The Nuts & Bolts of Investing in Pre-IPO Shares
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Transcript of The Nuts & Bolts of Investing in Pre-IPO Shares
The Nuts & Bolts of Investing in Pre-IPO Shares
Part of the Alternative Investment Basics Series 2015 Series
Premier Date: October 8, 2015
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
MEET THE FACULTY
PANELISTSBenjamin Alexander Greenberg GluskerHuiwen Leo CrowdCheck
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
MODERATORChristopher Cahill, Lowis & Gellen, LLP
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Practical and entertaining education for business owners and executives, Accredited Investors, and their legal and
financial advisors.
For more information, visit www.financialpoisewebinars.com
DISCLAIMER:
THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT
MAY BE BEST FOR YOUR INDIVIDUAL NEEDS
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
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ABOUT THIS EPISODE
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
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Investing in a company pre-IPO carries several risks that are not present in publicly traded stock. Attend this webinar to discover the risks and benefits of investing in pre-IPO shares.
ABOUT THIS SERIESTHE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
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The personal investment landscape in the United States is undergoing the greatest transformation since the popularization of the mutual fund. The JOBS Act of 2012 lifted the ban that previously prevented private placements from being advertised. At this point, millions of accredited investors are only beginning to understand that there are investment options available to them that they never before considered. This webinar series was created for those millions of Americans who meet the federal government’s definition of “accredited investor,” to help them decide if some of their investment dollars should be allocated away from stocks, bonds, mutual funds, and the like and into the asset class that is commonly referred to as “alternatives,” which includes PE, VC, hedge funds, private placements, and hard assets (things like gold, land, comic books, and much else). Like all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes: think sitcom rather than soap opera.
EPISODES IN THIS SERIES
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THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
(Dates below are premier dates; all webinars also available on demand)
#1 Are you an Accredited Investor, and if you are, so what? 5/7/15
#2 What is the JOBS Act and Why Should You Care? 6/4/15
#3 What is Equity Crowdfunding and Should it Matter to You? 7/9/15
#4 The Nuts & Bolts of Investing in a VC Fund 9/10/15
#5 Angel Groups vs. 506 Platforms 9/17/15
#6 The Nuts & Bolts of Investing in Pre-IPO Share 10/8/15
#7 The Nuts & Bolts of Investing in a PE Fund 10/29/15
#8 The Nuts & Bolts of Hedge Fund 11/12/15
#9 Basic Investment Principles- from Asset Allocation to Z Scores 12/3/15
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Pre-IPO Market for Restricted Securities
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Restricted Securities
are those acquired in unregistered private sales
are sold by the issuer (the start-up) or an affiliate
initially acquired via private placement offering, Regulation D offerings, employee stock benefit programs, as compensation for professional services, or in exchange for providing seed money or sweat equity
restricted with respect to when and how and to whom they can be sold
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Pre-IPO Market for Restricted Securities
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pre-IPO
Initial Public Offering is expensive (and moreso under Sarbanes-Oxley) and distracts company from its main work
IPOs featured strongly in tech boom in 1990s
IPOs less common now, companies staying private longer
Unicorns proliferating without clear IPO exit
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Pre-IPO Market for Restricted Securities
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Holders of restricted securities sell to 3d parties
Certain securities laws do apply, e.g., SEC Rule 144 under the Securities Act of 1933o Regulation Ao Regulation Do (Regulation CF)
JOBS Act increased the max number of shareholders for a private company
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Pre-IPO Market for Restricted Securities
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Second Market
Nasdaq Private Markets
Offerboard
SharesPost
Equidate
AssetMatch (UK)
Extant online marketplaces:
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Risks to Purchasers of Restricted Securities Pre-IPO
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Issuing company may not go public after all
Purchased stock may itself be restricted even if an IPO occurs(lock-in period)
Pig in a poke, or publicity-fueled valuation: private companies do not have the same
disclosure obligations as public companies
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Counters to Risks for Purchasers
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Liquidation preferences
Guaranteed return
Will secondary market help cause greater disclosure?
Will increasing participation of large public market investors cause greater disclosure?
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Scenarios for pre-IPO Market for Restricted Securities
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“Partial liquidity” to founders, employees, and early investors
Avoids stock dilution and partial liquidity to retains key talent (employees and founders)
Eliminates operational distractions for investors and employees who desire cash
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Scenarios for pre-IPO Market for Restricted Securities
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Issuer may have cash to buy back shares from employees and investors
Issuer may transact with particular new/old investor to buy the shares
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Scenarios for pre-IPO Market for Restricted Securities
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Issuer may transact with particular new/old investor to buy the shares
(opportunity for large refugee investors from public markets?)
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Scenarios for pre-IPO Market for Restricted Securities
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VC investor may need to exit position for internal reasons
VC investor may sell shares equal in value to its initial investment – possibly returning entire amount to its fund while still having substantial position in the issuer
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Another Scenario . . Look, A Unicorn!
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Toward 100 private companies valued at greater than $1 billion, up from 49 at this point in 2014
CNBC: VC-backed private market valuations now exceed public market valuations by 100% to 200%
Incumbent company may purchase control of unicorn
Unicorns are commonly “adjacent” to large incumbents: “adjacent” means presenting opportunities outside to focus of the incumbent’s business (Google and Nest; Facebook and WhatsApp)
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Accredited Investor Due Diligence
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Be prepared to buy and hold for a long time
Is it a duly incorporated and registered company? C-Corp? LLC? Partnership?
Where incorporated or registered?
Get by-laws or operating agreement or partnership agreement
What exemption to registration is relied upon? [Reg A, Reg D, Reg CF]
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Accredited Investor Due Diligence
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What is nature of interest to be purchased (e.g., preferred stock)?
Rights of ownership vary by company entity type
Do major investors get different substantive rights (e.g. tag-along, drag-along)
Do major investors get different informational rights?
How is your ownership interest recorded
Who is keeper of ownership interest records?
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Accredited Investor Due Diligence
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What is known about founders and key team?
Has founding team changed?
Are their written agreements for earn-out of securities, non-compete, assignment of intellectual property?
Who owns IP and are they still with the company?
MORE ABOUT THE FACULTY
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CHRISTOPHER CAHILL
Mr. Cahill is counsel with Lowis & Gellen LLP, in Chicago, Illinois. He guides secured lenders, creditors, debtors, creditors’ committees, potential purchasers and others through bankruptcy cases, out-of-court workouts, assignments for the benefit of creditors, and receiverships. Mr. Cahill has substantial mega-case experience at national law firms representing very large debtors, and has counseled and litigated on behalf of manufacturers and secured lenders in large and middle-market cases.
Mr. Cahill also publishes frequently and speaks regularly on commercial insolvency issues. He is an executive editor of Commercial Bankruptcy Litigation, 2d Edition (Jonathan P. Friedland, Elizabeth Vandesteeg & Christopher M. Cahill eds., 2015) and is the host of Accredited Investor Markets Radio, a weekly broadcast for investors, on accreditedinvestormarkets.com.
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
MORE ABOUT THE FACULTY
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HUIWEN LEO
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
Huiwen Leo, Director of Investor Services, is a corporate and securities attorney. She began her career at the World Bank, where she focused on Private Sector Development issues including corporate governance, aid effectiveness, privatization and globalization. She then joined the New York office of Clifford Chance, where she advised on capital markets transactions and corporate matters for companies and major investment banks in Asia, Europe and Latin America. When her husband was based in Camp Pendleton and deploying to Iraq, she relocated to the San Diego office of Latham & Watkins, where she worked on everything from start-up financing to multi-million dollar deals. She has worked pro bono on microfinance in Haiti, clean tech in San Diego, and military family and veterans issues. Huiwen helps investors maximize the investment opportunities of crowdfunding by having the information they need to make an educated decision.Huiwen received her B.A. and M.A. in law from Cambridge University and received her LL.M. with distinction from Georgetown University Law Center. She is a member of the New York and California bars. Huiwen has lived in Singapore and Beijing, traveled extensively throughout China, and is fluent in Chinese.
MORE ABOUT THE FACULTYBENJAMIN ALEXANDER
THE NUTS & BOLTS OF INVESTING IN PRE-IPO SHARES
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Benjamin Alexander is a corporate and securities attorney at Greenberg Glusker. He represents start-up enterprises, venture-backed companies, family-owned businesses and publicly-traded companies in areas including corporate finance, mergers and acquisitions, licensing, e-commerce, securities compliance and corporate governance.
Benjamin's experience includes public offerings and private placements of securities, mergers, acquisitions, reverse mergers, IPOs, PIPEs, '33 Act registration statements, going private transaction, equity compensation plans, contested proxy solicitations, asset based lines of credit, industrial development and revenue bonds, sales of public companies, and '34 Act and blue sky compliance. His experience also includes counseling, medical technology, software, Internet and new media organizations on licensing, joint ventures and strategic alliances, as well as general corporate matters. He is admitted to practice law in California, Rhode Island, and Massachusetts.Benjamin also advises clients on the corporate and securities issues arising in bankruptcy or other distress situations, including SEC compliance during the pendency of a bankruptcy case and the issuance of shares under a Chapter 11 plan. He handles distressed asset transactions and has represented buyers, sellers, secured creditors and assignees in assignments for the benefit of creditors, 363 sales and foreclosure sales.
Previously, as general counsel of a public company trading on the NASDAQ Global Market, Benjamin advised the company's management team in areas including corporate finance, corporate governance, SEC registrations and reporting, Sarbanes-Oxley compliance, employment law, litigation management, intellectual property law, licensing and contracting.
Before entering the legal profession, Benjamin worked as a systems engineer, specializing in digital circuit design, programming and systems integration.
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IMPORTANT NOTE:
THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.
IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.
YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS. 31