Insights

Deciding that it might be time to explore a sale of a family or founder owned business can be an intimidating task, but what can make it even more daunting is being unprepared for what comes next. This article sets forth the high-level steps that should be taken early on ahead of any merger or acquisition event (whether it be assets sale, equity sale, merger, or otherwise) for such businesses to ensure as smooth of a sale as is possible. Some of the items below are steps to take to protect your business, others are proactive steps that potential buyers will generally want to see, but all are generally best market practices.

The Securities and Exchange Commission (SEC) has issued a no-action letter providing interpretive guidance on the verification of accredited investor status in offerings conducted pursuant to Rule 506(c) of Regulation D under the Securities Act of 1933. Rule 506(c) permits issuers to engage in general solicitation or advertising in private offerings, provided that all purchasers are accredited investors and the issuer takes “reasonable steps” to verify the accredited status of all investors. The no-action letter introduces a streamlined approach, stating that, absent contrary indications known to the issuer, reliance on sufficiently high minimum investment thresholds—coupled with specific written representations from purchasers—may satisfy the verification requirement.

On December 17, 2024, the Department of Defense (DOD) published a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to implement the data rights portions of the Small Business Innovation Research Program (SBIR) and Small Business Technology Transfer (STTR) Program Policy Directive, which itself was most recently amended in May 2023.  The changes from this final rule will be effective as of January 17, 2025. 

The Securities and Exchange Commission announced on August 23, 2023 that they have adopted new rules under the Investment Advisers Act of 1940 which call for greater transparency for investors who invest in private funds. While some of these rules will make investing with registered investment advisers clearer, others will make the world of venture capital a bit more challenging.

In an unconventional opening to the normally staid proceedings of the United States Senate, the voice of Frank Sinatra introduced the July 12, 2023 Senate Judiciary Subcommittee hearing on artificial intelligence (AI) and intellectual property. More accurately, an AI-generated version of Frank Sinatra’s voice sang about regulating AI to the tune of New York, New York, which Senator Chris Coons (D-DE), Chairman of the Senate Judiciary Subcommittee on Intellectual Property, used to illustrate both the possibilities and the risks of the use of AI in creative industries.

In its long-awaited decision in Slack Technologies, LLC v. Pirani, 598 U.S. ___, No. 20-200 (June 1, 2023), the Supreme Court ruled that the tracing requirement of Section 11 of the Securities Act of 1933 applies to suits brought by investors in direct listings. Although the ruling definitively resolves an ambiguity in the statutory text, it leaves the door open to adverse consequences for both companies and investors in direct listings.

While forming a new entity is generally quite easy, corporate structure and tax considerations play a fundamental role in a startup’s ability to raise capital. Prospective investors have expectations for how a “venture backable” business (i.e., a business with the potential to generate significant returns with a potentially high valuation) is to be organized under state law and classified for income tax purposes. However, the fundamental question for founders is: what actually makes the most sense for the business? Here we briefly discuss four structures for forming a new business and their tax classifications: (1) a state law corporation classified as a C corporation; (2) a state law corporation classified as an S corporation; (3) a limited liability company (“LLC”) classified as either a C corporation or an S corporation; and (4) an LLC classified as a sole proprietorship or partnership.

On July 28, 2020, the National Venture Capital Association (NVCA) released updates to its model legal documents for use in VC financing transactions (the NVCA Agreements). The NVCA Agreements have become the industry standard equity financing documents for Series A financings and beyond, and are used by startups, VC investors and lawyers in Silicon Valley and elsewhere. Prior to this round of updates, the NVCA Agreements were last updated in October 2019 and January 2018. 

New York State Attorney General Eric Schneiderman's recent announcement that his office will be using the powerful and expansive provisions of New York State's securities statute, known as the “Martin Act,” to investigate Exxon Mobil's public statements and internal research concerning climate has put an exclamation point on a chorus of calls by congressmen, senators and presidential candidates for investigation of Exxon Mobil's private knowledge and public statements dating back 30 years. It might also open the door to broader scrutiny under federal securities laws.

On July 22, 2015, the IRS proposed regulations that, if and when finalized, will adversely affect many fee waiver and similar arrangements traditionally used by private equity funds to convert fee-based ordinary income to tax-preferred capital gains. The IRS has taken a dim view of such arrangements for several years, and the proposed regulations further crystallize the IRS' position. 

Since the economic downturn in 2008, the legal market has been in a constant state of change. Companies are demanding budget predictability, shared risk and reward, improved efficiency, more transparency, and a new way to define value, and law firms have rushed to respond. Firms cannot rely on the billable hour as they once did. This development has led to the rise of Pricing Departments whose job it is to manage value-based billing arrangements, profitability, and legal project management. Law firms and in-house counsel need to understand each type of alternative fee arrangement, its strengths and weaknesses, how to accurately scope and budget an engagement, and how to manage it once it has begun.

Budget cuts and a tough economic environment over the past several years have contributed to a rise in bid protests. Cost/price has become one of the primary deciding factors in who wins an award, and government contractors are more willing to fight for the fewer contract dollars that are available today. In fact, bidders are increasingly engaging in multiple rounds of litigation at the agency-level, GAO, or Court of Federal Claims to secure those prized procurement dollars or opportunities to obtain key expertise or establish a customer relationship.

On June 12, 2015, in Ariosa Diagnostics, Inc. v. Sequenom, Inc., the U.S. Court of Appeals for the Federal Circuit invalidated Sequenom's patent claiming methods of detecting paternally-inherited fetal DNA in a mother's blood serum or plasma, affirming the district court's decision. The decision highlights that discoveries to new, even "revolutionary," methods of detecting and analyzing naturally occurring phenomena may be ineligible for patent protection under 35 U.S.C. § 101 absent some additional contribution to the state of the art. In so holding, the court considered and rejected arguments by Sequenom that (1) limited preemption of the natural phenomenon by the claims at issue rendered the claims patent eligible; and (2) that a new application of already known steps or processes to a newly discovered natural phenomenon is itself patent eligible. 

On May 13, 2015, Marc Wyatt, Acting Director, SEC Office of Compliance Inspections and Examinations (OCIE), delivered an important speech that highlighted legal and compliance topics for investment fund managers.

On July 22, 2014, the Saudi Arabian Capital Market Authority (CMA) announced that qualified foreign financial institutions (QFIs) would be permitted to buy and sell stocks listed on the Saudi stock market in accordance with rules to be adopted by the CMA. The CMA subsequently released its Draft Rules for Qualified Foreign Financial Institutions' Investment in Listed Shares (the Draft Rules) and solicited opinions and suggestions from investors and other interested parties on the Draft Rules.

In Chief Counsel Advice 201518013 (CCA)1 released on May 1, 2015, the IRS took the position that an executive's retention agreement violated Code section 409A2 and therefore was subject to an additional 20 percent federal income tax—potentially subjecting the bonus to a 59.6 percent marginal federal income tax rate. The executive's employer had realized the error and attempted to correct the retention agreement before the bonus was paid, but the IRS determined that the correction came too late. This CCA underscores the importance of ensuring that bonus plans, employment and retention agreements, and severance agreements comply with section 409A from inception. If correction is necessary, companies should consider all available possibilities for correcting section 409A violations, both within and outside of the IRS formal corrections program. In either event, timing matters.

In a move designed to attract commercial technology companies into DoD contracting, the Pentagon has announced plans to open a Silicon Valley office and provide venture capital to identify and fund innovative technologies that can improve national defense. Although traditionally Silicon Valley companies have been wary of contracting with DoD because of its bureaucracy and rigorous intellectual property requirements, Pentagon leaders have pledged to address these concerns to entice high technology companies and to enable DoD to compete with commercial technologies utilized by our adversaries.

On July 22, 2014, the Saudi Arabian Capital Market Authority (CMA) announced that qualified foreign financial institutions would be permitted to buy and sell stocks listed on the Saudi stock market in accordance with rules to be adopted by the CMA. The CMA subsequently released its Draft Rules for Qualified Foreign Financial Institutions' Investment in Listed Shares (the Draft Rules) and solicited opinions and suggestions from investors and other interested parties on the Draft Rules.

On March 25, the Securities Exchange Commission (the "Commission") proposed revising Rule 15b9-1 (the "Proposed Rule"), in a move designed to require broker-dealers engaged in proprietary high-frequency trading (HFT) of securities or other applicable products to register with a regulatory association (an "Association"). Since FINRA is the only Association that currently exists, all such HFT firms would be required to register with FINRA. 

On March 25, 2015, the SEC approved the long anticipated Final Rules to implement Title IV of the JOBS Act, or as it is being colloquially called, "Regulation A+." The SEC has published the adopting release for the Final Rules here, and the Final Rules will become effective 60 days after publication in the Federal Register. We will provide a more detailed analysis in an upcoming Client Alert, but we wanted to provide a brief summary of our initial reactions to Regulation A+ (for our report last year on the Proposed Rules for Regulation A+, please see here).