Late Stage Financings

Transcription

1 Late Stage Financings San Francisco Session: Palo Alto Session: Tuesday, April 26, 2016 Wednesday, April 27, :30 AM 11:00 AM PDT 12:00 PM 2:30 PM PDT Morrison & Foerster LLP Morrison & Foerster LLP 425 Market Street 755 Page Mill Road San Francisco, CA Palo Alto, CA Presenters: Susan Mac Cormac, Morrison & Foerster LLP Anna Pinedo, Morrison & Foerster LLP Barb Izzo, former Managing Director at a Fortune 100 public company, advisor to several successful Silicon Valley tech companies Anand Subramanian, Qatalyst Partners Jeff Thomas, NASDAQ Private Market 1. Presentation 2. Morrison & Foerster Late Stage Investments Practice 3. Morrison & Foerster Infographic: U.S. Late Stage Financings 4. Morrison & Foerster Summary Chart: Investor Criteria for U.S. Private Placements and Other Offerings 5. Morrison & Foerster Summary Chart: Exempt Offering Alternatives 6. Morrison & Foerster Client Alert: Following the Wisdom of the Crowd? A Look at the SEC s Final Crowdfunding Rules

2 Morrison & Foerster LLP All All Rights Reserved mofo.com Late Stage Private Placements April 2016 Late Stage Private Placements NY This is MoFo.

3 Capital-Raising Dynamics This is MoFo. 2

4 The JOBS Act and private offerings Although the aspect of the JOBS Act that has received the most attention relates to changes to the IPO process, in large measure, the JOBS Act related changes affecting the private market may be more significant. Title V and Title VI changes to the Exchange Act Section 12(g) threshold Changes to Rule 506 Legal certainty for matchmaking platforms Taken together, these measures have the effect of permitting companies to stay private longer and to rely on exempt offerings (while enabling companies to contact a broader range of potential investors) for their capital-raising. This is MoFo. 3

5 Reliance on private or exempt offerings Even pre-jobs Act, based on various studies, it was already the case that more capital was being raised in reliance on Regulation D and Rule 144A (in aggregate) than in SEC-registered offerings according to the SEC s Division of Economic Research and Analysis (DERA), in 2014, for example, the total raised in registered offerings was $1.35 trillion whereas the total raised through all private offerings was $2.1 trillion Amounts raised in private offerings are likely to be understated given that many issuers fail to file Form Ds and amounts raised in 4(a)(2) offerings are not reported The amounts raised in registered offerings include debt offerings, whereas the majority of Reg D offerings involve equity or new capital These trends became more pronounced in

6 Reliance on private or exempt offerings (cont d) Companies are choosing to defer their IPOs and rely on private financing for much longer than in the past This is evident from various IPO reports For example, based on statistics for the period from 1/1/12 through 9/30/15, the median market cap for IPO issuers was approximately $386 million, and the average was $1.4 billion Fewer than 2.5% of IPO issuers have a market cap of $50 million or less This is MoFo. 5

7 Venture-backed companies delaying IPOs U.S. IPOs by venture-backed companies fell to a two-year low in the first quarter of 2015 (National Venture Capital Association and Thomson Reuters) Venture-backed tech companies have raised more capital in the private market ($20 billion) than the public market ($600 million) in the first five months of 2015 (CB Insights) This is MoFo. 6

8 Market Trends This is MoFo. 7

9 Market Trends U.S. LATE STAGE ACTIVITY BY QUARTER 8 8

10 Market Trends (cont d) 9 9

11 Recent high profile pre-ipo private placements $500M $1.5B $526M $1.0B $367M $350M $537M $2.8B $275M $300M This is MoFo. 10

12 Why undertake a late-stage financing This is MoFo. 11

13 Rationale There may be a variety of different motivations for a late stage or pre- IPO private placement Company may want to defer IPO and need to raise additional capital prior to the IPO Company may want to take out early friends and family and angel investors and clean up balance sheet or provide partial liquidity for longstanding holders Company may want to bring in strategic investors Company may be advised that it should prepare itself for the IPO by gaining support and validation from key sector investors that are opinion leaders Company and bankers may want to de-risk IPO by bringing in cross-over investors that will also invest in the IPO Company may be advised that an up round will make higher IPO pricing easier for IPO investors to accept May be quite sector dependent This is MoFo. 12

14 Late Stage Investments This is MoFo. 13

15 Late stage investment characteristics Impact on structuring and negotiating Typically made into existing, relatively mature companies Late stage Proven product viability Exhibits signs of increasing adoption and revenue growth Focused on marketing and sales Very late stage Cash flow is dependable Past initial hyper-growth period and reasonable to expect sale or IPO within months This is MoFo. 14

16 Late stage investment characteristics (cont d) Larger and more diverse groups of existing shareholders Founders, current/former management, employees, seed, family, high networth, early stage institutional venture and professional angels Each group has different levels of involvement, varying rights and protections tied to equity and divergent objectives for investment Founders/management may be significantly diluted by investment need to create alternative incentives for them Start-up, seed investors may desire quicker exit at lower valuation This is MoFo. 15

17 Late stage investment characteristics (cont d) By their nature, investments may require more extensive and complex due diligence Current capitalization and issued/outstanding securities (accredited vs. nonaccredited former employees) Existing shareholder rights Liabilities - complex credit facilities IP - may not have hit the radar of larger companies or trolls until $50mm in revenue; large enough to sue Control issues (above 20-30%) - subsidiary or affiliate status This is MoFo. 16

18 Types of securities Late stage equity Typically equity deals based on the previous A-D series of preferred However, later stage deal can depart greatly from venture Can be greater upside depending on liquidation preference Key is calculation of preference, whether there is participation and whether/how many additional rounds to exit Alternative is to take debt that looks like equity and includes: Interest payments to match PIK dividends Mandatory prepayment on trigger events to match redemption rights More financial control in terms of covenants Possible security interest in assets of issuer Convertibility features and warrant coverage Complications involve intercreditor/subordination issues with other lenders, particularly financial institutions Less up-side, particularly in IPO, and therefore utilized more in pre-sale transaction Consider tax issues (treated as equity) This is MoFo. 17

19 Types of securities (cont d) Common stock versus preferred stock Growth equity almost always preferred stock with preference on liquidation Basis for preferred stock is previous series with departures in later stages for: Conversion rights Liquidation and participation with common stock in remainder (usually capped) Dividend rights more often accrued and cumulative Board representation and approval is also critical (look for overrepresentation of early series with lower preference trigger for returns) Control of triggers for drags and tags Common stock used for companies with simplified cap structures and if very close to exit (particularly IPO) Depending on valuation and prior preferences, can give investor larger % and return Can be used to top up ownership percentage after purchase of company issued securities (particularly through secondary) This is MoFo. 18

20 Liquidation preference Liquidation preference of the investor s preferred stock Typically senior to all other outstanding classes or series of common stock and preferred stock Sometimes pari passu to an existing series of preferred stock, particularly if the investment is priced as a flat or up round (using the same or higher pre-money valuation as the previous financing round) Typically includes all accrued and accumulated dividends in the liquidation value of the preferred stock Usually participating (sharing in any residual liquidation value of the common stock on an as-converted basis) If participating, is generally not capped in a down round investment, but usually capped (by dollar amount or multiple of return on investment) in a flat or up round investment This is MoFo. 19

21 Dividend rights Dividend terms for preferred stock: Typically accrue a fixed dividend on the original liquidation value, with the dividend rate typically higher than in early stage deals (which typically have lower fixed dividend rates if they accrue a dividend at all) Are more likely than those in an early stage deal to be payable periodically in cash and, if not, are usually cumulative, unlike those in early stage deals, which are usually non cumulative even when they do accrue a dividend. In addition, the cumulative dividend is often compounding (earning a dividend on the accrued dividends) on a quarterly or annual basis (whether or not declared by the board) Often allow accumulated dividends to be convertible into common stock or, in some cases, are payable in cash on conversion (rather than forfeited on conversion as with many early stage deals that have cumulative dividends) Participating, with the right to share pro rata on an as converted basis in any dividends paid on the common stock This is MoFo. 20

22 Redemption rights Redemption rights much more common in late stage deals Not preferred exit method because investor relies on upside return of their underlying common equity value rather than minimal return of redemption and risk of non-payment of redemption price if company is struggling Primary issues to consider: What securities will be redeemed and how many shares? Which particular stockholders will be redeemed or whether the redemption will be pro rata for all stockholders? Full redemption or partial redemption? Tax implications of the redemption Manner of redemption This is MoFo. 21

23 Redemption rights (cont d) Redemption rights manner of redemption Cash redemptions Question of whether company funds the redemption with existing cash on its balance sheets, with proceeds of the investment or from the proceeds of new debt Debt securities The terms of interest on the debt, including the interest rate, the frequency of payment and whether interest is paid in cash or PIK Principal payments, including the final maturity date and whether there are any scheduled prepayments or mandatory prepayments under certain conditions (such as on a change of control of the company, a sale of assets or excess cash flow) Whether the debt is secured and, if so, which assets serve as collateral The liquidation priority of the debt relative to any other debt of the company or relative to the growth equity investor's investment The type of covenant protections and default remedies, if any, available to the existing stockholders This is MoFo. 22

24 Anti-dilution rights Specific issues for late stage include: Price for late stage investor that triggers rights particularly if have to pay a much higher valuation Full ratchet versus weighted average can negotiate full ratchet if high valuation; however, this is very unusual; previous investors usually require weighted average using same formula as previous rounds Pay to play much less common in later stage rounds (unless down-round) but may be required as condition to consent from early investors; if don t participate, then lose anti-dilution protection: late stage investor more likely to receive anti-dilution rights in such cases Exempt securities issuances that trigger anti-dilution; much more heavily negotiated in late stage; issuer often desires to use equity in acquisitions and third party partnerships without triggering anti-dilution This is MoFo. 23

25 Protective provisions charter/contractual High valuations at later stage yield minority investments and therefore protective provisions are usually stronger Negotiate to include strong affirmative covenants Financial and other information delivery rights Registration rights and rights in M&A Redemption rights Negotiate to include strong negative covenants Specify the actions that the company may or may not take without specific vote of the class Usually include all of the ordinary course provisions from venture related to sales of company or assets, bankruptcy, expansion of option pool, IPO or sale Expanded to include financial covenants, additional of debt, acquisition strategy, partnerships, management changes, etc. Contractual remedies for failure particularly with affirmative covenants e.g., right to take over board if fail to redeem This is MoFo. 24

26 Participation rights and restrictions Right of first refusal ( ROFR ) Mirrors rights of previous investors to have the right to buy when designated stockholders sell Issues around percentage trigger for stockholders who are subject to the right Usual threshold is 1-5%; however, if retain same threshold, (a) aggregation of sales can have material impact and (b) may exclude senior management (if you don t want them to sell out) because of dilution in round Late stage investors typically not subject to ROFR Right of first offer Typical right to have securities offered by the issuer first to investors prior to third parties With later stage, because of lower % and higher valuation, can also include a right to buyup to maintain ownership percentage in all securities issuances (including those that would previously be exempt) Particularly important because of use of equity in M&A and partnerships and for employee/management consideration Pricing is the key given typically high valuation for late stage (i.e., do the purchases outside of financings need to be at the investment valuation) Also make sure to add evergreen true-up provision to provide flexibility in terms of timing and deal terms This is MoFo. 25

27 Transfer restrictions Right of first refusal Somewhat unusual for late stage investor to be subject to ROFR (and offer first to company and other investors) Investor does not want to limit liquidity options Will push for rights to purchase when others sell to maintain % ownership Tag-along Almost always secure tag-along rights in M&A Drag-along Almost always negotiate for rights to drag other investors Late stage investor will not want to be subject to the drag except under certain conditions; negotiate for control to approve the transaction that triggers the drag rights Alternative is protective provision - blanket right to approve sale (or more likely sale below dollar threshold to return liquidation preference) Consider who else is required to trigger drag (what stockholders groups/classes are required effectively a block on sale) This is MoFo. 26

28 Involvement by Strategics This is MoFo. 27

29 Transfer and investment restrictions Transfer to competitors More heavily negotiated definition of competitors to whom investor may not transfer current and future competitors Negotiated update rights to list of competitors Related negotiation of the right for strategic investor to make investment in competitors of company Particularly important to issuer if investment is coupled with strategic partnership Key is definition of competitor by type of product and/or by name and update rights over time Also negotiation regarding steps to be taken if investor buys into a competitor either directly or indirectly This is MoFo. 28

30 Stand-still provisions Stand-still provisions more common in M&A transactions Sometimes asked of investors in late stage deals, particularly of strategics Investor is obligated to refrain from actions that relate to acquisition of control of the issuer including making proposals to acquire the issuer, buying shares, or launching a proxy contest Exceptions Negotiated sale Agreed-to-limits Other investor action 29

31 Right of first look for M&A Right of first offer Notice period Negotiation period Other potential rights Right of first refusal Investor friendly Chilling effect on competitive M&A Terms of transaction 30

32 Other Considerations This is MoFo. 31

33 Representations & warranties How much to rely on work of previous investors in diligence Careful to distinguish between strategic and financial investors given risk profile and desired outcomes Timing of last investment and composition of investors Usually include more detailed representations and warranties and disclosure schedules Longer operating histories More material agreements, partnerships, joint ventures More complex balance sheets U.S. regulatory compliance issues like privacy and environmental matters International compliance issues like FCPA Intellectual property issues Indemnification Unusual in early stage because issuer has few assets and founders would need to guarantee indemnification obligations Much more common in late stage; protects against the down-side and provides increased incentives for full disclosure This is MoFo. 32

34 Closing conditions Typical conditions differences from traditional VC deal Early stage has fewer outs while closing conditions for late stage may more closely resemble M&A Regulatory compliance (e.g., anti-trust waiting period) Preemptive rights waivers (separate from consents) Material adverse change/effect on issuer Bring-down of reps and which ones will provide out if there is a change Depends on company and industry Legal opinion issues Termination provisions/termination fees More likely to include fees to cover expenses and to serve as deterrent to sale of issuer during interim closing period Particularly important if combined with strategic deal This is MoFo. 33

35 Confidentiality issues NDA subject to public company disclosure requirements NDA for strategic partnership vs. investment Carve-outs for: Confidential information provided to Board representative Related information learned from other parties (particularly other Portcos) Residuals Ability to use residuals to develop competing products Residuals defined as in material in the unaided memories of employees who have access to the confidential information Unaided if employee does not intentionally memorize or retain Info Rights/Access = back-door standstill Insider trading considerations Back-door standstill in M&A Section % ownership (13G) This is MoFo. 34

36 Board seat Private company issues Board seat or observation rights? May have confidentiality issues with board seat if equity investment is combined with strategic partnership Need to carefully consider composition of board particularly given approval of M&A and incentives of early investors, particularly in event of liquidation event Often necessary to push for removal of certain board members so early investors do not have too much control in M&A This is MoFo. 35

37 Secondary purchases Secondary purchases often combine investment directly in issuer with purchase in secondary directly from existing stockholders Cross-purchase structure Less cash from investment available for company Typically purchase of common stock from management and employees to provide liquidity Can also purchase preferred from previous investors particularly those that need exit given LP demands Note issues particularly with liquidation preferences and other terms not desirable to late stage investor Can t change charter rights of class but can change contractual rights In contract rights, particularly important to ensure that you can bundle secondary shares with primary securities for co-sale, tag and registration rights This is MoFo. 36

38 Tender offers Disclosure and process issues under the tender offer Use of third party platform (e.g., Nasdaq Private Market) but administrative hassle Not subject to tender offer rules but important that it be fair particularly if insiders are selling Information prepared by the issuer and included in OTP but investor effecting the purchase and taking Note issues with options (net exercise feature) Issues with international stockholders/employees tender offer rules in different countries Mitigate risk through indemnification Also need true-up in company issued securities recommended as opposed to allowing a double dip by participants Risks mitigated further by purchasing directly from issuer and requiring issuer to effect tender This is MoFo. 37

39 Material Non-Public Information and Valuation Issues This is MoFo. 38

40 Insider trading Generally, most market participants associate concepts of insider trading with publicly traded securities However, the prohibition on insider trading stems from Rule 10b-5, which, by its terms, is not limited to public companies How should private companies think about insider trading and the information that they make public or that they are required (contractually) to share with certain parties? Information requirements? Regulation FD parallels? What constitutes current information? What can we learn from information requirements applicable to other exempt offerings? Should private companies implement trading windows? This is MoFo. 39

41 Valuation How are the shares of privately held companies valued and who is responsible for valuations? The IPO prices for many companies that have gone public have been lower than the prices at which these companies had last raised capital privately and lower than the prices at which secondary private transactions were completed Private companies also have been able to raise money at higher premiums than their direct competitors who are public What does this suggest, if anything? Are investors no longer applying a liquidity discount? Is the premium associated with the liquidation preference that typically accompanies preferred stock rounds only? In IPOs, investment banks in pricing the IPOs and IPO investors demand an IPO discount ( IPO underpricing ) When VCs or cross over investors participate in successive private financing rounds, often they can negotiate for themselves downside protection, including protection should the company go public at a lower valuation but what about participants in secondary private markets? This is MoFo. 40

42 Valuation (cont d) This is MoFo. 41

43 Valuation (cont d) Can the late stage investor/fund face any liability in connection with valuation issues? Is the investor buying newly issued shares or shares from an existing holder? Is the existing holder selling to the late stage investor sophisticated? Can s/he evaluate the company and its value as well as the late stage investor? What information is available to the existing holder? Does the late stage investor have more information? Better information? Will the late stage investor be shaping the IPO? Influencing the IPO price? This is MoFo. 42

44 Considerations for the Placement Agent This is MoFo. 43

45 Process considerations Typically, the investors in late-stage private placements will be institutional investors that have their own internal teams to conduct diligence and to evaluate the investment and the investors will be represented by counsel However, there are a number of considerations for the placement agent; placement agent will want to: Ensure that it obtains from each institutional investor a letter to the effect that the institutional investor is an institutional account for FINRA purposes and is not relying on the placement agent for any suitability determinations or recommendations Ensure that all investors are institutional accredited investors in order to avoid having any FINRA private placement filing obligations under FINRA Rule 5123 Exclude any individuals, such as friends and family of the company or friends and family of fund investors otherwise, the placement agent will be deemed to have KYC obligations, be required to make suitability determinations, undertake AML and similar investigations for each such investor, etc. Encourage the issuer to rely on Section 4(a)(2), and not on Rule 506 This is MoFo. 44

46 Process considerations (cont d) Placement agent can consider: Obtaining FINRA institutional account letters for its files Obtaining a separate side letter Relying on a representation from the investor in the securities purchase agreement Regardless, the placement agent as a broker-dealer and FINRA member will have a due diligence obligation Placement agent should have all the reps and warranties in the securities purchase agreement made to it (or be a named third-party beneficiary) Notice reminds broker-dealers of their diligence obligations in connection with Regulation D offerings Notice emphasizes obligation to conduct diligence on the issuer, management, the issuer s business and prospects, the representations and warranties made by the issuer and the issuer s intended use of the offering proceeds How will placement agent otherwise satisfy its diligence obligation? This is MoFo. 45

47 Marketing materials and other information Placement agent should consider carefully the materials used to market the private placement Will there be a teaser? A company presentation? Who has prepared what? Are any of the materials prepared by the placement agent? If so, how have those materials been diligenced? Are the materials fair and balanced? Is the placement agent sharing with investors a model? Vetting the company s model? If the investors are receiving projections and financial models, will these be stale by the time of the IPO? This is MoFo. 46

48 IPO Dynamics This is MoFo. 47

49 Preparing for the IPO Timing between the private placement and the IPO Are expectations aligned between the late stage investors and the company? What if the timeline for the IPO is extended? Will the late stage investors need liquidity? Will other existing stockholders of the company or employees require liquidity? Valuation issues As discussed, most late stage private placements include provisions providing for IPO price protection How will this work in a volatile market? What if IPO price is almost certainly less than the private price? How is the new valuation determined? This is MoFo. 48

50 Preparing for the IPO (cont d) Well recognized cross-over investors may be helpful in promoting the issuer s interests when dealing with the IPO bankers Will cross-over investors participate in the IPO? Ideally, the pre-ipo round investors will be the anchor orders in the IPO No ability in the U.S. to obtain and secure cornerstone investors Only two options: either obtain an indication of interest from the cross-over investor that can be disclosed in the IPO prospectus, or do a concurrent private placement to the cross-over investor at the IPO price concurrent with the IPO Maybe more uncertainty with the indication of interest option if the market remains volatile and IPOs price below stated ranges Did the cross-over investors receive confidential information during the pre-ipo process? Has that information been disclosed in the IPO prospectus? Are they cleansed of material nonpublic information? This is MoFo. 49

51 Practice Group Description Late Stage Investments Our lawyers regularly advise issuers, placement agents and investors in connection with private placements of equity, debt and hybrid securities. Private placements may be the first step for a venture capital or entrepreneurial client, or an alternative for a well-established issuer needing to raise capital when the public equity markets are unavailable. As privately held companies choose to remain private longer and defer their initial public offerings or other liquidity opportunities, these companies are focused on raising capital in private placements principally to institutional investors, cross-over funds and strategic investors. Often, these late-stage private placements are a prelude to an initial public offering. Late-stage private placements raise a number of special considerations for issuers, investors and financial intermediaries. A late-stage private placement may follow after many successive prior rounds of financing and requires addressing the rights of various categories of existing stockholders. In addition to providing a capital-raising opportunity, a late-stage private placement also may serve as a means of providing liquidity to longstanding stockholders, such as angel investors and friends and family. This can take place through a secondary private placement or through a tender for shares held by existing stockholders. Properly structuring a late-stage private placement is important to the issuer s IPO planning. Given our understanding of the private placement market and our expertise with IPOs, we are well-placed to address these concerns. Over the years, we have worked with our financial institution clients to devise new distribution methodologies for securities, such as the PIPE transaction. Created by Morrison & Foerster lawyers in 1985, the PIPE (private investment in public equity) transaction has become a key financing alternative for public companies choosing to raise capital in tough markets or to address specific objectives. PlacementTracker and other data providers rank the firm as one of the most active in representing issuers and agents in connection with private placements and PIPE transactions. Recent Representative Late Stage Investment Matters We regularly represent our issuer clients in connection with their capital-raising needs, including their private financings and pre-ipo private placements. Similarly, we regularly work with our placement agent clients in connection with late stage institutional private placements. Late Stage Investments 1

52 Practice Group Description We highlight below a few matters on which we were engaged to advise the issuer or the investor on the financing. Revolution Foods Represented Revolution Foods, a provider of school meals and ready to eat meal kits, in its $31.5 million Series H venture funding from Revolution Growth. The Series H funding gave the company a reported pre-money valuation of approximately $172 million. We are currently advising the company on a Series I financing. BrightPath Capital Partners Sungevity. Represented BrightPath Capital Partners L.P., as lead investor in a $63.8 million later stage Series C venture investment in Sungevity, an international provider of residential solar installations. The company is reported to have a pre-money valuation of approximately $235.8 million. Buchanan Investments Tri Alpha Energy. Representing Buchanan Investments, a San Franciscobased venture investment firm in its proposed late stage investments in Tri Alpha Energy, a developer of plasma-fusion technologies used to generate energy. Intel Corporation Cloudera. Represented Intel in its $740 million later stage investment in Silicon Valley's Cloudera, a leading enterprise data management software provider. Intel Corporation and Cloudera announced their broad strategic technology and business collaboration, as well as the equity investment from Intel, in March This was Intel's single largest "big data" center technology investment in its history. Softbank Group SoFi. Represented the SoftBank Group in a $1 billion Series E funding of SoFi, one of the nation's leading marketplace lenders. The funding led by SoftBank marked the largest single financing round in the fintech space to date. SoftBank Corp. Legendary Entertainment. Represented SoftBank in its $250 million investment in Legendary and the formation of a joint venture to exploit Legendary s intellectual property rights. Late Stage Investments 2

53 Practice Group Description Corvus Pharmaceuticals We represented investors led by Rock Springs Capital Management in their investment in Corvus Pharmaceuticals, Inc. Corvus is a private clinicalstage biopharmaceutical company focused on the development of novel agents targeting the immune system to treat patients with cancer. Rock Springs and other healthcare focused funds invested $75 million in a Series B financing. Late Stage Investments 3

54 U.S. LATE STAGE FINANCINGS As privately held companies choose to remain private longer and defer their initial public offerings or other liquidity opportunities, these companies are focused on raising capital in private placements made principally to institutional investors, cross-over funds and strategic investors. Late stage private placements have almost become a prerequisite to an IPO, or perhaps they are the new IPOs $44.9 billion 1,548 Deals $28.9 million [avg. deal size] CAPITAL RAISED NO. OF DEALS COMPLETED 2014 $40.4 billion 1,862 Deals $21.7 million [avg. deal size] VOLUME BY SECTOR IN 2015 Software 36% Healthcare 11% Commercial Services 10% Pharma/ Biotech 6% Consumer 4% Media 4% IT Hardware 3% Energy 2% Other sectors: 23% In the technology sector, there were 712 late stage deals completed, which raised $27.6 billion. In the biotech sector, there were 106 late stage deals completed, which raised $3.3 billion. UNICORNS "Unicorns" are private companies valued at $1 billion and above. As of April 2016 there were a total of 93 Unicorns in the United States valued at over $326 billion. For more information about late stage financings, visit: business--finance/capital-markets/latestage-investments "Late Stage" references Series B through Series Z+ rounds. Sources: Pitchbook, CB Insights (C) 2016 Morrison & Foerster LLP mofo.com

55 Investor Criteria for U.S. Private Placements and Other Offerings Summary Tables and Comparisons Regulation D: Accredited Investors Banks and savings and loan associations. Registered brokers or dealers. Insurance companies. Registered investment companies, business development companies, small business investment companies. Employee benefit plans established by a state or its subdivision with assets exceeding $5 million. ERISA plans where the investment decision is made by a plan fiduciary, or if the plan has assets exceeding $5 million. (Or if a self-directed plan, investment decisions are made by accredited investors.) Private business development company under the Investment Advisers Act. Corporations and other entities with assets in excess of $5 million. Source: Rule 501 of Regulation D. Director, executive officer or general partner of the issuer of the securities being offered (or any director, executive officer, or general partner of a general partner of that issuer). Natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1 million. Natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years (and has a reasonable expectation of reaching the same income level in the current year). Any trust, with total assets in excess of $5 million, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person. Any entity in which all of the equity owners are accredited investors. Institutional Accredited Investor: Regulation D This category is not a defined term in Regulation D. Instead, an offering document or agreement may limit sales of the applicable securities solely to the Regulation D accredited investor categories that are institutional in nature (i.e., to those described in Rule 501(a)(1), (a)(2), (a)(3) or (a)(7)). This limitation is imposed in Regulation D offerings when the offering participants do not want individuals to purchase securities in the offering. Rule 144A: Qualified Institutional Buyers Any of the following, which owns and invests at least $100 million in securities of unaffiliated entities: o Insurance companies. o ERISA employee benefit plans. o o o Registered investment companies (subject to special aggregation rules relating to fund families) or any business development company. Licensed small business investment company. Employee plan established by a state or a subdivision. o o o o Certain trust funds where the trustee is a bank or trust company, and where the participants are certain institutions. Business development companies. Corporations and other entities. Registered investment advisers. Registered broker-dealers, acting for their own accounts or the accounts of other QIBs, that owns and invests at least $10 million in securities of unaffiliated issuers. Any entity, all the equity owners of which are QIBs, acting for its own account or the accounts of other QIBs. Any bank, savings and loan or non-u.s. bank or savings and loan that owns at least $100 million in securities of unaffiliated issuers that are not affiliated with it and that has an audited net worth of at least $25 million. Source: Rule 144A(a). Major U.S. Institutional Investor: Securities Exchange Act A U.S. institutional investor that has, or has under management, total assets in excess of $100 million (for purposes of determining the total assets of an investment company under this rule, the investment company may include the assets of the family of investment companies of which it is a part). A registered investment adviser that has total assets under management in excess of $100 million. Must be: o o A registered investment company; or A bank, savings and loan association, insurance company, business development company, small business investment company, or certain employee benefit plans; a private business development company (as defined in Rule 501(a)(2)); a 501(c)(3) entity; or a trust. Source: Rule 15a-6 under the Securities Exchange Act. 1

56 Investor Criteria for U.S. Private Placements and Other Offerings Summary Tables and Comparisons Qualified Purchaser: Investment Company Act Any natural person who owns at least $5 million in investments. Any company that owns at least $5 million in investments and that is owned by or for 2 or more natural persons that are related (or foundations or trusts established for their benefit). Certain trusts established for the investors in the two prior bullets. Any person, acting for its own account or the account of other qualified purchasers, who owns and investment at least $25 million in investments. Source: Section 2(a)(51) of the Investment Company Act. Knowledgeable Employee: Investment Advisers Act An executive officer, director, trustee, general partner, advisory board member, or person serving in a similar capacity, of the investment company or an affiliated management person. An employee of the investment company or an affiliated management person who participates in the investment activities of the investment company or its affiliates, provided that the individuals has performed these duties for at least one year. Source: Rule 3c-5 under the Investment Advisers Act. Qualified Client: Investment Advisers Act A natural person or a company that has at least $1 million under the management of the investment adviser. A person or a company that investment reasonably believes either: o o A natural person who is: o o Has a net worth (together with a spouse) of more than $2.1 million (as of August 15, 2016); or Is a qualified purchaser under the Investment Company Act. Part of the investment adviser s management; or An employee of the investment adviser who participates in the investment activities of such investment adviser, and has had such duties for at least one year. Source: Rule under the Investment Advisers Act. Eligible Contract Participant: Commodity Exchange Act Entities with more than $10 million in assets (or an entity guaranteed by such an entity). Individuals with at least $10 million invested (or $5 million if the individual is hedging). An entity with a net worth of at least $1 million that are hedging commercial risk. Financial institutions. Insurance companies. Registered investment companies and similar non-u.s. entities. Commodity pools with at least $5 million in assets under management. ERISA plans with assets of at least $5 million (or that have investment decisions made by a registered commodity pool adviser, commodity trading adviser or a financial institution or insurance company). U.S. federal, state and non-u.s. government entities. U.S. registered broker-dealers and similar non-u.s. entities. Futures commission merchants and similar non-u.s. entities. Source: Section 1a(18) of the Commodity Exchange Act. 2

57 Summary Chart of Exempt Offering Alternatives Below we provide a summary comparison of various securities exemptions. Type of Offering Dollar Limit Manner of Offering Issuer and Investor Requirements Filing Requirement Restriction on Resale Blue Sky Exemption Section 3(a)(11) None. No limitation other than to maintain intrastate character of offering. Issuer and investors must be resident in state. No limitation on number. None. Rests within the state (generally a 9- month period for resales within state pursuant to Rule 147). Need to comply with state blue sky laws by registration or state exemption. Section 4(a)(2) None. No general solicitation or general advertising. Investors must meet sophistication and access to information test so as not to need protection of registration. None. Restricted securities. Need to comply with state blue sky laws. Rule 504 Regulation D $1 million within prior 12 months. No general solicitation or general advertising unless registered in a state requiring use of a substantive disclosure document or sold under state exemption for sales to accredited investors with general solicitation. Available to nonreporting companies only that are not investment companies or blank check companies. File Form D with the Commission not later than 15 days after first sale. Filing not a condition of the exemption. Restricted unless registered in a state requiring use of a substantive disclosure document or sold under state exemption for sale to accredited investors with general solicitation. Need to comply with state blue sky laws by registration or state exemption. Rule 505 Regulation D $5 million within prior 12 months No general solicitation or advertising. Unlimited accredited investors and 35 non- accredited investors. File Form D with the Commission not later than 15 days after first sale. Filing not a condition of the exemption. Restricted securities. Need to comply with state blue sky laws. Rule 506(b) None. No general solicitation or general advertising under Rule 506(b). Unlimited number of accredited investors and 35 nonaccredited investors that are sophisticated. File Form D with SEC not later than 15 days after first sale. Restricted securities. No need to comply with state blue sky laws.

58 Rule 506(c) None. General solicitation permitted, provided that all purchasers are accredited investors. Under Rule 506(c), all purchasers must be accredited investors. Issuer must take reasonable steps to verify accredited investor status. File Form D with the SEC not later than 15 days after first sale. Restricted securities. No need to comply with state blue sky laws. Tier 1 Regulation A $20 million within prior 12 months, but no more than $6 million by selling security holders. Testing the waters permitted before and after filing Form 1-A. Sales permitted after Form 1-A qualified. Eligible issuer No investor requirement. File test-the-waters documents, Form 1- A, any sales material and report of sales and use of proceeds with the SEC. Not restricted securities. Subject to state blue sky laws regarding pre- offering review, filing, and anti-fraud. Tier 2 Regulation A $50 million within the prior 12 months, but no more than $15 million by selling security holders. Testing the waters permitted before and after filing Form 1-A. Sales permitted after Form 1-A qualified. Eligible issuer No investor requirement; however, investors who are natural persons and are not accredited investors are subject to an investment limit. File test-the-waters documents, Form 1- A, any sales material and report of sales and use of proceeds with the SEC. Issuer subject to ongoing reporting requirements. Not restricted securities. Not subject to state blue sky laws regarding pre-offering review; however, subject to state blue sky filing and antifraud requirements. Regulation Crowdfunding Up to $1 million in a 12-month period. Offering must be made solely through a platform. Issuers that are not reporting companies, not funds, and not subject to disqualification. Requires the preparation of a Form C, which resembles a Form 1-A. Securities sold in an offering are subject to certain transfer restrictions for one year. No need to comply with state blue sky laws.

59 Client Alert November 2, 2015 Following the Wisdom of the Crowd? A Look at the SEC s Final Crowdfunding Rules In this alert, we provide a detailed overview of the final rules, Regulation Crowdfunding, which will be applicable to crowdfunding offerings conducted in reliance on Section 4(a)(6) of the Securities Act of 1933 as amended (the Securities Act ), which was added by Title III of the Jumpstart Our Business Startups Act of 2012 (the JOBS Act ), as well as to those intermediaries participating in such offerings. We do not address the proposed FINRA framework applicable to funding portals, which will be covered in a separate alert. All rule references, unless otherwise noted, refer to rules under Regulation Crowdfunding. We will supplement this alert with a more detailed practical analysis comparing the various new offering exemptions available to issuers as a result of the JOBS Act. Limit on Capital Raised PART ONE: GENERAL REQUIREMENTS Consistent with the statutory limitations, Rule 100(a) provides that an issuer may sell up to $1 million in any 12-month period to investors in an offering made pursuant to the exemption. Of course, an issuer may consider conducting other exempt offerings in close proximity with its crowdfunded offering. In calculating the amounts sold for purposes of the threshold, amounts sold by a predecessor or by an entity under common control with the issuer will be aggregated with the amounts sold by the issuer. Individual Investment Limits In the final rules, the Securities and Exchange Commission (the SEC ) has modified the investor limits from those included in its proposed rules. The final rules make clear that the individual investor limit is an aggregate limit, which applies to all investments made by the individual over a 12-month period in crowdfunded offerings and not to a specific offering. 1 Attorney Advertisement

60 An investor will be limited to investing: (1) The greater of: $2,000 or 5% of the lesser of the investor s annual income or net worth if either annual income or net worth is less than $100,000; or (2) 10% of the lesser of the investor s annual income or net worth, not to exceed an amount sold of $100,000, if both annual income and net worth are $100,000 or more. As we discuss below, the issuer can rely on the intermediary s calculation of the investment limit; provided that the issuer does not have knowledge that the investor has exceeded, or would exceed, the investment limits as a result of participating in the issuer s offering. Offering through an Intermediary An issuer would only be able to engage in an offering through a registered broker-dealer or through a funding portal, and an issuer can only use one intermediary for a particular offering or concurrent offerings made in reliance on the exemption. The offering must be conducted online only through the intermediary s platform, so that the crowd has access to information and there is a forum for an exchange of information among potential offering participants. A platform is defined as a program or application accessible via the Internet or other similar electronic communication medium through which a registered broker or a registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6) of the Securities Act. Eligible Issuers The ability to engage in crowdfunding is not available to all issuers. By statute, the following issuers cannot rely on crowdfunding transactions under Section 4(a)(6): issuers not organized under the laws of a state or territory of the United States or the District of Columbia; issuers already subject to Securities Exchange Act of 1934, as amended (the Exchange Act ) reporting requirements; investment companies as defined in the Investment Company Act of 1940 (the Investment Company Act ) or companies that are excluded from the definition of investment company under Section 3(b) or 3(c) of the Investment Company Act; and any issuer that the Commission, by rule or regulation, determines appropriate. The final rules also exclude: issuers disqualified from relying on Section 4(a)(6), or bad actors; and issuers that have sold securities in reliance on Section 4(a)(6) and have failed, to the extent required, to make required ongoing reports required by Regulation Crowdfunding during the two-year period immediately preceding the filing of the required new offering statement; and 2 Attorney Advertisement

61 any issuer that is a development stage company that has no specific business plan or purpose, or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies. Disclosure Requirements PART TWO: ISSUER REQUIREMENTS The statute sets out a number of required disclosures in any Section 4(a)(6) offering. An issuer that elects to engage in a crowdfunding offering must comply with disclosure requirements, including: an initial disclosure about the offering on Form C, amendments to Form C to report material changes (Form C-A), periodic updates on the offering on Form C-U and ongoing annual filings until a filing obligation is terminated. The annual filing must be made on Form C-AR and a termination notice on Form C-TR. Form C The Form C would be filed with SEC and the intermediary would post the filing or provide a link to the filing for investors. The Form C must include disclosures relating to the issuer s business, officers, directors and control persons, use of proceeds, capital structure and financial results, as discussed below in more detail. In many respects, the Form C requirements resemble those for Form 1-A used in connection with Regulation A offerings. The final Form C also includes an optional Q&A format that issuers may elect to use to provide certain disclosures. Basic issuer information would be required, including: the entity name, the form of entity, the jurisdiction of formation, formation date, address, website, number of employees, the issuer s website on which an investor can find the issuer s annual report and the date by which such report will be made available, whether the issuer or any predecessor previously failed to comply with the ongoing reporting requirements of Regulation Crowdfunding. In addition, the form must disclose certain basic information about the intermediary, including: the intermediary s SEC file number and FINRA CRD number and fees being paid to the intermediary, expressed either as a dollar amount or as a percentage of the offering amount, and a description of the intermediary s financial interests in the transaction and in the issuer. In addition, the form will require, among other things, a discussion of: Use of Proceeds: a specific use or range of possible uses for the offering proceeds, as well as the factors impacting the selection by the issuer of each such use; The Targeted Offering Size: as discussed further below, the issuer must disclose the maximum offering size and the subscription process; Offering Price: a description of the price to the public of the securities and a description of how the offered securities were valued; Business: the form must include a business description, for which no particular format is prescribed; Directors and officers: each individual s name, positions held with the issuer and duration in those positions and business experience during the last three years; 3 Attorney Advertisement