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 We believe that startup companies represent the future, and it is our mission to make sure they understand everything they need to in order to be successful. Today, our goal is to help startups understand everything they need to know about Regulation D.  What is Regulation D? Regulation D is an exemption from SEC registration under the Jobs Act and it’s the one most commonly used by startups because it allows a startup to raise an unlimited amount of money.  There are 2 main components to Regulation D: 506c 506c allows a startup to raise an unlimited amount of money from accredited investors only and allows for the use of general solicitation. 506b 506b allows a startup to raise an unlimited amount of money from accredited investors and up to 35 unaccredited investors. It does not allow for general solicitation. Although it allows for up to 35 unaccredited investors, the cost to do so could be prohibitively expensive.  How Can My Startup Raise Money Using Regulation D? In order to use regulation D, a startup must first verify that investors are accredited which can be done in 1 of 2 ways: If the investors are from the close network of the entrepreneur, they can use the self-verification method. If they are made through general solicitation, tax returns and other forms of verification must be obtained.  The startup must also file a Form Dwith the SEC either before the first investment or within 15 days of the first investment. Form D is a notice that includes the names and addresses of the company’s promoters, officers and directors along with details regarding the offering. Startups must also comply with the state Blue Sky laws where the investor resides. This is also known as a notice requirement that needs to be filed with the state within 15 days of the sale. Each state has its own fee and some states require you to use the electronic filing depository (EFD) in order to make the filing. You can expect to pay around $155 to use that system.  Note: Florida and Indiana are the only states that don’t have a filing fee associated with state Blue Sky laws. In the state of New York, there is case law that states an offering and subsequent sale of shares to a limited number of sophisticated investors within the state of New York is considered to be outside of the scope of the Martin Act. Therefore, no filing is required. If your company takes advantage of an exemption from registration, it should still provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information a company provides to investors must be free from false or misleading statements.  Bottom Line: Regulation D is the quickest and “easiest” way to raise an initial round of financing and a great starting point before getting into the other exemptions.  If you still have questions on this topic, reaching out to a lawyer for advice is recommended. At Benemerito Attorneys at Law, we offer free consultations and would love to help guide you toward the right decision for your business.  Let’s talk >>> 212-785-1528 This blog is for informative purposes only. This information does not constitute legal advice. You should consult with a licensed attorney that can advise you according to your particular circumstances.​ 

​When getting your startup off the ground, raising capital can feel like a full-time job. That’s why it’s so important to understand the options you have when it comes to finding funding. A common question we hear from our countless startup clients across the globe is “What Are Convertible Notes?” Our Short Answer: A Convertible Note is a form of short-term debt that converts into equity. It’s one of the most commonly used tools used by a startup in raising money during its first round of financing. These are commonly used by startups who wish to delay establishing a valuation for that startup until a later round of funding or milestone. Convertible notes are structured as loans with the intention of converting to equity. The outstanding balance of the loan is automatically converted to equity at a specific milestone, often at the valuation of a later funding round. Why should my startup use Convertible Notes? Convertible Notes are the best option for a Startup because they defer having to put a valuation on the company. It’s nearly impossible to put a valuation on an early stage company, especially in situations where the company is still just an idea, making it the best option for a new concept or business. Notes offer a simple, cost-efficient, and fast way for startups to obtain funding as compared to traditional priced equity rounds.  There are four basic components to a Convertible Note. The two most important ones, in general, are the valuation cap (or “cap”) and the conversion discount (or “discount”). Let’s run through them: 1. Valuation Cap   A valuation cap sets the maximum valuation at which the investment made via the convertible note can convert into equity. Investors in the convertible note typically get converted at the lesser of the valuation of the next qualified priced round and the cap. On the East Coast, around 3 to 6 million dollars is a typical cap in the first round of financing, and 5 million is usually the average. A suggestion is to always start higher at a 6 million cap with the expectation to negotiate down to a lower amount.  2. Discount This refers to the discount that will be applied to the price per share in the qualified financing, usually between 15% to 30%, with 20% being the most common discount offered. A discount in a note sets a percentage reduction at which the convertible note will convert relative to the next qualified priced round. This permits an investor to convert the principal amount of their loan (plus any accrued interest) into shares of stock at a discount to the purchase price paid by investors in that round. 3. Interest Rate The interest rate of a convertible note indicates how much interest accrues to the investor prior to the note’s conversion to equity or its repayment as cash when called. Convertible Notes will more often than not accumulate interest. The interest rate usually falls between 4 to 8% on the east coast with 5% being the most common, and between 2 to 4% on the West Coast. Note that interest rates cannot be lower than 2% or they might not be viewed as a convertible debt instrument. 4. Maturity Date The maturity date of a note indicates the date when the note is due to be repaid to the investor along with any accrued interest if it has not yet converted to equity. This usually falls anywhere between 12 and 24 months. The most common date of maturity is around 18 months, but we always aim to get around 24 months. In most situations, startup investors will not call for a note to be repaid at the maturity date, and will instead amend the note to extend the note’s maturity date, typically for another year. There are some convertible notes that call for automatic conversion to equity at maturity date at a pre-defined price, but these are unusual. Bottom Line: If you’re trying to raise money, a Convertible Note is probably the best way to start if it’s your first round of financing. If you still have questions on this topic, reaching out to a lawyer for advice is recommended. At Benemerito Attorneys at Law, we offer free consultations and would love to help guide you toward the right decision for your business.  Let’s talk >>> 212-785-1528 This blog is for informative purposes only. This information does not constitute legal advice. You should consult with a licensed attorney that can advise you according to your particular circumstances. 

STOs and ICOs are two fundraising mechanisms with functional similarities and differences. Due to an overwhelming amount of recent questions regarding the topic at hand, today we’re going to talk about the difference between STOs and ICOs. OUR SHORT ANSWER: STOs: Security Token Offerings   When you invest in a Security Token, you’re investing in something that has something tangible behind it already because they are actual financial securities backed by the assets, profits, and revenue of a company. You’re not taking as much of a risk and essentially investing into‘GoFundMe’ like you would be with an ICO.  ICOs: Initial Coin Offerings Most of the Cryptocurrencies that you know started out as an ICO in which people could invest money in hopes that the value would go up. An ICO is a security which means it needs to fall under one of the exemptions to the SEC (or otherwise be registered) such as Regulation D, Regulation A, Regulation CF and Regulation S which each have their own set of requirements according to the Jobs Act. If you want to launch an ICO, it’s not that you can’t do it, it’s just that you have to do it right. But just think of ICOs as the ‘Kickstarter’ of coins. There is not enough room in the market for ALL ICOs to do well! Now let’s talk about Utility Tokens. The major differences between Security Tokens and Utility Tokens are: Security Token: Ownership of assetInvestorsRegulated Offerings With Security Tokens, you’re buying a share of the project.  Utility Token: Access to protocolPurchasersUnregulated Crowdsales With Utility Tokens, you’re buying a token of the platform with the promise that once the platform is functioning you will have access to the platform through your token.  NOTE:The SEC does not recognize the term “Utility Token.” In fact, Chairman of the SEC, Jay Clayton, is on record saying that he has never seen an offering that he thought was not a Security. Therefore, in order to be on the safe side, all ICOs and STOs should be treated as a security until the law is clear about the defining factors.  Bottom Line: Because STOs are backed by something tangible, there is much less of a risk of fraud which makes STOs the safer option. In 2018 and 2019 you can expect to see a major rise in STOs!   If you still have questions on this topic, reaching out to a lawyer for advice is recommended. At Benemerito Attorneys at Law, we offer free consultations and would love to help guide you toward the right decision for your business.  Let’s talk >>> 212-785-1528 This blog is for informative purposes only. This information does not constitute legal advice. You should consult with a licensed attorney that can advise you according to your particular circumstances.  

Startups raising money for the first time often ask us if it makes sense to raise capital from friends, relatives or other potential investors who are not considered an “accredited investors”.  Our short answer: It’s not that you can’t take money from unaccredited investors, it’s just more difficult and expensive with all of the hoops you have to jump through. If you’re raising money for your Startup, always try to go through accredited investors first! If you’re not an expert in securities law and are looking for a more in-depth answer to this question, we broke it down below.  The History Up until recently, only accredited investors were able to invest in privately held companies. Privately held companies, or Startups, are companies that aren’t listed on a stock exchange like the New York stock exchange or the Nasdaq. This history of this law dates back to 1933 after the Great Depression when individual investors were consistently being taken advantage of through get-rich-quick schemes.  Because many of these scams involved unregulated private investments, the US government established the Securities and Exchange Commission (SEC) and put it in charge of creating and enforcing Securities Laws. One of their very first actions was to prevent non-accredited investors from investing in private deals.   This all changed with the Jobs Act, which passed under President Barack Obama in 2012, permitting companies to offer and sell securities through crowdfunding regardless of their income or net worth. However, many capital raises do not meet the requirements of Regulation Crowdfunding. Who are Accredited Investors? Accredited investors are people that can invest in your Startup with little to no issue with the Securities and Exchange Commission (SEC).  The only problem is they make up less than 10% of the US Economy. Out of the 127 million households in the US, only 12.4 million of those are Accredited Investors.  What makes an Accredited Investor? Someone who makes more than $200,000 a year for two consecutive years with the expectation that they’ll make it again the third yearA couple who makes more than $300,000 for two consecutive years with the expectation they will make it again the third yearAn individual couple with a million dollars or more in net worth not including their primary residence  If you do want to include non-accredited investors in your funding, they must comply with detailed additional information requirements. These requirements are thorough, comprehensive, and too expensive for most Startups to prepare. Most companies find that raising money from non-accredited investors can result in gradual fees that wind up being even higher than the amount of money they would raise from the investors. This is a good reason to exclude all non-accredited investors from your fundraising as an early-stage company! If you still have questions about what type of investor is right for you, reaching out to a lawyer for advice is recommended. At Benemerito Attorneys at Law, we offer free consultations and would love to help guide you toward the right decision for your business.  Let’s talk >>> 212-785-1528 This blog is for informative purposes only. This information does not constitute legal advice. You should consult with a licensed attorney that can advise you according to your particular circumstances.

Should You Form An LLC Or A Corporation?

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