbnail] => Day Pitney LLP [ID] => 618 [post_title] => The Original JOBS Act: A Summary [post_date_gmt] => 2014-07-14 20:06:14 [post_url] => https://aceportal.com/insights/the-original-jobs-act-summary/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/money_gold_bars_hd_wallpaper-350x262.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/money_gold_bars_hd_wallpaper.jpg [excerpt] => [post_content] => This Post originally appeared on the VC Experts Buzz Feed and was written by Lane T. Watson and Bion Piepmeier of Day Pitney LLP shortly after the passing of the JOBS Act. It provides a very well crafted snapshot of the originally passed JOBS Act and does not reflect any subsequent updates. For a review of the JOBS Act in the two years since it has passed see this interview. After a comparatively brief debate in Congress, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) on April 5, 2012. The JOBS Act enjoyed an unusual level of bipartisan support in the hope that the new law's provisions streamlining the initial public offering process for emerging companies, enhancing the private placement market and leveraging the Internet to raise capital for small companies will result in the creation of new jobs. In this alert we consider the three provisions of the JOBS Act dedicated to facilitating nonpublic offerings of securities: Title II, which allows for public solicitation in connection with certain Rule 506 and Rule 144A offerings; Title III, which creates a new private placement exemption for crowdfunding via the Internet; and Title IV, which may breathe new life into the otherwise little used Regulation A offering exemption. For a comprehensive overview of these changes to the Private Markets see the ACE Portal White Paper.

TITLE II ACCESS TO CAPITAL FOR JOB CREATORS

Rule 506 of Regulation D is a longstanding and much used exemption safe harbor from the registration requirements of the Securities Act of 1933 (Securities Act). Through this exemption, issuers can sell unregistered securities to an unlimited number of accredited investors and a limited number of nonaccredited investors. However, prior to the JOBS Act, Rule 502 of Regulation D prohibited the general solicitation or advertisement of securities in Rule 506 offerings. Thus, issuers needed to have some preexisting relationship with potential purchasers before conducting a private placement. This created a potentially significant limitation on an issuer's ability to find and raise capital in a competitive process. Title II of the JOBS Act has reversed that limitation to allow for the general solicitation and advertisement of a Rule 506 offering, as long as all ultimate purchasers are accredited investors. Within 90 days following enactment of the law, the Securities and Exchange Commission must revise Rule 506 to provide that Rule 502's limitations on solicitation and advertisement do not apply to Rule 506 transactions involving accredited investors only. This makes the identification of accredited investors especially significant [See additional posts on this here and here]. Prior to the JOBS Act, purchasers have been allowed to self certify that they qualify as accredited investors. In a departure from this long approved practice, however, the JOBS Act provides that issuers are now required to take "reasonable steps" to ensure investors purchasing securities through a Rule 506 offering are "accredited investors." It remains unclear what steps the SEC will require from issuers to verify that purchasers under Rule 506 are actually accredited investors. According to the 14 Law Firm Consensus Report released on April 5, 2012, the current version of Rule 506 will remain in effect until the SEC puts forward the new rules. Many companies take advantage of Rule 506 to issue securities. By removing the ban on general solicitations, these companies do not have to rely solely on existing relationships for funding. A wider audience of investors can be reached via the Internet, seminars and other venues. Additionally, placement agents and finders can also use Rule 506 to advertise securities through a diverse range of mediums. The fact that purchasers must be accredited investors will not significantly change the audience for Rule 506 offerings, because most issuers avoid offerings to nonaccredited investors because of the additional disclosure burdens it creates. Title II also amends Rule 144A of the Securities Act. Rule 144A is a safe harbor exemption that allows an individual to resell restricted securities to "qualified institutional buyers." Within 90 days following the enactment of the JOBS Act, the SEC must revise Rule 144A to allow offers to nonqualified institutional buyers, including by means of general solicitation or general advertising. Issuers may not use Rule 144A to offer securities, but instead may sell securities to an intermediary who can resell the securities to qualified institutional buyers. However, pursuant to the JOBS Act, a reseller using Rule 144A can sell these securities only to a purchaser the reseller, and any person acting on behalf of the reseller, reasonably believes is a qualified institutional buyer. As with the accredited investor verification, it remains to be seen what standard the SEC will set for issuers to "reasonably believe" a purchaser is a qualified institutional buyer. Moreover, current Rule 144A remains in effect until the SEC provides the new rules. Finally, under Title II, individuals who conduct Rule 506 offerings via the Internet or other platforms are not required to register as brokers or dealers. Offerings conducted through these platforms may employ general solicitation and general advertising to market the unregistered securities. Further, individuals will not have to register as brokersor dealers simply because they coinvest in the securities or they provide "ancillary services" (such as due diligence services or providing standardized documents) in the offering of these securities. In order to qualify for the exemption from registration as a broker or dealer, the individual maintaining the offering platform must not receive compensation in connection with the purchase and sale of the securities, must not have possession of customer funds or securities, and must not be subject to disqualification under the Securities Exchange Act.

TITLE III CROWDFUNDING

Title III (crowdfunding) is the most novel provision of the JOBS Act in that it creates an entirely new exemption from registration of securities offerings structured to take advantage of the Internet's capacity for mass communication and social interaction. Nonetheless, it remains to be seen whether crowdfunding will ultimately be a widely used exemption or spur the kind of startup economic activity Congress and the president intended. The concept of crowdfunding is based on large numbers of investors each investing relatively small amounts in an issuer, to give early stage companies access to capital while minimizing the risk to individual investors. It also extends the tacit promise of making entrepreneurial investing, of the type previously the exclusive realm of venture capital funds and wealthy individuals, available to the vast majority of potential investors who do not qualify as accredited investors. Because many of the details of Title III were left up to the SEC to determine by additional rulemaking within 270 days after passage of the JOBS Act, however, the new exemption will not become effective until the new SEC rules have been adopted. Securities issued pursuant to the crowdfunding exemption (crowdfund securities) offer a number of advantages to issuers. As in Rule 506 offerings, they are "covered securities" exempt from state registration requirements (but not from enforcement of state antifraud laws). In addition, the original holders of crowdfund securities will not be counted toward the shareholder limits under Section 12(g) of the Securities Exchange Act, which can cause issuers to become reporting companies. As an example of the potential effects of SEC rulemaking, however, whether that exclusion will apply to subsequent holders of crowdfund securities is not so clear. Unlike Rule 506 offerings, in which issuers deal directly with investors, crowdfunding creates an offering structure that interposes an intermediary between the issuer and the investor. The issuer, the intermediary and the investor alike are subject to specific responsibilities and limitations regarding participation in crowdfund offerings. Ostensibly, crowdfunding issuers can sell up to $1 million in crowdfund securities, but issuers have to announce a specific target amount. However, the magnitude of financial disclosure required is a function of the targeted size of the offering, and may therefore be the crucial determiner of amounts issuers are willing to ask for. All issuers must provide a description of their financial condition and certain financial information. If an issuer is trying to raise $100,000 or less, it need only provide its most recent tax returns or a copy of its financial statements certified as true and complete by its principal executive officer. If an issuer wants to raise more than $100,000 but not more than $500,000, it must provide financial statements reviewed by an independent public accountant. But if an issuer wants to raise $500,000 or more, it needs to provide audited financial statements. That might prove to be the breaking point for a number of issuers who will have to decide whether the cost and effort of audited financials justifies the additional offering amount. Other information the issuer must provide includes names of officers, directors and 20 percentor greater shareholders; a description of its business; and the intended use of proceeds. In addition, issuers must describe their ownership and capital structure, including the rights of existing shareholders, how the offered crowdfund securities were valued, the risks to purchasers of minority ownership and other information the SEC may require in its rulemaking process. Importantly, the issuer itself cannot advertise the terms of the offering other than by providing notices that direct a potential investor to the crowdfund intermediary. Once the offering is over, the issuers still retains an obligation to file annually with the SEC and provide to investors reports of the results of operations and financial statements in accordance with the rules developed by the SEC. More than any other requirement, it may be this residual reporting obligation that will cause issuers to think twice about the costs of crowdfunding relative to other available exemptions. Crowdfund intermediaries must be registered with the SEC as either a broker or a "funding portal," a new service provider concept created for the crowdfund exemption. A "funding portal" is exempt from registration as a broker or dealer but is subject to SEC authority; it is not permitted to offer investment advice, solicit purchases or sales of the crowdfund securities offered in its website, compensate employees or others based on sales of crowdfund securities, or hold or manage investor funds. The intermediary's role is largely that of a conduit. An intermediary is required to make available to the SEC and potential investors the information provided to it by the issuers. However, intermediaries are also required to fulfill a number of affirmative obligations. These include ensuring potential investors review certain investor education information, affirming the possibility of loss of the entire investment and the investor's ability to withstand such a loss, and requiring investors to answer questions demonstrating an understanding about the risks of investing in a startup, the illiquid nature of crowdfund securities and others the SEC may require. An intermediary is also responsible for ensuring no funds are released to the issuer  unless the offering target has been achieved. Limits are placed on the amount of crowdfund securities that can be sold to an investor in any 12month period based on his/her annual income and net worth. Investors with either annual income or net worth of less than $100,000 can invest the greater of $2,000 and 5 percent of annual income or net worth. Investors with either annual income or net worth of more than $100,000 are allowed to invest up to 10 percent of their annual income or net worth, up to a maximum of $100,000. Annual income and net worth will be calculated in the same manner as for accredited investors under Regulation D. It is not clear whether and to what extent investors will be allowed to self certify their status, as is currently the case in Rule 506 offerings. Moreover, the crowdfund exemption makes the intermediary responsible for policing whether potential investors are adhering to these limitations in the context of a particular offering. Crowdfund securities will not be transferable for a year after initial purchase, except to the issuer or an accredited investor and in certain other circumstances. Issuers may want to add additional restrictions. Foreign entities will not be able to use crowdfunding, because it will be available only to entities organized in the United States. Issuers and intermediaries will be subject to disqualification from using crowdfunding for prior bad acts. The issue of potential fraud was raised early by many legislators and the SEC, and this resulted in the adoption of a more restrictive version of crowdfunding than the one originally proposed by the House of Representatives. In addition to scaling back offering amounts and increasing disclosure requirements, the version of crowdfunding passed into law creates liability for issuers that make untrue statements of material facts or fail to state material facts required to make statements not misleading. For purposes of the antifraud provisions of Title III, the concept of "issuer" is broadly defined to include directors and officers or partners of an issuer, who offer or sell crowdfund securities. Investor remedies in such cases include rescission, if they still own the securities, or seeking damages if they do not. Ironically, some state securities authorities have speculated the crowdfunding law passed may not be attractive enough for genuine growth companies to consider and may be more favored by "fraudsters" trying to take advantage of unsophisticated investors looking for the next Google or Facebook. Whether crowdfunding will be able to achieve the goals of funding more early stage companies and creating jobs is far from certain. The financial disclosure limits and other obligations on issuers may keep many companies out of the market or keep them from raising amounts that will spur employment. Companies that are able to obtain venture capital financing may continue to use Rule 506 private placements, relegating crowdfunding to the realm of companies that are unable to get the backing of professional investors or to small companies that need infusions of capital but are unlikely to grow much in the future. The rules developed by the SEC may largely determine whether crowdfunding becomes a genuine path to growth for startups or an unfulfilled promise.

TITLE IV- SMALL COMPANY CAPITAL FORMATION

Section 3(b) of the Securities Act gives the SEC authority to exempt certain securities from registration. Pursuant to that provision, the SEC adopted Regulation A to help small companies raise limited amounts of capital without going through full, and potentially burdensome, registration requirements. Thus, a Regulation A offering is often called a "mini-registration" because the issuer needs to provide only certain documentation, such as Form 1A and financial information. However, Regulation A has been a relatively little used exemption. Title IV of the JOBS Act is intended to increase the appeal of Regulation A for issuers by adding a new exemption many have referred to as "Regulation A+." Regulation A+ raises the maximum amount that may be offered from $5 million to $50 million. The SEC will review this offering ceiling every two years to consider increasing the amount that may be issued. Issuers can use Regulation A+ to offer equity securities, debt securities, and debt securities convertible or exchangeable for equity interests (including guarantees of such securities). In addition, Regulation A+ securities may be promoted through general solicitation and advertisement, expanding the potential pool of investors available to issuers. There are no holding periods or similar restrictions on resales of Regulation A+ securities. Issuers using the revised Regulation A+ may also "test the waters" and solicit interest prior to the offering by filing an offering statement. Civil liability through Section 12(a)(2) applies to any person offering or selling securities under Regulation A+. In a change from previous law, securities offered through Regulation A+ will now be "covered securities" under NSMIA and will not be subject to state securities law review. In order to qualify for this exemption and avoid state securities law review, however, the securities must be sold on a national exchange or be sold to "qualified purchasers." The SEC has not yet provided a definition for "qualified purchaser" under this provision. The JOBS Act also charges the comptroller general with studying the impact of Blue Sky Laws on offerings made under Regulation A. Finally, issuers offering securities through this Regulation A+ will have to meet certain disclosure requirements. The SEC will require issuers to file audited financial statements on an annual basis. Additionally, Title IV grants the SEC the authority to promulgate other rules and regulations for the protection of investors. Such rules may include a requirement that issuers file with the SEC and distribute to prospective investors an offering statement or other documentation containing audited financial information, a description of business operations and corporate governance principles, and information on the issuer's use of investor funds. The SEC may also require disqualification provisions similar to those regulations found in the Dodd Frank Wall Street Reform and Consumer Protection Act that currently prohibit felons and other "bad actors" from making Regulation D offerings.
Lane T. Watson, Counsel, ltwatson@daypitney.com Mr. Watson is a counsel in Day Pitney's Corporate Law department. His practice includes mergers and acquisitions, venture capital and other private placement transactions and private equity fund investments. He graduated from The University of California Hastings College of the Law and was a member of the Hastings Law Journal. Full Bio Bion Piepmeier, Associate,epiepmeier@daypitney.com Mr. Piepmeier is an associate in Day Pitney's Corporate Law department. He graduated from the Fordham University School of Law and was a summer apprentice at the firm in 2010. While in law school, he served as a legal extern for then-U.S. Magistrate Judge Esther Salas of the District of New Jersey. He was also an associate editor for the Fordham Environmental Law Review, a member of the Moot Court Board and a legal writing and research teaching assistant. Mr. Piepmeier worked as an innovation fellow at the Connecticut Technology Council in 2010, and received a Bachelor of Arts in Government from Connecticut College. Full Bio Day Pitney LLP Day Pitney LLP (www.daypitney.com) is a full-service law firm with more than 300 attorneys in offices in New York, New Jersey, Connecticut, Boston and Washington, DC. The firm offers clients strong corporate and litigation practices, with experience working on behalf of large national and international corporations, as well as emerging and middle-market companies and individuals.

[post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Day Pitney LLP ) [74] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 561 [post_title] => Using A Placement Agent in Early-stage Rounds [post_date_gmt] => 2014-07-14 18:45:29 [post_url] => https://aceportal.com/insights/placement-agents-in-early-stage-rounds/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/cars-city-contours-1828-350x233.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/cars-city-contours-1828.jpg [excerpt] => [post_content] => This article first appeared in the "Introduction to VC and PE Finance" Encyclopedia by VC Experts

Should I use a Placement Agent to Raise Money

Founders, who are desperate for financing, debate whether the faucet will turn on if they engage a placement agent. This is a question to be addressed in a real-world context. In the first place, the great majority of first-round financing is not economically interesting to an investment-banking firm. The fee for a placement is usually in the range of 2 to 5 percent of the amount raised. Assuming a $1 million first-round financing, a fee of $20,000 to $50,000 is not likely to attract many takers in the investment-banking fraternity, when fees for acting as financial adviser in contested merger-and-acquisition transactions run into eight figures. There are exceptions to this, as in any other proposition. Encore Computer, because of the splendid reputation of its founders, attracted a high degree of interest from major-bracket investment bankers in the seed round; William Poduska, on leaving Apollo Computer and organizing Stellar, was able to titillate investment-banking appetites to a fever pitch. (Neither firm, it should be noted, remains as an independent entity.) However, the traditional founder is wasting his time beating down the doors of the elite investment bankers to help raise money in the early rounds. Smaller investment-banking houses sights are set lower than Morgan Stanley or Goldman Sachs, are more likely candidates, but even they are not enthusiastic about hitting the pavement to arrange a first-round investment because the amount of work is enormous and the payoff is often uncertain. If an agent is engaged to place securities privately, he will surely act only on a best-efforts basis. A firm commitment in the early stages of a company's history, indeed a firm commitment on a private placement of any kind, is encountered only in special circumstances. Moreover, the founder should understand that the agent is not obligated to sell an untried security; that task remains the responsibility of the founder. The agent is engaged to do the following: Purchasers in early rounds are not interested in discussing the merits of the investment with a salesman. The founder, and only the founder, has that reservoir of knowledge about the technology and its potential application which potential buyers are interested to hear. Moreover, the agent will look to the founder for a so-called friends list, that is, potential investors already known to the founder. More importantly, the placement agent will usually insist on a right, in the nature of a first-refusal right, to lead subsequent rounds of financing, a provision that should be approached thoughtfully. If an investment-banking house known only to a few loyal adherents on Wall Street is willing to help out in a first-round financing but at a cost of controlling subsequent rounds, the founder may find that price too stiff. On the other hand, it is unrealistic to expect an investment banker to work enthusiastically on the most difficult financing, that is, the earliest, and then simply take his chances at being remembered with gratitude when subsequent, more lucrative rounds are being discussed. One value of a placement agent at an early stage is it will, in all likelihood, impose some important imperatives upon the founder, in some cases to his consternation. For example, experienced corporate financiers save time by introducing founders to the real world of early-stage finance and some of the "rules," such as that all moneys raised go into the company (and none of it leaks out to the founder). Often the founder has built up a debt from the company to himself for accrued and unpaid salary, money loaned, and so forth. With his own creditors knocking at his door, the founder may approach a financing with an eye to intercepting some of the money for himself, to pay his urgent bills. A placement agent will rapidly disabuse a founder of that notion. For a different take on the benefits an agent can provide a private company see this post

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VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries.

[post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [75] => stdClass Object ( [post_author] => VC Experts [post_author_bio] => VC Experts provides verified data, reports, and analytics to help private market investors [post_author_thumbnail] => VC Experts [ID] => 549 [post_title] => Defining the Types of Angel Investors [post_date_gmt] => 2014-07-14 16:43:20 [post_url] => https://aceportal.com/insights/whos-who-of-angel-investors/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/Screen-Shot-2014-07-16-at-2.29.35-PM-350x160.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/Screen-Shot-2014-07-16-at-2.29.35-PM.png [excerpt] => [post_content] => This article first appeared in the VC Experts comprehensive "Introduction to VC and PE Finance" Encyclopedia.  Angel groups [1] have grown significantly in the last decade, as more and more organizations have been established and more individual angels have joined the groups. Angel groups now exist in nearly every American state and Canadian province, and they offer accredited angel investors the opportunity to invest in and help build successful companies–while also having a good time. Every group is different in terms of investment strategy and culture, but ACA member groups offer interested investors a variety of benefits. Most angel groups are looking for new investors to join their group. [2] Other than "having a high net worth," no one-size-fits-all description of an angel investor exists. The levels of experience and particular interests of angel investors vary widely. But certain overall classifications can be useful if you're hoping to match your capital needs with the right kind of investor.

Types of Angel Investors

Wondering what kind of angel is right for your kind of investment opportunity? Here's a guide to the many different types of angels: Some venture capital firms and investment banks have rules against this practice because conflicts of interest can get tricky. For example, the VC firm and individual partner may invest in the same enterprise but a different price levels. However, many banks and firms encourage angel investing as a way to keep the pipeline flowing. These angels are often the most desirable because of the so-called chaperone rule, which states that the odds of a startup company succeeding are significantly enhanced when the company has a chaperone from the get-go, an experienced guide on the trip from the embryo to the IPO.

Nicknames for Types of Angel Investors

Within the various categories of angels, angel investors have earned a variety of nicknames. These nicknames, coined by Robert J. Gaston in his book, Finding Private Venture Capital for Your Firm: A Complete Guide (John Wiley & Sons, 1989), tend to indicate more precisely the motivation that drives the angels to invest their hard-earned money if often-risky ventures: The Angel Capital Association's website (http://www.angelcapitalassociation.org) offers a comprehensive study of Angel groups. A listing of the members that are associated with the Angel Capital Association can be found at http://www.angelcapitalassociation.org/directory/. These members provide a wide range of expertise.

The Typical Angel

Unfortunately, you can't identify angel investors simply by looking at their nametags or by sizing up the cars they drive. Angels are male or female, they're young and they're retired, and they come from all walks of life. The majority of angel investors do, however, share some general characteristics. According to studies on the topic:  
[1] Bartlett & Economy, "Raising Capital for Dummies," p. 50 (Wiley 2002). Reprinted with permission. [2] http://www.angelcapitalassociation.org/about-aca/ [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from VC Experts ) [76] => stdClass Object ( [post_author] => Victor Sowers [post_author_bio] => [post_author_thumbnail] => [ID] => 515 [post_title] => Digitally Savy Investors Means Digital Deals [post_date_gmt] => 2014-07-10 19:37:13 [post_url] => https://aceportal.com/insights/digital-investors-require-digital-deal-sourcing/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/market-trends-image2.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/market-trends-image2.jpg [excerpt] => [post_content] =>

Traditional Capital Raising is Old School

Traditional capital raising is an old school process. This means that succeeding in raising funds has typically depended on two criteria—a strong track record of success and/or a dense network of connections. Real world connections, whether professional or personal, help create the right meetings, draw the right attention, and get funds committed. While the capital raising environment is in a transformative state (see below) it’s not all “out with the old.” A history of success and a well-developed network will always remain important.

Digital Networks are Transformative

What is changing is the definition of one’s network. Professional networks are becoming digital, and this transition is shaping the future of capital raising. Chances are you have used LinkedIn in a professional capacity right? Sourcing deals, developing relationships, and setting up meetings all already depend on tapping digital networks. We are at the point where any investor or capital raiser not using the internet is either still using a flip phone or is willfully avoiding a powerful tool. The utility of digital networks will only continue to grow as their use becomes more widespread. After all, it was not too long ago that finding a significant other via an online dating site was looked down on. Now, if you are single and not using the internet to meet someone you are significantly lowering your chances of finding a great match (and significantly increasing the cost of doing so). (link to Carl’s article on “online dating”). Capital raising is following that exact same trend, except the social stigma (and perhaps the relative importance) of raising money online is lower than it was with finding a partner!

Investors Are Hungry for Access to Alternatives

The digital ecology of capital raising is especially important when thinking about alternatives because access in this asset class has traditionally depended on rather closed networks. From the investor perspective, one of the key conversation topics that comes up regularly in our talks with all the major investment houses and asset managers is the groundswell of demand for alternative investments and new product offerings from their base. The head of alternative investing at one of the largest asset managers in the world, for example, recently told us about the enormous challenges and opportunities in transitioning their UHNW investors from a 3% allocation to alternatives all the way to a 30% allocation. Direct private investing is becoming its own sub-asset class with robust demand requiring its own technology solutions. Meeting that demand entails expanding access and providing diversification opportunities for investors that have been less traditionally involved in the private capital markets. There are challenges here of course, especially relating to aggregating individual demand, but these challenges only further strengthen the need for vibrant well-functioning digital networks within alternative investing. More investors, more intelligently grouped investors, and greater access and transparency are all possible. Crowdfunding, P2P loan networks, angel investor groups, and start-up communities have been the earliest adopters of online fundraising. Recognizing the success of these models and the strength of underlying demand, larger and more traditionally closed institutional investment opportunities, including larger private companies and elite PE and hedge funds, are following suit (albeit more slowly).

Digitization of Private Capital Is a Robust Trend

The trend towards digital networks will only become more unavoidable as we undergo a profound generational shift of wealth. Millennial inheritors and their successors grow up wired into communities and view the digital ecology as a natural extension of their social and business worlds. It is a nascent trend, but as these younger investors accumulate or inherit wealth, the paradigm of investing will continue to shift even further in order to accommodate them. Firms that do not position themselves ahead of this trend will lose an opportunity to establish profitable long-term relationships. Because private capital markets have typically depended on tapping into personal networks, they are actually perfect for a transition into digital. It is my belief that private investing will be at the forefront of the movement towards a larger digital ecology. Digitally sourced, diligenced, and executed deals will soon be the norm.

[post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Victor Sowers ) [77] => stdClass Object ( [post_author] => Carl Torrillo [post_author_bio] => Carl is the CFO of ACE [post_author_thumbnail] => Carl Torrillo [ID] => 511 [post_title] => The Practical Application of General Solicitation [post_date_gmt] => 2014-07-10 19:28:27 [post_url] => https://aceportal.com/insights/the-practical-application-of-general-solicitation/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/09/car-fast-speed-13564-350x233.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/09/car-fast-speed-13564.jpg [excerpt] => [post_content] => ACE Portal’s user base of registered placement agents has warmed to the idea of general solicitation Given the fanfare surrounding the passage of the JOBS Act, most industry participants are likely familiar with Title II which created the framework for entrepreneurs and fund managers to publicly advertise that they are fundraising. In short, Title II created a new exemption, termed “506c”, which allows an issuer to advertise that they are raising money / generally solicit investors for their capital raise. This provides issuers (and their placement agents) unprecedented latitude to reach out to investors, as compared to offerings made under “506b”, where marketing is limited to investors with whom an issuer or their agent has a substantive pre-existing relationship. (For a more in depth review on the different offering formats, please refer to our White Paper, “Navigating Change in the Private Capital Markets”). With the new rule in place since last September, we thought it would be interesting to take an early look at adoption of the 506c exemption in our marketplace, using deals listed year to date as our data set. The charts below provide an overview of activity on ACE year to date. The data set is comprised of 32 deals representing a total of ~$1.8bn of expected transaction value. 506c Deals ACE Volume
Of the 32 deals, a total of 9 have been listed as 506c deals (~28%) representing $187mm of expected transaction value (~11%).
Based on ACE-listed transactions, issuers and their agents were still reticent to avail themselves of general sonication at the beginning of the year, but more recently, the exemption has grown to represent a meaningful percentage of transaction volume. Note that the low percent of dollar value in June (month to date) is the result of two relatively large transactions coming onto the platform under 506b. Average deal size overall in the market is ~$55mm; the average deal size for 506b deals is ~$68mm and the average for 506c deals is ~$21mm; so 506c deals have skewed to the smaller side here in the early innings. Given ACE’s focus on relatively large scale institutional transactions (as opposed to smaller scale placements or crowd funding), we were not certain whether our registered agents would advise their issuer clients to avail themselves of general solicitation. At first blush, the concept seemed to lend itself more to crowd funding than large scale placements where confidentiality and exclusivity can be a concern. What we’ve found however is that issuers and their agents have begun to adopt 506c as a means to reach a broader network of investors in a controlled manner. The 506c exemption allows agents using ACE to efficiently broaden their reach to include institutions (and individual accredited investors if they desire) with whom they do not have a substantive pre-existing relationship, without advertising the capital raise to the general public. In response to growing adoption of general solicitation in this manner, ACE has created additional tools to allow agents to be more proactive and effective in marketing their deals. We believe this will support adoption of general solicitation among our agents. Of the 13 agents that have listed deals on ACE in 2014, 5 have at least one 506c transaction on the site. In summary, we’ve seen agents and issuers adopting the 506c exemption in a practical, controlled manner as opposed to broadly advertising to the general public. We will continue to monitor the evolution of the market for securities issued under 506c and provide periodic updates as our data set continued to build. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Carl Torrillo ) [78] => stdClass Object ( [post_author] => Richard Pistilli [post_author_bio] => Richard is the COO of ACE [post_author_thumbnail] => Richard Pistilli [ID] => 504 [post_title] => The Agent Choice for Private Companies [post_date_gmt] => 2014-07-10 17:48:08 [post_url] => https://aceportal.com/insights/using-an-agent-for-companies/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/business-chimneys-dirty-2391-13-e1413375656536.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/business-chimneys-dirty-2391-13-e1413375656536.jpg [excerpt] => [post_content] => Whether you are a new entrepreneur or a seasoned executive, you are familiar with the challenge of allocating scarce resources. You make choices everyday based on perceived costs and benefits on where to invest your time and where to seek assistance. Accessing the private capital markets is no different. Thanks to new legislation under the JOBS Act, as well as some innovative technology, the private capital markets are opening up. This creates new choices for companies seeking to raise private capital through the advent of online fundraising platforms. On one end of the spectrum lies the DIY model where companies are free to go it alone and directly control the capital raising process with potential investors. Professional intermediaries are cut out, which in theory should result in lower transaction costs. The argument goes something like this: “I only pay an agent to introduce me to investors, so thanks to the online platform, I don’t need them anymore”. Such may be the case if targeted investor introductions were the only value offered by a placement agent. A placement agent actually earns their fee by fulfilling a number of key roles in addition to investor matchmaking.
  1. The agent acts as curator by conducting professional due diligence on the issuer and presenting a vetted opportunity to the investor community at large.
  2. The agent acts as administrator by preparing offering materials and managing the process through interaction with potential investors, outside counsel, accountants, and other  parties to the deal.
  3. The agent acts as financial advisor and advocate by structuring deal terms and negotiating with potential investors who are often financial professionals themselves.
  4. The agent establishes credibility for investors who are unfamiliar with the offering by extending their implicit seal of approval.
Depending on your company’s background and internal skill set, you may be able to satisfy a number of these roles yourself. Even so, this would require a significant investment of your team’s time and resources which would otherwise be allocated towards more direct business-related activities (and therein lies the rub!). In making your determination, you should remember that while going it alone may be a reasonable alternative with a seemingly attractive ROI, ask yourself what happens when a process doesn’t go according to plan, the market is fickle, or investors are difficult. How much of your scarce resources are you really prepared to devote then? For more, see this post on 'Using an Agent in Early-stage Rounds' [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Richard Pistilli ) [79] => stdClass Object ( [post_author] => Victor Sowers [post_author_bio] => [post_author_thumbnail] => [ID] => 501 [post_title] => Data Transparency Would Grow Private Markets [post_date_gmt] => 2014-07-10 15:59:21 [post_url] => https://aceportal.com/insights/data-transparency-foster-private-markets/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => One of the biggest differences between investing in private companies versus public companies is the amount of information readily available. Publically traded equities have far more verified data available then private securities. The prevalence of this information together with the low-cost of obtaining it forms the very basis for the creation of efficient public markets because it facilitates comparing the risk/return profiles of different securities. Agree or disagree with the market structure argument, few would dispute the micro-argument that without credible disclosure between company managers and prospective investors the efficient flow of capital would be impeded.[1] After all, most investors do not invest in something without knowing something about the opportunity. But for various reasons information flows within the private markets are often constrained. The end result can include more expensive capital for companies and a severely tilted information playing field for investors relative to management (or even relative to one another). In order for the private capital markets to continue to become more liquid and more efficient (and thereby benefiting all involved parties) a standard for minimum acceptable information disclosure should be fostered.

Public Market Disclosures: Regulated & Regular

Within the public markets, financial reporting and disclosure is an important way for a firm’s management to communicate company performance, governance, and the risks and opportunities facing the firm.[2] Not only is a certain standard of information disclosure facilitated by requiring regulated financial reports—including financial statements, footnotes, management discussion and analysis—but capital markets participants on the public side have grown used to voluntary communication including management forecasts, conference calls, press releases, and various other corporate reports. These voluntary practices have become so prevalent as to become their own standard. In other words, a company’s non-participation in these types of disclosures is often a red flag in and of itself. Thus any investor in the public space who noticed a lack of communication from management might immediately question why this was the case. The credibility of public market information is also bolstered via the active participation of analysts, regulators, standard setters, auditors, and other intermediaries. These parties actively seek and collect information, evaluate performance, forecast future prospects, and issue buy/hold/sell decisions. All of these actions facilitate more rapid incorporation of information into stock prices. Public markets are shaped by these information-driven activities. Private markets, on the other hand, are partially defined by the relative absence of such company-specific information. Reasons for the lack of information in the private market are diverse and certainly include a degree of discretion on the part of market participants to protect their competitive advantages. I am not suggesting that a lack of information inherently indicates an inferior offering. A core advantage of staying private is guarding sensitive information while also not having to adhere to costly disclosure requirements. With that in mind, however, issues of agency and information asymmetry can still come into play when the aggregate private capital marketplace lacks standardized information standards.

The Consequences of Less Information in Private Markets

Less information limits the pool of buyers. It can also further differentiate these buyers into informed and uninformed pools, even within the same investment opportunity. In fact, one source of the large returns enjoyed by VC and PE firms stems from their ability to deploy resources to uncover and conduct extensive due diligence on investment opportunities. Greater information disclosure will not eliminate these profit opportunities, but it will make it easier to conduct due diligence. Furthermore, when buyers have little information (and/or little independently verified information) on which to base their purchasing decisions, it makes it difficult for all participants to differentiate quality opportunities from those that are less attractive. The potential for adverse selection inflates the information premium on these opportunities and is a core part of the reason private capital remains expensive. Basically, less information makes it much harder and much more expensive to determine a Ferrari from a lemon.

Investors, Agents, and Companies Would Benefit from Better Information Disclosure

The vast majority of private market participants would benefit from the standardization of greater information flow. Quality private companies (and funds) should willingly embrace greater disclosure because that would effectively communicate to the market their above average prospects. This would in turn reduce their cost of capital and put pressure on other firms to also offer greater information. Broker-dealers and agents would benefit from higher standards of information disclosure because reducing investment uncertainty would attract more investors to the space. More deals could be facilitated and more capital could be raised. The benefits to investors would seem to be the most obvious. Standardized information disclosures would mark the evolution of the private capital markets into a more mature and efficient marketplace. Most investors would have a greater confidence in their ability to gauge a private investment’s prospects. More intelligent asset allocation decisions could be made and the entire sector would conceivably mature and grow as a percentage of investor portfolios. Given these advantages, why has the sector not evolved in a similar manner to the public markets?

So why the lack of information in Private Markets?

There are several reasons the information evolution within the private capital markets has not happened yet. Apathy could certainly be one of these reasons. Prior to the JOBS act, interest in private capital raising was more limited, and the smaller pool of investors generally had the resources to conduct their own information gathering processes. Catalysts for greater growth in private markets dovetail with an increased need for better information standards. A second reason is the historical lack of technology to control information dissemination. As mentioned above, a private company raising capital has to balance their need for protecting their competitive advantages with presenting enough credible information to attract investor dollars. Without strong controls over information sharing (which new technologies have made easier), companies and their representatives had to exercise extreme caution with broad sharing of information. The final reason is perhaps one of the most interesting. Namely, the rules of the game surrounding private capital raising may have endured because some market participants stand to lose some of their competitive advantages as standards change. For example, firms with poor opportunities would find it more difficult to access capital if investors had access to more information about each opportunity. VC and PE firms on the other hand might lose some of their informational advantages and competing against a greater number of investors could also limit their leverage in negotiating terms. Both of these factors would theoretically reduce expected returns.
Summary
As regulatory changes (such as the JOBS act) and the rise of online platforms facilitate greater efficiency, access, and transparency in the private capital markets new questions around information disclosure are arising. The potential to transform the market to the benefit of all market participants makes this a conversation well worth continuing.   [1] Paul Healy & Krishna Palepu, “Information asymmetry, corporate disclosure and the capital markets: A Review of the empirical disclosure literature,” Journal of Accounting and Economics 31 (200), p.2. [2] Paul Healy & Krishna Palepu, “Information asymmetry, corporate disclosure and the capital markets: A Review of the empirical disclosure literature,” Journal of Accounting and Economics 31 (200), p. 1.

[post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Victor Sowers ) [80] => stdClass Object ( [post_author] => ACE Portal [post_author_bio] => [post_author_thumbnail] => ACE Portal [ID] => 439 [post_title] => AIMkts Interview with ACE Portal [post_date_gmt] => 2014-07-07 15:48:52 [post_url] => https://aceportal.com/insights/aimkts-interview-with-ace-portal/ [post_thumbnail_small] => [post_thumbnail_large] => [excerpt] => [post_content] => The following interview (by Alicia Purdy) originally appeared on Accredited Investor Markets (AIMkts) and can be found at http://www.accreditedinvestormarkets.com/a-few-minutes-with-ace-portal.

1. What sort of gap/need in the private investment market spurred the inspiration for ACE Portal?

Peter Williams (PW): The initial basis for ACE Portal was born from practical experience.  Having worked in investment banking for close to a decade I was pulled into numerous private placement processes and was amazed at the inefficiencies in that process.  On the investment banking side the process is very labor intensive, with most investor interactions recorded manually.  Investor reach was highly limited and literally relied on a couple of guys and a telephone as the state of the art way to reach the investment community.  While there are over 30,000 qualified institutional buyers in the US alone, collectively we, the bankers, would determine which 25-75 investors would be the only ones to even know about the specific transaction we were marketing.  This took months and often resulted in failed transactions.  Ultimately I thought there had to be a better way to bring efficiency to this market, to increase transaction speed and success rates, all in a fully compliant manner. Carl Torrillo (CT): For me, the inspiration is about democratizing access to capital for deserving companies and in turn democratizing access to deal flow for investors, which I believe ultimately helps stimulate growth in the economy.  The catalystfor me to leave my profession and join forces with Peter and Rich was the passage of the JOBS act.  This created the practical opportunity to address the grand vision of streamlining a tremendous (~$1 trillion) market. Richard Pistilli (RP): What I found in the private investment market was a common structural impediment towards streamlining processes which was driven by antiquated systems and aversion to change.  The challenge to introduce efficiencies through innovation resonated with me, and it’s what I saw in ACE.  The private capital markets are in need of structural solutions that can transform the asset class, which can then enhance capital flows and accelerate economic growth.

2. Can an issuer use ACE Portal’s back end technology to manage a raise even if it doesn’t want to use ACE Portal with the marketing function?

CT: Not directly, no…but through a registered broker-dealer, yes.  Let me explain that in a bit more detail.  ACE only works with registered broker dealers, so we would not allow an issuer to directly access ACE’s tools for managing a transaction.  That said, if the issuer has engaged a placement agent to manage the transaction, the placement agent can access ACE’s tools on behalf of the issuer to manage the process through what we’ve termed our ‘invite only’ offering.  This essentially allows the placement agent to utilize ACE’s full suite of communication management tools, along with the integrated data room and book builder to seamlessly manage their process to a closed community of investors. 3. What else makes ACE Portal different from crowdfunding platforms limited to accredited investors? CT: Let me preface this all by saying point blank that we are very different from crowdfunding.  Now with that out of the way, when you ask about crowdfunding, exactly what are you referring to?  Are we talking about true investments or are we talking about pledges to help a company get off the ground (where maybe you get a sample product as a reward)?  Are we talking about offerings that comply with Title III of the JOBS act (a $1mm maximum raise in any 12 month period)?  I ask all these questions because it’s really hard to define crowdfunding. So I tend to explain what we do rather than try to contrast our business against a term that I find has a different meaning for just about everyone you talk to. We operate strictly as the backbone for institutional private placements; meaning we provide a technology solution that investment banks can use to market their deals more effectively to a broader community of investors in a time efficient manner.  On the flip side, we provide investors with a one-stop-shop for seeking out and evaluating investment opportunities that fit their criteria across a spectrum of industries and security types. PW:  We benefit from similar technology enhancements to make capital formation more efficient, but we are targeted toward the existing institutional-focused marketplace. 4. Any plans to allow non-accredited investors invest through Title III? PW:  No.  ACE targets larger private offerings, and currently has an average deal size north of $50 million.  Title III of the JOBS Act limits capital raised in any 12 month period to $1 million.  So, that’s a very different market. CT: To add to that, we believe this is sensible given the risks inherent in private securities where transparency and liquidity are limited and there is increased potential for information gaps between buyers and sellers as compared to the public market.  This makes conducting due diligence challenging, and it often requires professional assistance even for accredited investors and large scale institutions.  That said, we are very much in favor of finding ways for non-accredited investors to participate in the returns that private securities offer.  Over time for example, we could see funds established that provide for a certain percentage of holdings in illiquid securities. 5. In what ways has ACE Portal improved/modernized the private placement process and why should that matter to an accredited investor? RP: ACE introduces efficient technology to an antiquated and opaque marketplace.  For investors, this means the arrival of a centralized IT forum for navigating private investment opportunities.  The platform has the potential to revolutionize investor access and introduce a level of transparency to the market that’s never been achieved before. CT: ACE has taken a very labor intensive process and automated it.  For accredited investors, the overarching goal of our platform is to provide enhanced access to deal flow.  With ACE, for the first time, investors can seek out institutional private capital raises that meet their specific objectives, all in a confidential manner. PW:  While the accredited investor universe is large, access to it has been highly limited with agents targeting only a small group of large investors who can write big checks to get deals done.  Through ACE, mid-sized institutions, family offices and ultra-high net worth individuals, and retail accredited investors will have access to transactions that they never would have previously. 6. Peter, as someone who spent time raising capital for issues the pen-and-paper/phone call way, what gaps existed that ACE Portal is closing? PW:  There are really two key areas.  First, it is very difficult and highly unreliable to keep track of processes manually.  People are literally tracking who called who, who got a teaser, who was provided documents, all via excel… In addition, many things, such as investor attestations and non-trading attestations are done over the phone, which is highly unreliable.  So, the first major gap we cover is providing tools for process and compliance management.  The second major area is investor reach. In the current, manual, one-to-one process, investor reach is limited from a practical perspective to maybe 100 investors, at best.  With ACE, agents now have the option and ability to reach and interact with potentially thousands of investors as easily as they would communicate with say 50 using their current processes.  This allows them to get more deals completed in a shorter period of time. 7. How does Title II, the lifting of the ban on general solicitation, change what ACE Portal is doing?  RP: Lifting the ban will increase investor access, which, in my opinion, also increases the need for financial professionals to act as intermediaries.  More investors looking at more investment opportunities requires a heightened standard of diligence and process.  Investors will need to be able to discern the different merits and risks of these opportunities, and the best way to do that is through the aid of a financial professional. CT: It will be interesting to observe the practical implementation of Title II by industry participants.  For our part, we are building into our software the ability for placement agents to market their deals in accordance with “506(c)” — the new exemption under Reg. D which provides for general solicitation.  Practically, what this means is that an issuer’s name and more detailed business description can appear much earlier in the process than under a traditional raise.  It has also opened the door for us to send emails notifying investors (those who opt into receiving such updates) of relevant transactions.  At ACE, we believe agents and issuers will be using this exemption to cast wider nets through traditional channels PW:  Carl’s point is an important one.  Title II provides issuers and agents the right, but not the obligation, to reach out to investors with whom they do not have a substantive pre-existing relationship.  I think most issuers will still opt to run confidential processes but with broader reach through the use of technology.  ACE is perfect for that, as we provide the agent with the functionality to choose from along the spectrum of how open or confidential that process is. 8. Regarding funds, does ACE Portal facilitate the trading of LP interests between investors as well as helping funds do capital raises?  In other words, is ACE Portal a secondary market as well? CT: ACE can certainly facilitate secondary market transactions, but our current product only contemplates secondary transactions that involve an intermediary placement agent.  In other words, we are well equipped to support large scale secondary LP transactions. PW:  Actually, we do help funds raise capital, but that is a primary issue, not a secondary one.  With regards to secondary transactions, whether for a fund or corporate issuer, ACE’s view is that investors need information to be able to make informed investment decisions.  The private markets are more opaque than the public markets.  As a result, all investors may not have access to the same information.  Therefore we don’t really believe that true “trading” will develop significantly.  We believe that secondary transaction should be what we would call “marketed” deals whereby an agent is involved and investment materials are prepared for those new investors.  In that context yes, we are active in both primary and secondary transactions. 9. What diligence do you do on a company or fund before you allow it to list on ACE Portal?  Are there certain minimum objective metrics a placement agent must have before ACE Portal will list it? PW:  Our goal for ACE is to be the highly respected platform for larger, institutionally-focused private security offerings.  We do that by working only with respected investment banks and placements agents that operate in this space. It is not our place to advise those investment banks on their transactions, but we have turned away numerous agents that have sought to register on our platform for these reputational reasons. CT: So basically ACE focuses its diligence efforts on vetting the quality of placement agents that we allow to post deals to the site.  We are not in the practice of evaluating the specific deals that are listed, as that is the job of the agent who is placing the deal.  We do some high level work to ensure that no red flags are raised.  Beyond that, ACE’s deal minimums and minimum upfront fee, combined with the agent’s own reputational concerns serve to organically curate the investment opportunities. 10. Investing and vetting deals can be overwhelming and labor-intensive for an individual accredited investor – what does ACE Portal provide to take the pressure off? CT: We agree.  Conducting proper investment due diligence is challenging, and it often requires professional assistance.  We would encourage individual investors to work with financial professionals to properly evaluate participation on a deal by deal basis.  We are currently working on vetting a network of very reputable institutions who conduct professional, institutional quality diligence.  By aggregating individual demand through the portal, our goal is to make this institutional level of research available to individuals. PW:  That’s a very good point and to be blunt, direct private investing is not for everybody.  This is part of the reason the market has been so focused on institutions.  As Carl noted, working with an advisor or registered investment adviser is a great start.  We also expect that funds will be created to allow for individual investors to get access to a broader diversified portfolio of private securities, run by a professional investment team. RP: For the first time, investors can use ACE to look at deals across broker/dealers.  This improves transparency and enables investors to benchmark deal terms, and comparables.  In addition, ACE will be introducing 3rd party service providers that can assist in vetting deals. 11. Will ACE Portal put a lot traditional broker-dealers out of business?  PW:  Absolutely not.  Our business plan relies entirely on broker dealers running the private placement process.  We are an independent technology provider specifically for broker dealers.  We do not and will not allow an issuer to use ACE to go direct to investors for marketing their offering, so we will not disintermediate the incumbent broker dealers.  Our job is to make their business more efficient. CT: We certainly don’t think so.  In fact, our goal is to make it easier for placement agents to take on the incremental deal that they might otherwise pass on.  If we can provide a captive pool of demand that can be tapped into by placement agents on a consistent basis, they should be willing to take on a deal that might be below their more traditional transaction size.  In that matter, we think that a number of great ideas will end up funded that might have otherwise fallen through the cracks. RP: Private securities possess an intrinsic information gap.  Basically, sellers are in control of what information they share with buyers.  This makes conducting proper investment due diligence challenging, and often requires professional assistance. 12. Peter, during your banking career, you successfully raised over $13 billion in capital for a diverse group of companies, across multiple industries – what makes a startup, in your experience, fail versus succeed? PW:   That’s a very difficult question.  Also, I should point out that most of the companies I worked with in my banking career were not start-ups, but rather larger $100 million plus businesses.  To your question, there really is no one thing – there’s so much that can be attributed to being in the right place at the right time, having a great team, having a good business plan, being focused on a large market, luck etc. Regardless of whether you attribute the success to luck or skill, in the end it’s about providing something that users want and/or need better than anyone else. What makes something “better” will be defined by the industry and targeted user base.  In the long-run, however, success will be driven not by the short term “better” but by competitive advantage, as competitors will copy and commoditize what was once considered “better” if they can.  Being first to market, in and of itself, isn’t competitive advantage unless you are building a marketplace, with a network effect where the switching costs become high, for instance.  Ultimately, however, you can have a great idea but if you don’t have a good team to execute you’ll never succeed. 13. At what stage in the development of a company do ACE Portal investors come into an opportunity? CT: It really runs the gamut.  We’ve already had a variety of flavors of deals hosted on the site.  Opportunities have included early stage, small scale equity raises–where the proceeds represent the initial institutional capital needed to really get someone’s great idea off the ground, sizeable debt raises that support the ongoing operations of larger scale private companies, and LP interests in both new and existing funds.  That’s the great part about our business model. It is scalable across industries, agnostic to where a company is in its life cycle, and open to multiple capital raising formats. PW:  To date, the average deal size posted on Ace has been north of $50 million. 14. Are banks still using the “three guys and a telephone” approach to raising capital in the private placement market? Why? CT: Yes, absolutely.  I would say that’s evolved to three guys, a telephone and maybe an excel spreadsheet, but there has definitely not been a sea change in the deal making process…Of course we hope to change that.  I would say we haven’t seen a faster evolution as a result of two primary reasons: (i) regulations have historically limited the implementation of technologies that served to broaden the reach of a private offering and (ii) inertia—resistance to change for the sake of resistance.  So now that the regulatory environment has shifted a bit, we need to overcome the natural inertia that exists within banks around adopting something (anything) new.  The good news is that inertia works both ways, so I think as we continue to win over investment banks, many others will follow at an accelerated pace. RP: Our biggest competitor today is definitely inertia.  Changing behavior takes a lot of time and effort, but it also has the greatest potential to impact the market. 15. What process did investors have to go through to find private placement deals before ACE Portal? CT: They really had to be part of the “in crowd” to participate.  If you were not receiving calls from investment banks marketing these kinds of deals, they were very hard to find.  As an investor, you had to essentially call your relationships on the sell side (banks who are marketing deals), hope you get put in touch with the right person on the desk (i.e. someone who could put you on a list of interested parties for private placements), provide your investment criteria and then cross your fingers and hope that the bank (i) remembered who you are, (ii) remembered what you are interested in and (iii) showed you some of their high quality deal flow.  Pretty inefficient if you aren’t already on the inside. RP: Some investors will receive many opportunities, and some will not even receive a return phone call.  The entire process is riddled with inefficiencies and lost opportunities.  Given all the technological advances made in most other industries and the trillion dollar size of this asset class, this inefficiency is quite remarkable. PW:  The only thing I would add to that is that they had to have a big check book.  As discussed, the agents need to hit the most likely investors that can take down big portions of the capital raise in order for them to be successful reaching out to only 25-50 investors.  Mid-sized investment firms had great difficulty getting access to the “hot” deals as a result, and would only be contacted on deals that were struggling. For a retail accredited investor, access was next to impossible. 16. Why is it important that private placement professionals still be part of the ACE Portal process? CT: We believe that financial professionals play an incredibly important role given the risks inherent in private securities.  What are these risks? First, with a more limited degree of formal oversight as compared to the public markets, transparency is more limited, and there is increased potential for information gaps between buyers and sellers.  This makes conducting proper investment due diligence challenging, and it often requires professional assistance. Second, private securities do not trade openly in a large secondary market.  This means that investors are unable to look to the market for price discovery and have limited liquidity available to them should they choose to sell their private securities. Finally, private securities are not sold through a centralized market infrastructure.  As a result, it is difficult for investors to compare pricing and other deal terms across different offerings.  All of these reasons favor including private placement professionals in the ACE community. PW:  I’d add that agents are set-up to source transactions, are required to conduct diligence on these companies and prepare marketing materials to bring them to market, as well as target the investor outreach.   On its own, ACE could not replace the man hours, professional expertise, and broad industry knowledge that hundreds of agents bring to bear on thousands of private transactions each year. 17. Peter, you’ve said that even from your early MBA days, you knew you’d one day start a business of your own – wouldn’t it have been easier to follow the family into being a Canadian doctor? What made up your mind? PW:   Well, let me start by saying I wouldn’t define pursuing a career in medicine as “easy” – having seen my family work in this field, I’m well aware of the challenges. From an entrepreneurial perspective I would go back even further, to high school.  I always had an idea that I wanted to start a business-it’s just the size and scope of the ideas became bigger as time went on.  I chose my education and career path, I hoped, to best prepare me for this. I started with engineering as a place to develop problem solving skills and work ethic. Then I went into sales, which is critical to any new business in my opinion, regardless of whether the term “sales” is in your title or not, and these skills weren’t something that engineering had focused on.  And frankly, there is a lot more to it than most people think.  Then onto business school to get a broader business education, followed by investment banking to get a detailed financial education and experience with capital raising and mergers and acquisitions.  Also, I saw it as a path to provide me enough of a personal financial cushion to be able to venture out as an entrepreneur.  If you were to go back to my business school application essays, I stated that my goal was to work in banking for two to three years then leave to start a company. It took longer than I anticipated, but after nine years in banking I was ready, and had also seen some things that gave me ideas along the way.
Accredited Investor Markets (AIMkts) is a source where accredited investors can find news, analysis, and resources about investing in private equity, venture capital, hedge funds, tangible assets, and pre-IPO shares. [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from ACE Portal ) [81] => stdClass Object ( [post_author] => Frank R. Suess [post_author_bio] => Frank is the CEO & Chairman of BFI Wealth Management (International) [post_author_thumbnail] => Frank R. Suess [ID] => 433 [post_title] => Toward the End of a Deceptive Market Lull [post_date_gmt] => 2014-07-07 15:17:13 [post_url] => https://aceportal.com/insights/toward-the-end-of-a-deceptive-lull/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/Screen-Shot-2014-07-16-at-2.34.08-PM-350x140.png [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/Screen-Shot-2014-07-16-at-2.34.08-PM.png [excerpt] => [post_content] =>

“The ultimate result of shielding men from the effects of folly is to fill the world with fools.” ~ Herbert Spencer, English philosopher (1820 – 1903)

Financial Markets have been Calm since 2012

Since the European debt crisis in 2012, things have been relatively "calm”. Investor sentiment has improved. Central bankers did what they know best – inflate the money supply. An impressive and extended rally in stock markets around the globe continues. The recovery story seems to have broadly been accepted, albeit with some bumps. Over the past few months, a change of mood has started to transpire. After the arrival of the emerging market crisis earlier this year – i.e. slower EM growth, currency gyrations, capital outflows – the crisis in Crimea has led to some market uncertainty. Across the board, investor expectations no longer shine as brightly as they did in 2013. The cracks in the recovery story have been noticed. This needs to be considered and kept a close eye on in the coming months. I don’t agree with the panic mode some commentators have recently fallen into – even James Rickards, generally a moderate commentator, speaks of a financial system collapse and a 90% loss in the dollar. However, at BFI, after last year’s impressive performance in stocks, we too do expect some turbulence ahead and a sideways movement in global stock markets at best, for the next one or two quarters.

Why so cautious? Stock markets have been holding up fine...

Stock markets have recuperated rapidly from the correction in January, and despite the Crimea upset and China worries, they didn’t go into a nose dive. First of all, stocks in general are high-priced at this point. The rally went on longer and further than could be expected. At this point, there are very few “low hanging fruits” left. And, when stock markets are technically toppish, they are more easily tipped to the downside. Secondly, there are a number of geo-political developments - and not just Crimea - that could easily work toward the aforementioned tipping point. In that context, we need to take James Rickards’ concerns seriously as to the geo-political power games currently revolving around the US dollar. Clearly, the efforts of replacing, or at least complementing, the dollar in its role as the world’s number one reserve and trade currency continues. Several economic power houses – China, India, Russia, Iran – are actively negotiating and building a currency framework that reduces their dependency on the Greenback. To some degree, this has been a factor in the continued depreciation of the dollar. Currently, the factor that appears most prevalent and on the minds of investors globally is the slowing of growth in emerging economies and, most of all, that of China. Western economies do very much need China to grow. And it is…still at an estimated 7.8%! Unfortunately, the fundamental health of developed economies would prefer more. The concerns regarding China’s growth was confirmed by Barclay’s most recent quarterly survey of professional investors conducted by Barclays. The slow growth of developed markets, combined with the slowing of GDP growth in emerging markets, and in China in particular, was clearly seen as the greatest risk for the global economy and financial markets.

Chart: Greatest risks, as perceived by professional investors:  Q4 2013 vs. Q1 2014

Suess- Deceptive Lull Chart 1

Source: Barclays survey, Q1 2014

What is interesting about the results of the aforementioned survey by Barclays is the fact that concerns over Fed withdrawal policies have subsided largely. In other words, while until last year every word uttered by Ben Bernanke was followed hypnotically by financial markets, and the Fed in fact at times appeared to be the sole driver of stock markets, tapering concerns have given way to those regarding overall growth concerns and geo-political concerns. Debtor nations continue to pile more new debt on to old debt, keeping their economies and finances afloat with increasingly stark monetary expansion – irrespective of what Janet Yellen and her central banker colleagues are trying to make you believe.

Skepticism about the Economic Recovery

Piling up new debt just to re-finance old debt – much like Madoff… I know, being skeptical about the sustainability of the economic recovery or cautious about the rally in stock markets is about as unpopular as dropping a word in favor of Putin. Alerting investors to the possibility that the implications of the debt crisis might not yet be resolved quickly puts you in the camp of fear-mongers and party poopers. However, fundamentally, not that much has changed since 2008. The fundamental issues discussed at length, namely the flaws of a fiat currency system, the decades of loose monetary policies, the resulting effects of large-scale capital MISALLOCATION and credit bubbles, and finally the mountains of public debt, remain the dominant concerns and key drivers moving forward. In a recent study conducted by rating agency Standard & Poor’s, it was calculated how much more debt – in other words, commercial borrowing – the debtor nations of the world would require in order to satisfy their re-financing needs and to remain liquid, i.e. remain alive.

Chart: Top 10 Gross Commercial Long-Term Borrowers: Forecast for 2014 (% of Total)

Suess- Deceptive Lull Top 10 Gross Chart

Source: Standard & Poor’s, 2014

And the winner is…: Of course, the USA. America leads the ranking by far. Of the total (100%) refinancing needs, the US makes up 31.6%. Almost every third dollar, which is “created” for the purpose of global public refinancing needs, goes straight to the coffers of the US Treasury. Not all that far behind is Japan. Their re-financing needs will make up roughly 25.6% of the total. Italy comes in as third, with 4.7%, while the Euro zone overall makes up roughly one-tenth. Amongst emerging markets, China and Brazil account for about 4% each. The recovery and tapering talk has been misleading all along. In this context, it becomes even less credible. It is impossible to conceive how the world, and America in particular, should be able to do away with its debt problems and credit bubbles by merely creating more debt and credit. How much money are we talking about? S&P estimates that for the 127 countries for which an S&P rating is calculated, a total of approximately US$ 7’100 Billion of medium- to long-term debt paper (exclusive of money market / debt instruments of one year or less) will be issued. That amount is 2.7% higher than in 2013. That governments are indebted has become a generally accepted rule. Particularly in times of low interest, debt-financing appears to be the least painful means for liquidity and certainly a measure politicians will generally favor over austerity, or spending less. The recent past (European debt crisis), however, has unveiled the volatility and consequences an economy is exposed to when its government lives beyond its financial means. Every cent must not only be repaid, but it also must bear interest. Of the US$ 7.1 Trillion of new debt acquired this year, roughly 61% are there exclusively for the re-financing of old debt!

Reaching the end of a deceptive lull in global markets

In my view, we are nearing the end of a deceptive lull. The general perception: All is back in order; central bankers have saved the world. Well, that perception will turn out to be false. The “party” is losing steam and the comfort of the lull is quickly coming to end. Central bankers, if anything, have made things worse. We are now headed back into more volatile territory. It is certainly worthwhile to consider a more cautious asset allocation in your portfolios, or to implement more extensive risk management measures, ranging from stop losses to put options. Sincerely, Frank R. Suess

  ___________________________________________________________________________

BFI Wealth Management (International) is an independent wealth management and investment advisory firm with offices in Switzerland. BFI specializes in providing their upscale international clientele with a single point of contact for an array of multi-jurisdictional wealth services and solutions. BFI Wealth Management is a subsidiary of BFI Capital Group, a company with 20 years experience in offering a unique array of premium risk and wealth management services to private and institutional clients.

___________________________________________________________________________ © Copyright, BFI Wealth Management (International) Ltd., Bergstrasse 21, 8044 Zürich, Switzerland. Quotation is allowed if credit is given. Although every care has been taken in the preparation of this report, BFI does not guarantee and cannot be held responsible for the accuracy of any statistic, statement or representation made. We recommend that you consult qualified professional advisors to determine the applicability of this information and opinion. Readers should not view this report as offering personalized legal or investment advice. www.bfiwealth.com

  [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Frank R. Suess ) [82] => stdClass Object ( [post_author] => Stephen Bornstein [post_author_bio] => Stephen Bornstein is a securities lawyer in NYC and blogs regularly on financial services topics at aroundwallstreet.com [post_author_thumbnail] => Stephen Bornstein [ID] => 392 [post_title] => Lifting the Lid on Private Equity's Hidden Practices [post_date_gmt] => 2014-07-01 12:56:59 [post_url] => https://aceportal.com/insights/lifting-the-lid-on-private-equity/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/07/Lifting_lid-image.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/07/Lifting_lid-image.jpg [excerpt] => [post_content] =>

Private Equity Industry Hiding Fees

Who knew what PE managers were hiding from their investors?

Are private equity documents so opaque that even sophisticated investors couldn’t possibly figure out how much PE firms actually earn (or save) from their portfolio companies?

The SEC thinks so.

Following Dodd-Frank, the agency has been examining hundreds of new PE registrants and has found serious disclosure violations regarding fund fees and expenses in more than half of the firms examined.

One surprising discovery is the employment by PE managers of so-called “operating partners”.  These are industry experts touted by PE firms during fundraising as part of their management teams who are then installed on portfolio company payrolls once the PE funds are up and running.

Hidden Fees Often the Norm in Private Equity

Apparently, numerous PE firms don’t even tell their investors about transaction fees they earn from the re-capitalizations and eventual sales of their portfolio companies.  In addition, those PE firms that charge their portfolio companies so-called monitoring fees for providing ongoing advisory services (like board members) don’t disclose their receipt of early termination payments when their monitoring contracts are closed out upon exit.  Some of those contracts run for as long as 10 years, despite the fact that PE holding periods are typically half that long.

“In some instances, investors’ pockets are being picked,” according to Andrew  Bowden, who heads the SEC’s examination efforts.

The list of indiscretions goes on.  PE firms commonly charge their funds for administrative and back-office services – such as legal, accounting and reporting — that investors would reasonably expect to be included in their management fees.  Moreover, some of the outsourced providers are actually affiliates of the PE managers. 

In cases where PE managers have established separate accounts or co-investment vehicles for clients, the SEC found that broken deal expenses or other costs associated with generating deal flow were frequently allocated solely to the PE funds and not to the side-by-side accounts that would have benefited from the investments.

Conflicts of Interest Unique to Private Equity

Because PE firms typically obtain controlling interests in private companies, they are faced with temptations and conflicts that don’t affect asset managers who traffic only in publicly-traded securities according to the SEC.  PE managers actually have the power to hire and pay themselves to perform needed services for their portfolio companies and they apparently do so on a much wider basis than the regulators expected.

On the other side of the ledger, PE fund investors have their work cut out for them.  Try reading PE private placement memoranda and limited partnership agreements and see if you can ferret out anything that would clearly prohibit the self-serving, financial shenanigans described above.  Generally speaking, the disclosures in those documents are purposely broad and give PE managers lots of leeway.  In other words, caveat emptor.


Stephen Bornstein practices securities law in New York City.  His clients include hedge funds, private equity funds, funds of funds and family offices.  He serves as an independent director of a global hedge fund and provides expert testimony in securities disputes.  Stephen blogs regularly on financial services topics at www.aroundwallstreet.com. 

      [post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Stephen Bornstein ) [83] => stdClass Object ( [post_author] => Joe Bartlett [post_author_bio] => Founder and Chairman of VC Experts, [post_author_thumbnail] => Joe Bartlett [ID] => 318 [post_title] => Talking Like An Angel Investor [post_date_gmt] => 2014-06-29 22:44:39 [post_url] => https://aceportal.com/insights/talking-like-an-angel/ [post_thumbnail_small] => https://aceportal.com/wp-content/uploads/2014/06/vce-title-350x194.jpg [post_thumbnail_large] => https://aceportal.com/wp-content/uploads/2014/06/vce-title.jpg [excerpt] => [post_content] => This article, which first appeared in the VC Experts 'Buzz Feed, features Joe Bartlett explaining some basic terminology on the VC and angel industry.

Considering an angel investment?

Before you take the plunge, learn to talk shop like a professional VC. Angel investing is an increasingly common practice among high-net-worth individuals. But many would-be angels lack a true insider's vocabulary - and the savvy that goes with it. Do you know the difference between a "burn rate" and a "burn out"? The pros do, and so should you if you're looking to invest in a start-up. For a summary of "types" of angels see this post. What then, in plain English, are all these venture capitalists talking about?

Private Companies are Valued Differently

To begin, remember that pricing private investments on a per-share basis does not make much sense since the start-up company's shares do not trade. As a result, the convention is to value an emerging company as a whole -[this is the] the so-called "pre-money" valuation. If, say, a company is given a pre-money valuation of $5 million and investors put up an additional $5 million, then the "post-money" valuation is $10 million (pre-money valuation plus the $5 million invested). [Note from ACE: this gives rise to terminology such as 2 on 10: An investment of $2 million at a pre or post-money valuation of $10 million. Wikipedia has good introductory articles on this which you can find here and here]. Typically, in return for their cash, the new investors obtain securities equivalent to 50 percent of the outstanding stock of the company ($5 million investment divided by the $10 million post-money valuation).

Different Types of Investment Rounds

Measures taken to gain liquidity are referred to as "exit strategies" - the holy grail of venture capitalism.

Common Pitfalls of Startups

Of course, there are many pitfalls for potential investors along the way. One of the most critical elements for a start-up is the so-called "burn rate," the rate at which the company incurs expenses, usually expressed on a monthly basis (also known as the "cash out the door" rate). If the burn rate is too high, the start-up could run out of cash and be forced to fold - a phenomenon that has hit a number of high-profile start-ups in recent months. See financial decisions of a startup for more. This term should be distinguished from "burn out" (or "cram down"), which occurs when the percentage interests of the founders and their angel co-investors are diluted by rounds of financing at a low share price in which they do not have sufficiently deep pockets to participate (also known as "down rounds"). These are just a few of the shorthand terms used by venture capitalists. Learn them and you'll be talking like a pro in no time.

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You can contact Joe directly at joe@vcexperts.com

VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries.

[post_disclaimer] => Material in this work is for general illustrative, informational, and/or educational purposes only, without regard to any particular investor’s objectives, financial situation or circumstances, and should not to be construed as legal, tax, financial or accounting advice. The material in this work reflects the personal views of the authors and not necessarily those of their company or firm or any of their respective customers or clients. Prior to the execution of a purchase or sale of any security or investment, you are advised to consult with your own advisors. Reproduced with permission from Joe Bartlett ) )