Securities Law Exemptions

1
Securities Law Exemptions
Fall 2006 Venture Capital and Private Equity
Victor Fleischer ASSOCIATE PROFESSOR OF LAW
2
Recap of Last Class
Fall 2006 Venture Capital and Private Equity

• Professionalization
• More Intermediaries
• Going Retail
• Commodification?
• more regulation?

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
3
Significant Participation
Fall 2006 Venture Capital and Private Equity

• Less than 25 ERISA money (Benefit Plan
  Investors)
• Before 2006, this included state pension plans
• Now its corporate pension plans only
• What about Fund of Funds?
• If FoF
• If Fof 25 BPI, then proportionate, not 100
• (maybe)

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
4
VCOC
Fall 2006 Venture Capital and Private Equity

• A fund is a VCOC if
• 50 of its Portfolio Investments
• Are Venture Capital Investments
• In Operating Companies
• In which the fund has Management Rights

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
5
VCOC
Fall 2006 Venture Capital and Private Equity

• Portfolio Investments
• Anything but short term cash
• Operating Company
• Production or sale of a product or service other
  than investment services
• Management Rights
• substantially participate in, or substantially
  influence the conduct of management
• Board seat alone may not be enough
• Provide certification to LP

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
6
Today
Fall 2006 Venture Capital and Private Equity

• Securities Law Exemptions

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
7
Securities Law
Fall 2006 Venture Capital and Private Equity

• Premise is that a well-informed market is the
  best policeman
• 33 Act and 34 Act for the public
• Exceptions for sophisticated investors

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
8
Securities
Fall 2006 Venture Capital and Private Equity

• LP Interests are securities that, absent an
  exemption, must be registered
• Exemptions
• 4(2) (not involving any public offering)
• Reg D

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
9
Rule 506
Fall 2006 Venture Capital and Private Equity

• Rule 506
• 35 sophisticated purchasers Unlimited number
  of accredited investors
• Accredited investors defined in statute
• Banks and insurance companies
• Mutual funds
• Pension plans
• 1MM net worth or 200K /300K income
• others

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
10
Look Through
Fall 2006 Venture Capital and Private Equity

• If entity is organized for the specific purpose
  of purchasing the securities, then look through
  the entity to the underlying equity owners
• Percentage of entitys assets used to buy the
  securities
• Whether, when seeking investors, the entity
  announced to possible investors its intention to
  invest in the issuer
• Whether the entity is operated in such a manner
  to facilitate individual equity owner
  decision-making over investments

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
11
Marketing
Fall 2006 Venture Capital and Private Equity

• No general solicitation
• No newspaper, magazine, TV ads
• Careful w websites
• Careful w interviews?
• Instead, offering memoranda
• Who runs the fund
• Investment policy
• Refers to limited partnership agreement

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
12
Fall 2006 Venture Capital and Private Equity
CalPERS
GSA
Dedicated Program Vehicle
LP
GP
LP
LP
Fund / Intermediary
Portfolio Company
Portfolio Company
Portfolio Company
Portfolio Company
Portfolio Company
Victor Fleischer ASSOCIATE PROFESSOR OF LAW
13
Fall 2006 Venture Capital and Private Equity
LP
LP
LP
GP
FoF
LP
GP
LP
LP
Fund / Intermediary
Portfolio Company
Portfolio Company
Portfolio Company
Portfolio Company
Portfolio Company
Victor Fleischer ASSOCIATE PROFESSOR OF LAW
14
Problems
Fall 2006 Venture Capital and Private Equity

• Grove Street Advisors
• (p. 14) Suppose they set up a dedicated FoF for
  six pension funds Oregon, Texas, UCRS, GM,
  United Airlines and Delta Airlines.
• A. Will GSA be subject to ERISA?
• (i) if so, what are the implications?
• B. Will GSA have to register its securities?

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
15
Problems
Fall 2006 Venture Capital and Private Equity

• Grove Street Advisors
• ERISA Prior to 2006, yes, because of
  significant participation. Post 2006 Yes but
  only pro rata as it applies to underlying fund?
• Is GSA a VCOC? No.
• Incentive fee?
• No All are accredited investors.

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
16
Problems
Fall 2006 Venture Capital and Private Equity

• 2. Grove Street Advisors
• (p. 14) Suppose they set up a dedicated FoF for
  six family offices.
• A. Will GSA be subject to ERISA?
• B. Will GSA have to register its securities?
• C. Why might this facilitate access to
  top-tier VC funds?

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
17
Problems
Fall 2006 Venture Capital and Private Equity

• 2. Grove Street Advisors
• No not benefit plan investors.
• No all will be accredited investors
• Not subject to FOIA/state public records act
  disclosure. Stable source of capital (not
  fickle).

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
18
Summary
Fall 2006 Venture Capital and Private Equity

• Source of Capital makes a difference
• Securities law not hard to avoid
• Anti-fraud provisions still apply
• but reputation and sophistication of the players
  is doing the hard work, not regulation

Victor Fleischer ASSOCIATE PROFESSOR OF LAW
19
Next Class
Fall 2006 Venture Capital and Private Equity

• Note changes to syllabus
• UTV

Victor Fleischer ASSOCIATE PROFESSOR OF LAW