Newsletter of the Private Equity and Venture Capital Committee
  Preferred Returns
Join the Committee Online

Message from the Editor

Featured Articles
  Crowd Control: Optimizing the crowdfunding provisions of the JOBS Act
  Seinfeld v. Slager—The Case About Nothing
  Fiduciary Duties and LLCs: Like Oil or Like Water?

Heard on the Listserve
  Cali Founders and Non-Competes
(November 2012)

  Modifications to LP Agreement for Venture Fund
(July 2012)

  Start-Up Algorithm Patent
(November 2012)

  Warrants - How to Amend
(November 2012)

  Finders' Fees Paid to Angel Forums
(June 2012)


Articles and Authors for Preferred Returns

Committee Leadership

Editorial Board:

Eric S. Klinger-Wilensky
    Morris Nichols Arsht & Tunnell LLP
    (302) 351-9169

William (Ken) Maready, Jr.
    Regional Editor (Southeast)

Raymond Walheim
    Regional Editor (Mid-Atlantic)

Samantha Horn
    Regional Editor (Canada)

Francesco Portolano
    Regional Editor (Italy)

  Message from the Editor
   
It has been quite some time since this newsletter last went out. I hope, however, that you will find the articles included well worth the wait. Each of the articles -- on issues associated with the JOBS Act, option grants, and fiduciary duties in the context of an LLC -- addresses important and developing areas of the law. In addition, our Committee's listserve has been extremely active over the past few months, and this newsletter contains some of the highlights of those postings.

For 2013, the goal is to circulate this newsletter quarterly. Please let me know if you have any articles or other material that you would like to include in this newsletter or if there are specific topics you think the newsletter should address.

Best wishes for the holiday season and for a happy and healthy New Year.

Warm regards,

Eric Klinger-Wilensky
Editor, Preferred Returns


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  Featured Articles
   
Crowd Control: Optimizing the crowdfunding provisions of the JOBS Act
Matthew S. Brown
The Jumpstart Our Business Startups Act of 2012 ("JOBS Act") was signed into law by President Obama on April 5, 2012. Certain provisions of the Act provide a securities registration exemption for crowdfunding that will become available on January 1, 2013. The crowdfunding provisions allow a business to sell, online, up to $1 million of securities every twelve months to an unlimited number of purchasers, irrespective of who they are; i.e., purchasers do not need to be qualified purchasers or accredited investors. While this revolutionary method of raising capital greatly simplifies the process, businesses must be aware of and properly weigh the potential ramifications from using crowdfunding. A company that is successful in raising $1 million through crowdfunding could find itself with thousands of stockholders who are strangers to the management and founders, and unable to attract investments from institutional investors due to the unmanageable nature of the crowdfunded stockholders cohort. This article proposes approaches to make the crowdfunding provisions more practicable by managing crowdfunded stockholders and lessening the concerns stemming from dealing with hundreds or thousands of unsophisticated investors.


More...



Seinfeld v. Slager—The Case About Nothing
Andrew M. Johnston
The hit comedy series "Seinfeld" was described by its creators as "the show about nothing." A recent case in the Delaware Court of Chancery dealing with challenges to compensation decisions by the Board of Directors of Republic Services, Inc. ("Republic"), which was brought by a plaintiff who has the same last name as that iconic show, could be described as "the case about nothing" because the Court found that the absence of meaningful limits on awards that the Board of Directors could make to its members under a stock incentive plan allowed the claims concerning those awards to proceed. Thus, the absence of meaningful limits—or "nothing"—presented a key element in the Court's ruling.


More...



Fiduciary Duties and LLCs: Like Oil or Like Water?
Srinivas Raju and Robert Burns
For many years, a line of decisions from the Delaware Court of Chancery have held or assumed that default fiduciary duties apply to the managers of limited liability companies formed pursuant to the Delaware Limited Liability Act, 6 Del. C. § 18-101 et seq. (the "LLC Act"), unless the parties to a limited liability company agreement exercise the contractual freedom granted by the LLC Act to "expand[] or restrict[] or eliminate[]" fiduciary duties. 6 Del. C. § 18-1101(c). The Delaware Supreme Court, however, recently stated that it considers this issue to be unresolved, and that in at least one case the Court of Chancery's statements on the proper construction of the LLC Act regarding the existence of default fiduciary duties were unnecessary dictum. See Gatz Props., LLC v. Auriga Capital Corp., -- A.3d --, 2012 WL 5425227 (Del. Nov. 7, 2012) ("Auriga II"). The Supreme Court's decision in Auriga II demonstrates that while practitioners have long assumed based on Court of Chancery decisions that default fiduciary duties exist in the LLC context, this issue has not yet been definitively settled.


More...



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  Heard on the Listserve
   
Cali Founders and Non-Competes (November 2012)

Richard C. Bruder writes: The facts are simple, though the answer (if there is one) may be complex:

I represent a NY investor, negotiating a Series AA round in a company located in California (Company is incorporated in Delaware, however).

We'd like a non-compete that binds the Founders (who live and work in Calif), but NCs are not enforceable in Cal.

What do venture investors in California companies do to protect themselves against walking Founders?

Thanks, as always, for your great insights.

See Replies





Modifications to LP Agreement for Venture Fund (July 2012)

Richard C. Bruder writes: Client is the GP of an committed capital Angel Fund. They are rounding third base on their fundraising, and a large family office is willing to invest PROVIDED that "a few things are changed" in the deal.

To what extent can changes be agreed to with this Family Office only (via side letter) -- as opposed to having to amend the LP Agreement for all.

Some changes obviously can be made via side letter alone (e.g., we'd like notices sent to us AND to our lawyer). Other changes obviously could not be made for this investor alone (e.g., we'd like TWO Units for the price of one).

But, what are the rules for the not so obvious changes between these extremes?

Thanks, as always, for your insight, help and wisdom.

See Replies





Start-Up Algorithm Patent (November 2012)

Mattia Colonnelli writes: I am advising an Italian start-up company (big data). I am currently negotiating a first round investment with a venture capital fund. The main and more valuable asset of the start-up is an algorithm. According to certain high level researches conducted, it seems that an algorithm is patentable in US, if certain conditions are met (while in Italy, and Europe at large, the scenario is different). The client is considering to patent such algorithm in US before going forward with the first round. Is an algorithm patentable in US? Under which conditions? What are the associated costs? Any advise will be more than welcome.

Many thanks.

See Replies





Unlicensed Finder located in US but all activities Offshore (January 2012)

Richard C. Bruder writes: Company closed a funding round a while back which included issuing warrants to investors. The Company has decided to extend the exercise window on the options and the Board has passed a resolution authorizing the Company to extend the exercise window by an additional period of time.

In order to implement this, should we amend the existing warrants (which, on their face, have an exercise period that is either soon to expire or already expired)? Or, is it sufficient for an investor-warrantholder to simply have possession of the Company Board Resolution in which the Company authorized the extension of the warrant exercise window?

I have a strong feeling as to the correct answer, but I am asking so that you folks can help solve a debate between me and counsel on the other side.

Thanks, as always, for your collective wisdom!

See Replies





Unlicensed Finder located in US but all activities Offshore (January 2012)

Stephen M. Goodman writes: A newly-formed angel forum is considering asking its presenting companies for a percentage fee if a presenting company successfully attracts investment from members of the forum as a result of its presentation. I have advised them that traditionally this was supportable on the theory that the forums (fora?) are acting as finders but not brokers, since the specifics of each investment are hammered out by the investors and the issuer directly. I am aware that the SEC has consistently rejected this view, saying that percentage-based compensation in connection with a securities transaction is virtually dispositive of the question of whether someone is acting as a broker. However, the courts appear to be more willing to allow for the possibility that someone claiming to be a finder may not, in fact, be in the business of "effecting" transactions in securities. Therefore, there has been at least judicial support for true finders (which these forums may well be) to take percentage-based compensation without having to register as brokers.

However, Section 201(c) of the JOBS Act seems to codify the SEC's position in this matter as regards Rule 506 private placements, which are presumably the result of most presentations to angel groups. That Section says that no person is subject to registration as a broker or dealer solely because such person "maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitations, general advertisements or similar or related activities by issuers of such securities, whether online, in person, or through any other means. . ." However, this exemption is available only if "such person and each person associated with that person receives no compensation in connection with the purchase or sale of such security . . ."

Since I feel that angel forums fit within the "platform or mechanism" concept, is it overly conservative to take the view that the SEC may point to the statutory prohibition as evidence of Congress' intent to override the judicial view regarding the ability of true finders to accept percentage-based compensation? Or is it simply that if an angel forum fits the "platform" definition and takes the compensation, the statutory exemption from registration is simply unavailable, and the forum can continue to rely on the current judicial view? Or is it incorrect to believe that angel forums are "platforms" covered by the statute? Any insight would be greatly appreciated.

See Replies





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  Articles and Authors for Preferred Returns
   
The Editorial Board is collecting articles for future newsletters which are circulated to our members worldwide. Please send your submissions to Eric S. Klinger-Wilensky at ekwilensky@mnat.com.

Articles should be 1500 words or less, and on any topic of interest to practitioners in the private equity and venture capital sectors. From short scholarly articles, to practice tips, reviews/summaries of a Section program, life in the trenches, interesting pro bono projects, humorous looks at life and the law, or even how you balance work and personal life. We appreciate your help in making this newsletter a success.


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