The University of Miami School of Law hosted a panel that dealt with the legal funding of entrepreneurial ventures as part of Global Entrepreneurship Week 2016.
The panel was led by Daniel Ravicher, the director of the Larry Hoffman|Greenberg Traurig Startup Practicum, a program which connects Miami Law students with new ventures in need of legal assistance. “Starting a business triggers all sorts of legal issues,” Ravicher said. “That’s what the practicum addresses.”
The panel consisted of three Miami Law students, including Feras Ahmed, a third-year law student interested in the intersection of law and technology. He discussed the role of general solicitation in raising capital.
“Historically there’s been a ban on general solicitation and general advertising,” he said. “From a policy perspective, we think that lots of people are susceptible and easily can be coaxed into unfair deals and unfair investment opportunities.”
Ahmed went on to talk about an exemption to the ban on general solicitations. “If you file with a 506 (b), what you’re saying is that ‘we’re not using any general solicitations in this offering,’” he said. “If you go with the 506 (c) option, what you’re saying is that ‘yes, we used general solicitations, but these general solicitations are subject to additional requirements.’”
Ahmed emphasized the importance of considering all factors when deciding how to file when raising capital for a small business.
“There’s a calculus that a businessperson is going to have to do, together with legal counsel, in determining whether they should choose 506 (b) or 506 (c).”
Also on the panel was Alex Montje, a 2L who worked in the finance industry for several years before starting his law studies. Montje discussed the advantages and disadvantages of different types securities that entrepreneurs may deal with, equity and debt.
He noted that raising funds through the sale of company equity is advantageous in that it gives the business owner a certainty in their valuation. “If somebody gives you $100,000 for 10% of your company, you have a firm valuation of your company.”
Montje warned, however, of the high cost of raising capital this way. “It takes a long time to do it,” he said. “And it’s a high-fee situation.” He went on to say that taking on debt can be a much quicker, cheaper option for business owners.
Howard Rapp, a Miami Law student with a background in communications, was also a panelist. He became involved with the startup practicum due to his love for entrepreneurship. “I like seeing innovators and seeing what we can do and how we can change our community to create something better.”
Rapp talked about the ways in which startups can offer securities without having to go through the costly and time-consuming process of registering with the Securities and Exchange Commission.
“Rule 504 exempts offerings of up to $1 million … with this exemption you’re allowed to generally solicit people to invest. Rule 505 exempts offerings of up to $5 million; however there can be no more than 35 unaccredited investors.” The final exemption is rule 506, which “exempts offerings of any amount so long as there are no more than 35 unaccredited investors.” Rapp emphasized that general solicitation and advertisement of securities is not permitted by rules 505 and 506.
Students in the Startup Practicum help clients with organizing, financing, talent, intellectual property, risk, regulation, and other legal issues. Specific legal matters that students have assisted with in the past include forming a business entity, evaluating, negotiating and documenting equity and debt transactions, applying for patents and trademarks, and drafting Terms of Service and Privacy Policies.
In his concluding remarks, Ravicher noted the importance of having confidence when looking for potential investors in one’s company: “Come from a position of, ‘I have a privilege of offering a select number of people the right to participate in my company,’” he said. “If you don’t have that confidence you’re not going to get a good deal.”