News Updates

(Editor’s note: Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, PLLC, a law firm specializing in the representation of entrepreneurs. He submitted this column to VentureBeat.)
A reader asks:  I saw your story in March about how Senator Dodd’s financial reform bill could destroy angel investing.  I see now that the bill has passed, with certain amendments made in the U.S. Senate that watered down some of the provisions.  What’s the story with this issue?  Will the bill still hurt angel investing?
Answer: There’s good news and bad news.
The good news is that the financial reform bill recently passed by Congress omitted the most troubling provision in Sen. Dodd’s original proposal, which essentially required a filing with the SEC in connection with any seed or angel financing (even if all the investors were “accredited investors”) and potentially gave state securities commission(s) the right to review the merits of the financing
As I discussed in the story you cite, this would have created significant delay and cost in connection with seed and angel financings and also would have put the State securities commissions back in the private placement game – which is exactly what SEC Rule 506 is designed to prevent
So, the fact that this provision will not become law is very good news indeed
The other piece of good news is that under Dodd’s original proposal the definition of “accredited investor” would have been revised to require individuals to have either a net worth of at least $2.3 million (up from $1 million) or annual income in each of the two most recent years (and a reasonable expectation of such income level in the current year) of $449,000 individually or $674,000 jointly (up from $200,000 and $300,000, respectively).  According to Business Week, this revision would have lowered the number of individual accredited investors by 77 percent
The bill, passed by Congress on July 15, leaves the net worth test at $1 million (subject to the change discussed below) and leaves the annual-income test at $200,000 individually and $300,000 jointly.  Again: Good news.
The bad news is that the net-worth test no longer includes the value of the investor’s principal residence.  Clearly, this is a big change – and it could significantly lower the pool of accredited investors.
The other piece of bad news is that the bill expressly permits the SEC to conduct an immediate review and modification of the annual-income test if “deem[ed] appropriate for the protection of investors. . . .” In other words, the annual-income test may go up – but we’ll have to wait and see.
Finally, the bill also requires the SEC in four years (and once every four years thereafter) to review the “accredited investor” definition “in its entirety” and make appropriate changes – though the bill is poorly drafted and this four-year review may not apply to the “accredited investor” definition for purposes of private placements under Regulation D (the typical private placement).
Startup owners: Got a legal question about your business? Submit it in the comments below or email Scott directly. It could end up in an upcoming “Ask the Attorney” column.
Disclaimer: This “Ask the Attorney” post discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.
Tags: ask the attorney

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GSD&M Idea City co-founders Steve Gurasich and Tim McClure are turning water into wine for the University of Texas, launching a new bottled-water product to raise funds for the school.

Here’s the latest from VentureBeat’s Entrepreneur Corner.
Who owns user-generated content? – When you put an idea on a public forum or post an original video on YouTube, does it remain your property? The answer depends greatly on what you agree to before you post, says attorney Curtis Smolar.
In a “flash crash” world, is your site ready? – The stock market’s “flash crash” in May might seem like a one-time event, but Imad Mouline, CTO of Gomez says it offered an important heads up to startup owners. He offers some advice on ensuring that your site will always be open.
How much should you look for in your seed round? – Entrepreneurs who are doing their first hunt for funding are often told to build a spreadsheet. Serial entrepreneur Will Herman says that’s fine, but before you put any numbers on the grid, there are certain high-level guidelines you need to consider first.
The myth of the protectable advantage – Investors often ask potential portfolio candidates about their protectable advantage. David Goldenberg, co-founder of PigSpigot.com, says the question is idiotic. A good idea is worthless until it’s executed, he says, and that means exposing it to the world.
Today’s crazy idea is tomorrow’s breakthrough – Being risk-adverse might help your bottom line in the immediate future, but Peter Diamandis, chairman and CEO of the X-Prize Foundation, notes in this 2008 Entrepreneur Thought Leader Lecture at Stanford University that to truly succeed, you need to be audacious.
Tags: entrepreneur corner

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Venture capital funds may be struggling to raise money lately, but their investments in other companies actually increased during the second quarter — a positive sign after one of the bleakest periods for the venture capital industry in years.
VC funds invested $6.5 billion across 906 deals during Q2, and $11.4 billion across 1,646 deals in the first half of 2010, according to the MoneyTree Report released today by PricewaterhouseCoopers and the National Venture Capital Association.

The data, provided by Thomson Reuters, shows a 34 percent increase in the amount invested between Q2 2009 and Q2 2010, and a 22 percent uptick in the number of deals. The half-year dollar amount jumped 49 percent, and the number of deals went up 23 percent compared to last year.
But this doesn’t mean that venture capital has made a full recovery from the economic downturn. Its results for the quarter are strong, but not as good as they were in 2006, 2007 and 2008, when the investment totals exceeded $7 billion and included more deals.
Their report made several other key observations about investment activity this quarter:
- Dollars sunk into the clean technology sector doubled during Q2, up from Q1, setting a new record for quarterly investment in the area at $1.5 billion. Interestingly, the number of deals in green remained flat between the two quarters, but included seven of the top deals of the quarter, as well as the fourth largest deal in any sector in the past 15 years (the $350 million invested in Better Place, a company that wants to build battery-switching stations for electric vehicles).

- Investment in biotechnology bumped up 52 percent in dollars to $2.1 billion across 234 deals. Pricewaterhouse attributes the boost to the large number of companies filing to go public in the sector. Medical device investing, in particular, went up 40 percent to $755 million across 95 deals.

- The software industry saw the highest number of deals: 229 — a 43 percent increase from the first quarter. But the sector still came in third place in terms of dollars, receiving only $1 billion. Clearly, software remains the most capital-efficient category for firms.
- Seed and early-stage investments are on the rise, increasing 54 percent to $2.3 billion in the second quarter. The number of deals in this category increased 32 percent to 429 just from Q1, and accounted for 47 percent of the total number of deals made during the quarter. Seed deals are also growing in size, from an average of $5.1 million in Q1 to $7.1 million in Q2.
- Mid-stage — also knows as expansion stage — investments increased 48 percent over the second quarter, with $2.7 billion handed out in 277 deals.
- Late-stage investment remained flat at $1.5 billion, although the number of deals increased 14 percent from Q1 to 200. Later-stage rounds are actually shrinking, with averages falling from $8.9 million in Q1 to $7.7 million in Q2. This highlights a convergence between seed and angel investors and large late-stage venture firms, noted earlier this week at the VentureBeat’s MobileBeat conference.
- Other top deals in Q2 included $150 million for solar-thermal company BrightSource Energy, $90 million for analysis software maker Palantir Technologies, $70 million for photovoltaic manufacturer Stion, $62 million for advanced battery maker Boston Power, $55 million for solar panel financing firm SunRun, and $50 million for DNA sequencing provider Pacific Biosciences.
Earlier reports breaking down venture capital performance in the second quarter were not nearly as sunny as today’s. Earlier this week, the NVCA released two other reports, one showing a seven-year low in the dollars raised by funds from limited and institutional partners, and one detailing results of a survey showing that most venture capitalists see their industry shrinking in the U.S. and Europe and growing in emerging markets like Asia.
Tags: Venture Capital
Companies: Better Place, BrightSource Energy, national venture capital association, Pacific Biosciences, Palantir, PricewaterhouseCoopers, Stion, Sunrun, Thomson Reuters

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