Stark & Stark Associate Max L. Schatzow, member of the Securities Group, authored the article The Startup Lifecycle: Friends and Family Round, which was published in the New Jersey Law Journal on December 1, 2015.
This is the third part of an ongoing series detailing all the minutia of a business’ startup lifecycle. In this article, Mr. Schatzow continues with the hypothetical business as it begins to raise funds. More specifically, this means its founder will need to conduct the offering under Rule 506 of Regulation D.
Further, Rule 506 requires “an issuer to make a subjective determination that, at the time of acquisition of the investment, each nonaccredited purchaser is sophisticated or has a sophisticated ‘purchaser representative.’” Meanwhile, under Regulation D “any purchaser that is not an ‘accredited investor’ must receive prior to the sale, at a minimum: i) the issuer’s balance sheet and potentially audited financial statements, and ii) nonfinancial information that is typically found in a prospectus.”
However, prior to conducting the offering, the founder would need to meet with his attorney to discuss all the information that will need to be disclosed in a private placement memorandum. This includes a description of the business, disclosing the use of proceeds, indentifying the directors and executive officers, list of principle shareholders, and other risk factors. As Mr. Schatzow explains, business owners are encouraged to provide this information to “all investors for fear of the antifraud provisions of the securities laws, where even an omission can create liability for the company.”
To read the full article, please click here.
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