US Securities and Exchange Commission Rules on Crowdfunding Effective

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US Securities and Exchange Commission Rules on Crowdfunding Effective

The U.S. Securities and Exchange Commission (SEC) rules on crowdfunding became effective on May 16, 2016.  The rules are a hefty 685 pages long and are available, here.  The Investor Bulletin issued by the SEC Office of Investor Education and Advocacy provides an overview of the rules and the JOBS Act tailored to potential investors, here.  The Investor Bulletin explains that anyone can make a crowdfunding investment, but that there are limitations based on net worth and annual income on the amount that can be invested.  The Investor Bulletin explains: 

If either your annual income or your net worth is less than $100,000, then during any 12-month period, you can invest up to the greater of either $2,000 or 5% of the lesser of your annual income or net worth.
If both your annual income and your net worth are equal to or more than $100,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $100,000. 

Additionally, crowdfunding investments can only be made through a portal and not through other direct means.  "The broker-dealer or funding portal—a crowdfunding intermediary—must be registered with the SEC and be a member of the Financial Industry Regulatory Authority (FINRA)."  The Rules provide numerous requirements for intermediaries to protect investors.  The Investor Bulletin also provides numerous warnings to potential investors concerning the risks associated with crowdfunding.  The Rules provide that, "An issuer is permitted to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period." 

Notably, the Rules also state that: 

Certain companies are not eligible to use the Regulation Crowdfunding exemption. Ineligible companies include non-U.S. companies, companies that already are Exchange Act reporting companies, certain investment companies, companies that are disqualified under Regulation Crowdfunding’s disqualification rules, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Offering documents must disclose: 

Information about officers and directors as well as owners of 20 percent or more of the issuer; • A description of the issuer’s business and the use of proceeds from the offering; • The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the issuer will accept investments in excess of the target offering amount; • Certain related-party transactions; • A discussion of the issuer’s financial condition; and • Financial statements of the issuer that are, depending on the amount offered and sold during a 12-month period, accompanied by information from the issuer’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor. An issuer relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the issuer are available that have been audited by an independent auditor. 

Happy investing!

 

10 Patent Considerations for Startups in the Age of the Assault on Patents

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10 Patent Considerations for Startups in the Age of the Assault on Patents

Today, Oxfirst sponsored a talk by the distinguished Rt. Honorable Professor Robin Jacob defending patents.  Another commentator has also stepped forward to defend patents.  Recently, attorney John R. Harris authored an article titled, “The Patent System is Under Assault:Startups, Should You Care? Ten Things About Patents that Startups Need to Consider,” published in the 44 American Intellectual Property Law Association Quarterly Journal 27 (Winter 2015).  Mr. Harris outlines the current assault by describing one of the attacks coming from the Patent Trial and Appeal Board (affectionately known as the so-called “Death Squad” for patents) and its rate of 80% in finding patents invalid in Inter Partes Review Proceedings.  Notably, the U.S. Supreme Court has recently granted certiorari in Cuozzo Speed Techs., LLC v. Lee to determine whether the Patent Trial and Appeal Board is applying the correct standard in reviewing patents for invalidity.  The outcome of that case will be closely watched—particularly, I think, given the current gaming going on concerning shorting the stock of companies whose patents are then challenged through IPRs.

In defending patents, particularly in the context of startups, Mr. Harris states:

But most significantly for startups, that property right can represent enhanced value for investors and improve the prospects for obtaining early stage financing.  A well-crafted patent—or even better, a collection of patents in a portfolio that forms a patent “thicket”—reveals and represents the fruits of product or service development, helping form a protective barrier against theft. If that product or service requires capital to come to market, investors draw some comfort from the patents’ protection of the investment while the product is commercialized. This early protection is vital because, in this author’s experience, it often takes companies years to go from “maybe a good idea,” to a prototype, to a testing environment, to a sold product, to market acceptance, to profitability, and finally, to investment realization.

My own personal experience mirrors Mr. Harris’: it can be difficult to draw attention from venture capitalists without solid patent rights.  I haven’t practiced in a while, but my understanding is that venture capitalists still value patents in determining whether to invest in a startup.  [Interestingly, I’ve never seen the use of term “patent thicket” in a positive light.]

Moreover, in spite of the assault on patents (and their cost), Mr. Harris notes that startups should take into account these ten considerations concerning patents: 1. Enterprise Value Enhancement; 2. Signaling Quality to Investors and the Investment Community; 3. Establishing Ownership of Technology and Inventions; 4. Assertion Against Competitors; 5. Avoiding the IP of Competitors and Others; 6. Revenue Generation/Licensing/Monetization of IP; 7. Facilitating Collaborative Research; 8. If You Get the Patent, You Block the Competitors; 9. The Laws Will Change . . . Again; and 10. Although Trade Secrecy and Copyright Offer Some Protection, There Is No Viable Alternative to Patents.

Do you have any other considerations to add?  Also, what is on the cost side?

The Push and Pull of the Biotechnology Startup on the Academic Researcher: A Case of Altering The Traditional Norms of the Republic of Science

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The Push and Pull of the Biotechnology Startup on the Academic Researcher: A Case of Altering The Traditional Norms of the Republic of Science

In a fascinating story published by the Sacramento Bee authored by Cathie Anderson titled, “UC Davis Cancer Researcher Weighs Risk of Leaving Campus Against Reward of Cutting-Edge Startup,” Ms. Anderson discusses some of the pros and cons of leaving a researcher position at a public university to pursue a high level position at a startup.  The article discusses how Mr. Degregorio, a UC Davis researcher, has been involved in the development of promising drugs to address cancer in the immunotherapy field.   Mr. Degregorio is receiving pressure from his investors in the company and his research partners to completely disengage from the university and essentially work full-time for the startup.  Apparently, the pressure stems from a desire to have Mr. Degregorio fully invested in the startup and fully assuming the associated risk.  From Mr. Degregorio’s, who is 60 years old, position, he has apparently worked long enough to retire from UC Davis with a full pension which seems to cover his full current pay and his family will have medical benefits.  Why is he concerned with staying on at UC Davis? He apparently believes that:

Academia, however, offers . . .  the freedom to study potential drug treatments without worrying about whether his research delivers dividends. In the private sector . . . failure could mean that he loses a high-profile position at the company he founded.

He also expresses concern about how biotechnology stocks have recently been hit hard and the timing may not be great.  The latter concern seems to be a very real concern to me.  The first concern is very interesting and, I think, highlights the divide between a benefit in academia—freedom of research agenda, even if for applied research—versus pressure to research and develop drugs that must be commercially successful.  There is still pressure though in academia to do “relevant” and “successful” research because of the need to continue to obtain research grants, but the freedom to choose remains and perhaps the thought of being fired is unbearable to some.  It is especially interesting that as a researcher he feels this tension even in light of the fact that he would not lose the security of his pay and medical benefits at UC Davis.  But, what if he was not fully vested in his pension?  I suppose that at least for Mr. Degregorio he would not make the decision to leave.  What about other researchers in a similar position?  I wonder how highly they would value their academic freedom and potential pension weighed against the opportunity to make a killing in the high risk biopharmaceutical startup field. 

Another interesting issue is the role of patents.  The article notes that Mr. Degregorio has worked closely with the UC Davis Technology Transfer Office to ensure that all necessary patents rights have been acquired.  Likely without the Bayh-Dole Act and patent protection, the possibility of this startup existing, the startup potentially receiving $6 million in venture capital funding (and the article notes they need more funding for further development and to get through clinical trials), and Mr. Degregorio having to make a tough decision for him, would not exist.  But, what if the Bayh-Dole Act did not exist?  Would we still have the invention?  Would it be cheaper?  Would it reach the marketplace eventually—crossing the Valley of Death?