Stubbs Alderton & Markiles’ client Edesa Biotech Inc., a clinical-stage biopharmaceutical company, has announced the completion of its business combination transaction with Stellar Biotechnologies, Inc. pursuant to a share exchange agreement entered into on March 7, 2019. The combined company will be called Edesa Biotech, Inc. and commenced trading on the Nasdaq Capital Market on June 10, 2019 under the symbol "EDSA."
To read the full press release visit here.
Stubbs Alderton & Markiles’ attorneys representing Edesa Biotech in this transaction are Jonathan Friedman and Brent Armitage.
About Edesa Biotech, Inc.
Edesa Biotech, Inc. (Nasdaq: EDSA) is a clinical-stage biopharmaceutical company focused on efficiently developing innovative treatments that address significant unmet medical needs. Edesa's lead product candidate, EB01, is a novel non-steroidal anti-inflammatory molecule (sPLA2 inhibitor) for the treatment of chronic allergic contact dermatitis which has demonstrated statistically significant improvements in multiple clinical studies. Edesa also intends to expand the utility of its sPLA2 inhibitor technology, which forms the basis for EB01, across multiple indications. The company is based in Toronto, Canada, with U.S. offices in Southern California.
For more information about our Corporate & Business Matters practice area please contact Jonathan Fredman at
Stubbs Alderton & Markiles' client Pelage Pharmaceuticals, a startup company founded by UCLA faculty members Heather Christofk, William Lowry, and Michael Jung, has discovered a new way to activate the stem cells in hair follicles that are responsible for hair growth. This week they have announced that the compounds and the technology have been exclusively licensed by UCLA to Pelage Pharmaceuticals.
To read the full press release visit here.
Stubbs Alderton & Markiles’ attorneys representing Pelage Pharmaceuticals in this transaction are Kevin DeBré, Scott Galer, and Jonathan Friedman.
Stubbs Alderton & Markiles’ client New Form, a highly acclaimed digital entertainment studio whose owners included Discovery, ITV, Ron Howard and Brian Grazer, has been acquired by Whistle, a sports and entertainment internet media company. The value of the deal was not disclosed.
To read the full article on Variety visit here.
Stubbs Alderton & Markiles’ attorneys representing New Form in this deal are Greg Akselrud, Jonathan Friedman, and Michael Shaff.
ABOUT NEW FORM
New Form is an entertainment studio redefining the way stories are developed, packaged and distributed by producing original narratives that transcend formats and platforms. New Form creates premium video content that resonates with young audiences using data-driven insights to influence its content strategy. For more information visit www.newform.com
For more information about our Internet, Digital Media & Entertainment practice area contact Greg Akselrud at
As companies grow, so do their need for capital. In today’s global economy, U.S. companies have a viable option to raise capital from foreign investors. Countries like Canada, which have similar laws and customs to those of the U.S., are a logical place to seek financing. Although raising capital from foreign investors is relatively easy, there are several factors from a legal perspective that companies need to consider when seeking foreign investment. This article will address several of these factors.
1. What Securities Laws Should be Considered?
When raising capital from foreign investors, in addition to complying with U.S. securities laws, companies also need to comply with the securities laws of the country in which the investor is located. Qualified local counsel will need to be engaged early in the fundraising process to ensure compliance with foreign laws and regulations.
In addition, as with any issuance of securities by a U.S. company, consideration needs to be given to the securities law exemption in the U.S. that will be relied upon to issue securities without registration under the Securities Act of 1933 (the “Act”). The most common exemption relied upon is Rule 506(b) in an offering only to “accredited investors” (which accredited investors may also include foreign investors in addition to domestic investors). An alternative is issue securities to foreign investors in compliance with Regulation S. Regulation S provides an exclusion from the registration requirements of the Act for offerings made outside the U.S., subject to compliance with certain restrictions, including that no “direct selling efforts” are made in the United States. A potential benefit of Regulation S offerings is that, subject to compliance with local law, securities can be sold to non-accredited investors.
2. What About Bad Apples?
Before taking capital from foreign investors, U.S. companies need to ensure that the country in which the investor resides and the prospective investor are not barred from doing business with U.S. entities. The Office of Foreign Asset Control (“OFAC”) maintains a website that lists Terrorists and Specially Designated Nationals and Blocked Persons as well as embargoed countries and regions that can be checked for this purpose. Ensuring that a potential foreign investor is not on a prohibited list is important, as companies may be subject to severe consequences for violating OFAC regulations.
In addition, companies raising capital from foreign investors will need to gather information to assist banks in complying with their “know your customer” or “KYC” obligations. KYC is designed to prevent banks from being used by criminal organizations for money laundering activities.
3. Tax. Tax. Tax?
Central to any cross-border financing are the tax implications of the transaction both to the company and to the investor. As an example, if a U.S. corporation is an “S” Corporation for tax purposes and is subject to pass through taxation, taking on foreign investors will automatically convert the corporation to a “C” corporation for tax purposes, and subject the company to corporate level taxation---a situation which may not be desirable for the company and its founders. From the perspective of a foreign investor, they may prefer tax assessed at the company level to avoid the prospect of the IRS deeming the investor to be doing business in the U.S. and thus subjecting the investor to the requirement of filing U.S. tax returns. Knowledgeable tax advisers should always be utilized when conducting international transactions to avoid unnecessary and costly mistakes.
If you are interested in raising capital from foreign investors, you need to consider the above issues, among others, and should always consult counsel to ensure your transaction is in legal compliance.
Jonathan Friedman is partner at the firm. Jonathan advises a wide range of both public and private clients, including development-stage, emerging-growth and middle-market companies as well as angel investors, venture capital firms and strategic investors. Jonathan’s practice focuses on corporate finance, mergers and acquisitions, securities law, intellectual property licensing and general corporate and business matters. Jonathan also has experience forming venture capital funds. Jonathan has represented corporations and other entities in a variety of industries, including Internet and e-commerce, apparel, medical devices, entertainment and high technology.
Jonathan has substantial experience managing strategic transactions, including private equity and debt financings transactions, mergers and acquisitions in the public and private markets, offerings by public companies and angel and venture capital financing transactions. In addition, Jonathan counsels companies in connection with SEC reporting requirements and registrations, federal and state securities laws, corporate governance issues, joint ventures and strategic alliances and commercial contracts. Jonathan also has expertise advising companies in their formation process.
As part of his practice, Jonathan facilitates cross-border financings, mergers and acquisitions and expansions by companies into new markets and works to promote bi-lateral trade opportunities between Canada and the United States that will result in the job creation, investment connection and trade partnership support.
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. To learn more about foreign investors, contact Jonathan Friedman at
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Stubbs Alderton & Markiles client BillGO, a B2B payment engine, has announced its acquisition of Prism, an award-winning app that has already paid $1B in bills on behalf of its customers. This will yield a considerable boost to BillGO’s real-time payments (RTP) biller network. BillGO will leverage Prism’s existing network of over 11,000 billers for its customers, widening their already significant lead in the bill payments industry – providing the most advanced eBills (statements) and bill presentment platform.
To read the full press release visit here.
Stubbs Alderton & Markiles’ attorneys acting as counsel BillGO in this deal were John McIlvery and Jonathan Friedman.
About
BillGO constantly creates and innovates past what exists. That drive powers the BillGO team to relentlessly advance payment systems to accelerate speed, efficiency, and security. BillGO provides a simple integration into any existing system that gives payment providers access to a faster, proven bill payments engine. Learn more: https://www.billgo.com/
For more information about the Mergers & Acquisitions practice, contact John McIlvery at [/vc_column_text][/vc_column][/vc_row]
Resonant Inc.(NASDAQ: RESN), a designer of filters for radio frequency, or RF, front-ends that specializes in delivering designs for difficult bands and complex requirements, today announced the closing of an underwritten public offering for 5,714,286 shares of its common stock at a per share price to the public of $3.50. The Company received net proceeds of approximately $18.4 million from the offering after deducting the underwriting discount and estimated offering expenses.
To read the full press release, click here.
Stubbs Alderton & Markiles’ attorneys that represented Resonant in the transaction were John McIlvery and Jonathan Friedman.
About Resonant® Inc.
Resonant is creating software tools and IP & licensable blocks that enable the development of innovative filter designs and modules for the RF front-end, or RFFE, for the mobile device industry. The RFFE is the circuitry in a mobile device responsible for the radio frequency signal processing and is located between the device’s antenna and its digital baseband. Filters are a critical component of the RFFE that selects the desired radio frequency signals and rejects unwanted signals and noise.
To learn more about our Public Securities Practice, contact John McIlvery at .
Stubbs Alderton & Markiles client Champion Technology, the provider of a next-generation expert system and analytic platform, DarkLight®, announced it is forming a strategic partnership with R9B. R9B (root9B, LLC), is a leading provider of cybersecurity products and services. The companies will form a technology partnership to leverage DarkLight's knowledge framework to optimize and cross-correlate data sets.
To read the full press release visit here.
Stubbs Alderton attorneys representing Champion Technology are Scott Alderton and Jonathan Friedman.
About Champion Technology Company's DarkLight
DarkLight is a next-generation cybersecurity analytic and automation platform. Driven by artificial intelligence (AI), this groundbreaking solution is a force multiplier which leverages the logic, knowledge, and reasoning of security analysts to deliver human-quality results, at scale. To learn more, please visit www.darklightcyber.com.
For more information about our Venture Capital and Emerging Growth Practice , contact Scott Alderton at
Stubbs Alderton & Markiles client Colle Capital Partners, a global, opportunistic, early stage technology venture fund based in New York, with a presence in San Francisco, has closed its fund, after a strategic investment by Zain Group, a leading innovator of mobile communications in eight markets across the Middle East and Africa. Colle Capital Partners has a diversified technology focus with an emphasis on data in the Energy, Media, Telecommunications, Health IT, Security, and Software Development sector.
To read the full press release visit here.
Stubbs Alderton attorneys representing and acting as Fund Counsel to Colle Capital Partners are Scott Alderton and Jonathan Friedman.
About
Colle Capital Partners is a global, opportunistic, early-stage technology venture fund. Managers have completed deals in various verticals and across all capital structures. They pay special attention to data. Virtually all their deals have an intrinsic relationship with data as they believe that data will drive future growth for all their companies.
For more information about our Venture Capital and Emerging Growth Practice , contact Scott Alderton at
Stubbs Alderton & Markiles, LLP announced that it reprsented its client Resonant Inc. (NASDAQ: RESN), a designer of filters for radio frequency, or RF, front-ends that specializes in delivering designs for difficult bands and complex requirements, in the closing of an underwritten public offering for 2,715,000 shares of its common stock, which includes the exercise in full by the underwriters of their over-allotment option, at a per share price to the public of $4.25. The Company will receive gross proceeds of approximately $11.5 million from the offering.
Stubbs Alderton & Markiles' attorneys that represented Resonant in the transaction were John McIlvery and Jonathan Friedman.
To read the full press release on Businesswire, click here.
About Resonant® Inc.
Resonant is creating innovative filter designs for the RF front-end, or RFFE, for the mobile device industry. The RFFE is the circuitry in a mobile device responsible for the radio frequency signal processing and is located between the device’s antenna and its digital baseband. Filters are a critical component of the RFFE that selects the desired radio frequency signals and rejects unwanted signals and noise.
About Resonant’s ISN® Technology
Resonant can create designs for hard bands and complex requirements that we believe have the potential to be manufactured for half the cost and developed in half the time of traditional approaches. The Company’s large suite of proprietary mathematical methods, software design tools and network synthesis techniques enable it to explore a much bigger set of possible solutions and quickly derive the better ones. These improved filters still use existing manufacturing methods (i.e. SAW) and can perform as well as those using higher cost methods (i.e. BAW). While most of the industry designs surface acoustic wave filters using a coupling-of-modes model, Resonant uses circuit models and physical models. Circuit models are computationally much faster, and physical models are highly accurate models based entirely on fundamental material properties and dimensions. Resonant’s method delivers excellent predictability, enabling achievement of the desired product performance in roughly half as many turns through the fab. In addition, because Resonant’s models are fundamental, integration with its foundry and fab customers is eased because its models speak the “fab language” of basic material properties and dimensions.
About Stubbs Alderton & Markiles, LLP
Stubbs Alderton & Markiles, LLP is a business law firm with robust corporate, public securities, mergers and acquisitions, entertainment, intellectual property, brand protection and business litigation practice groups focusing on the representation of, among others, venture backed emerging growth companies, middle market public companies, large technology companies, entertainment and digital media companies, investors, venture capital funds, investment bankers and underwriters. The firm’s clients represent the full spectrum of Southern California business with a concentration in the technology, entertainment, videogame, apparel and medical device sectors. Our mission is to provide technically excellent legal services in a consistent, highly-responsive and service-oriented manner with an entrepreneurial and practical business perspective. These principles are the hallmarks of our Firm.
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For more information about the Public Securities practice at Stubbs Alderton & Markiles, LLP contact John McIlvery at (818) 444-4500 or
Stubbs Alderton & Markiles, LLP recently completed the formation of Colle Capital Partners I, L.P., a $20M global, opportunistic, early-stage technology venture fund. Managers have completed deals in various verticals and across all capital structures. They pay special attention to data. Virtually all of their deals have an intrinsic relationship with data as they believe that data will drive future growth for all of their companies.
SAM Partner Jonathan Friedman served as lead counsel in connection with the formation of the fund. For further information on SAM’s fund formation practice, please contact Jonathan Friedman at (818) 444-4514 or .
Stubbs Alderton & Markiles, LLP announces that it represented client Vitesse Semiconductor Corporation (Nasdaq: VTSS) in its successful sale to Microsemi Corporation (Nasdaq: MSCC). Microsemi acquired Vitesse through a cash tender offer and follow-on merger at a price of $5.28 per share, for a total transaction value of approximately $389 million. SAM Attorneys John McIlvery, Jonathan Friedman and Daniel Kim represented Vitesse in this transaction that closed at the end of April.
For more information about the Public Securities Practice of Stubbs Alderton & Markiles, LLP, contact John McIlvery at (818) 444-4502 or
Press Contact:
Heidi Hubbeling
Director of Marketing
(310) 746-9803
Stubbs Alderton & Markiles Client Vitesse Semiconductor Corporation has announced that it has reached an agreement to be acquired by Microsemi Corporation for $389 million, furthering a drive toward consolidation in the semiconductor industry.
Vitesse, which has headquarters in Camarillo, CA, designs a diverse portfolio of high-performance semiconductors, application software, and integrated turnkey systems solutions for Carrier, Enterprise and Internet of Things (IoT) networks worldwide.
Based in Aliso Viejo, CA, Microsemi offers a comprehensive portfolio of semiconductor and system solutions for communications, defense & security, aerospace and industrial markets.
Stubbs Alderton & Markiles’ attorneys John McIlvery and Jonathan Friedman are representing Vitesse in this pending transaction.
For more information about our Public Securities practice, contact John McIlvery at .
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Join us for a catered lunch as we discuss the benefits of US businesses having operations in British Columbia. The program will explore the economic incentives available to technology companies that are offered by the Government of British Columbia and by local authorities in Vancouver, how to access the programs and how to commence operations in BC. The program will also include first hand insights of companies that have opened a satellite office in British Columbia.
Moderator:
Jonathan Friedman, Stubbs Alderton & Markiles, LLP- Jonathan Friedman is Partner at the law firm of Stubbs Alderton & Markiles, LLP. Jonathan advises a wide range of both public and private clients, including development-stage, emerging-growth and middle-market companies as well as angel investors, venture capital firms and strategic investors. Jonathan’s practice focuses on venture capital and corporate finance, intellectual property licensing, mergers and acquisitions, securities law and general corporate and business matters. Jonathan has represented corporations and other entities in a wide variety of industries, including Internet and e-commerce, apparel, medical devices, entertainment and high technology. Jonathan is a member of the Executive Committee of the Canadian California Business Council, an entity that was formed to support Canada and California businesses growth. The Council aims to use its membership network to connect bi-lateral opportunities that will result in the job creation, investment connection and trade partnership support.
Panelists:
Robert Wong, Creative BC - After working for several years for a chartered accounting firm in Vancouver, Robert joined BC Film + Media (now Creative BC) where he is currently the Vice President and Acting Film Commissioner. Robert joined the staff just prior to the launch of the film and television tax credit program in 1998, and has since played an integral role in the evolution of British Columbia’s film and television tax policy, including the recent enhancements to the tax credit program. He is responsible for all administrative aspects of Film Incentive BC (FIBC), the Production Services Tax Credit (PSTC), and development funding programs. As Acting Film Commissioner, he is tasked with marketing British Columbia as a destination of choice for projects and companies looking for a world class production centre.
Lui Petrollini, Ernst & Young - Lui is the EY B.C. Media & Entertainment Services Leader, Private Mid-Market Services Leader and the Director, Pacific Region Entrepreneur of the Year Awards. He has over 29 years experience in Public Accounting, serving private Canadian and international companies. Serving a wide variety of clients from start-up, development stage to full mature companies, Lui has extensive experience with software development companies, Media & Entertainment production companies and industry-related service providers. He currently sits as a director of the B.C. Technology Industry Association, the Telus World of Science (“Science World”) and the B.C. Motion Picture Production Industry Association. Lui possesses considerable knowledge and expertise in the film and television production industry. He has worked closely with film and television producers, and government and taxation agencies in dealing with the various film and tax credit incentives available to producers in Canada.
Mikko Setala, Rovio Animation Company- Mikko Setala joined Rovio Entertainment in 2006 as the Chairman of the Board and has also served Rovio as the CFO and EVP of Corporate Development. Living currently in Los Angeles, he is the President of the Rovio subsidiaries in North America. Mikko's background is in the software industry and he has been an entrepreneur, worked as an executive in major software companies and also as the CEO of a listed company. Mikko has written two books and acts as an angel investor and board member. Mikko has a M.Sc. degree from Helsinki University of Technology.
Twitter: mikesetala
Agenda: 12:00-12:30 Networking and Free Catered Lunch; 12:30-1:30 Panel Discussion
Parking: Ramp #5 on 4th Street near Broadway, or at the Santa Monica Place Mall. No Validations.
Sponsors:
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January 14, 2014 - SAM Partner Jonathan Friedman participated in a roundtable discussion with the Consulate General of Canada, David Fransen and Director General, Foreign Affairs and International Trade Roxanne Dubé, as well as other active members of the LA/Silicon Beach Tech Community to outline the state of the LA Tech Community and how partnerships can be made between Canada and Silicon Beach.
Jonathan is a member of the Executive Committee of the Canadian California Business Council, an entity that was formed to support Canada and California businesses growth. The Council aims to use its membership network to connect bi-lateral opportunities that will result in the job creation, investment connection and trade partnership support. For more information regarding cross-border transactions between Canada and the U.S., please contact Jonathan at (818) 444-4514 or .
Los Angeles, October 11, 2013. Stubbs Alderton & Markiles, LLP announced that it advised client HemaCare Corporation in the sale of its Coral Blood Services subsidiary to the New York Blood Center (“NYBC”). Financial terms of the transaction were not disclosed. Coral’s 24 employees have been offered equivalent positions at NYBC.
In addition, NYBC and HemaCare have signed an agreement granting HemaCare access to NYBC’s 22 metro New York area collection centers. This allows HemaCare to further support the skilled, standardized apheresis collection services required for cell therapy and immunotherapy clinical trials of HemaCare’s rapidly growing list of BioResearch Products and Services customers.
SAM Partner John McIlvery, and attorney Jonathan Friedman advised HemaCare Corporation in this transaction.
To read the full press release, click here.
Los Angeles– June 26, 2013 - Stubbs Alderton & Markiles, LLP announced that it advised client Vitesse Semiconductor Corporation (Nasdaq VTSS) in an underwritten public offering of 18,720,000 shares of its common stock at a price to the public of $2.15 per share. The offering closed on June 25, 2013.
Vitesse designs a diverse portfolio of high-performance semiconductor solutions for Carrier and Enterprise networks worldwide. Vitesse products enable the fastest-growing network infrastructure markets including Mobile Access/IP Edge, Cloud Computing and SMB/SME Enterprise Networking.
To read Vitesse’s full press release, click here.
The Stubbs Alderton & Markiles, LLP team advising Vitesse included John McIlvery and Jonathan Friedman.
About Stubbs Alderton & Markiles, LLP
Stubbs Alderton & Markiles, LLP is a business law firm with robust corporate, public securities, mergers and acquisitions and intellectual property practice groups focusing on the representation of venture-backed emerging growth companies, middle-market public companies, large technology companies, entertainment and digital media companies, investors, venture capital funds, investment bankers and underwriters. The firm’s clients represent the full spectrum of Southern California business with a concentration in the technology, entertainment, videogame, apparel, and medical device sectors. Our mission is to provide technically excellent legal services in a consistent, highly-responsive and service-oriented manner with an entrepreneurial and practical business perspective. These principles are the hallmarks of our Firm.
Contact:
Heidi Hubbeling
Director of Marketing
Stubbs Alderton & Markiles, LLP
Canada, because of its geographic proximity to the United States, shared language and similar business culture offers a logical expansion opportunity for companies that have successfully developed, marketed and sold a product or service in the United States. In 2012, bilateral trade between the United States and Canada for goods and services totaled approximately $742 billion, representing more than $2 billion of goods and services crossing the border every day, and Canada is currently the United States’ largest goods trading partner. There are a number of ways to export your products or services to Canada, each of which require differing levels of management, capital commitment and expertise.
Selling to domestic buyers, who export your product
Selling to domestic buyers who export your product offers a simple way to sell into Canada, since the domestic purchaser handles all aspects of export administration and assumes all risk associated with exporting. Examples of domestic buyers that purchase for export include parties who represent Canadian customers, such as Canadian government agencies, distributers or retailers. Another class of buyers includes intermediaries, such as export management companies, who are responsible for finding Canadian purchasers for your products. Better export management companies specialize by product or by market, and because of their specialization and existing networks, can significantly reduce the time and resources required to enter a new territory like Canada.
Direct Exporting
Accessing the Canadian market directly provides a number of significant benefits for a company, including enhanced control over the export process, the ability to gain valuable insight into foreign customers and competition and potentially higher profit margins. Direct exporting, however, can be much more labor and capital intensive as foreign representatives need to be identified, and working relationships established.
One method of direct exporting is entering into an arrangement with a Canadian sales representative, who then locates and introduces your company to potential customers. As an alternative, direct exporting can be achieved by locating foreign distributors who purchase your products (usually at a discount to wholesale prices) and then resell your products to retailers or dealers in the territory. If your company has sufficient resources, it may attempt to locate and sell directly to retailers or to the ultimate end consumer in Canada.
Legal Challenges
In the event your company uses intermediaries to achieve its export objectives, careful thought will be required in the selection of your partners and your agreements with any such party. For example, will your agreement with such party be exclusive in Canada or in certain channels of distribution? If the arrangement is exclusive, thought has to be given to the circumstances under which the arrangement will become non-exclusive—for instance if the party fails to fulfill certain sales requirements over a specified period of time.
When entering into a business relationship with an intermediary, it is also important to think about safeguarding the reputation of your brands. At a minimum, your agreement with a third party representative should include pre-approval rights with respect to marketing strategies and advertising campaigns. To enhance the reputation of your brands in Canada, you may also negotiate that your third party representative incurs minimum marketing expenditures on your behalf to promote your products.
A well structured relationship should also address the resources you expect the third party to provide during the term of your agreement. For instance, how many people will be devoted to the sale of your products in Canada and will the efforts of a particular person in the organization be required? Also, will the third party be required to provide customer support on your behalf, and if so, to what extent?
Perhaps most importantly, it is essential to provide escape clauses in your agreement to enable you to terminate the relationship in the event it does not develop as expected. For example, you may want to limit the term of the agreement to a period of one year, which agreement will automatically renew for an additional specified period unless either party gives notice. This will allow you to evaluate the performance of the third party without getting locked into a long term commitment. Your contract should also specify the circumstances under which you can terminate for non-performance or for breach.
When entering into a relationship with a third party representative, thought also has to be given to your needs upon the termination of the relationship. For instance, will a distributor have the right to continue to sell products in Canada to deplete their existing inventory or alternatively, will you have the right to repurchase unsold inventory? The agreement should also mandate the return of confidential information and other property following its expiration or termination.
Although exporting may seem daunting and fraught with risk, it is possible to export to Canada with minimal resources and capitalize on new growth opportunities for your products. The key lies in carefully selecting third party representatives for your brands and relying on your advisors to help you properly structure your commercial arrangement with such third parties.
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For more information regarding cross border transactions and similar inquiries, please contact Jonathan Friedman, attorney with Stubbs Alderton & Markiles, LLP ( . Jonathan’s practice focuses on venture capital and corporate finance, intellectual property licensing, mergers and acquisitions, securities law and general corporate and business matters. Jonathan, a Canadian citizen, also specializes in Canadian/United States cross border transactions and sits on the board of the Canadian California Business Council. Jonathan received his Bachelor of Applied Science in Mechanical Engineering in 1998, his M.B.A. in 2002, and his J.D. in 2002, all from the University of Toronto.
What is a convertible promissory note?
A convertible promissory note is a debt instrument that is convertible into equity at a future date either automatically upon the occurrence of certain events or at the choice of the investor. Even though it is a debt instrument, investors who purchase convertible promissory notes issued by a start-up company are expecting the notes to convert into equity at a future date, since equity (unlike straight debt) allows investors to participate in the upside of the company. A simple return of principal and interest is not attractive to an early stage investor who is taking tremendous risk in funding a start-up. To compensate investors for the risk they are taking, the notes sold are often convertible at a discount to the price of the next preferred equity round and will also contain a “cap” – or a maximum conversion price - on the price at which the note will later convert.
What is preferred stock?
Preferred stock is an equity ownership interest in a company with certain features that are designed to protect an investor’s investment. For example, investors in preferred stock typically receive cash distributions before holders of common stock and also receive certain rights relating to the control of the company, such as board representation and the right to veto certain company activities.
Why do start-up companies and investors sometimes prefer the sale of convertible promissory notes over equity to finance a startup?
Convertible promissory notes are sometimes used to finance start-up companies when the prospective investors lack the sophistication to properly price an equity round, when the size of the financing does not warrant the costs of a traditional preferred stock financing or when the company and the investors want to avoid pricing an equity round. In addition, convertible note financings are often used because they are perceived to be quicker and cheaper to structure and document than preferred stock financings.
What are some of the risks for investors financing a start-up through a convertible promissory note?
Even though convertible notes often contain price discounts to the next equity round and conversion caps, purchasers of convertible notes are often not sufficiently compensated for the risk they are taking in financing a start-up. Caps are often set at a premium to the company’s value at the time the notes are issued and discounts may not be adequate, especially as the time between the issuance of the notes and the priced equity round increases. Moreover, initial investors are subject to the risk that later investors, who often have greater bargaining power (especially if a company is in dire need of financing), will attempt to renegotiate the terms of the promissory notes to their detriment.
Convertible notes also may not adequately compensate early stage investors to the extent the investors provide resources to the company, such as key customer or supplier introductions, or otherwise add credibility or other value to the company. If the value of the company rises substantially as a result of the investor’s efforts, the investor is ultimately increasing the price they will pay for their own equity in the company, which is clearly a perverse outcome.
What are some of the risks a company that issues convertible promissory notes faces?
Convertible notes work well for start-up companies when the value of the company increases between the time of the debt financing and a preferred stock financing. However, if the value of the company falls, investors who purchased convertible notes may end up owning more equity in the company then the company anticipated at the time of the debt financing. This occurs because the price discount feature often included in the notes enables the investors to purchase equity at a price below what they would have paid at the time they purchased the convertible notes. Moreover, because the purchased equity often contains a liquidation preference, in addition to obtaining a larger equity position in the company at the expense of the founders, investors will also likely obtain an increased preference over the founders to the cash of the company in the event of a sale, dissolution or winding up of the company. Another downside of convertible notes is that, in the event a convertible note is not converted into equity prior to its maturity, investors could demand that the note is repaid with principal and interest, or potentially force the company into bankruptcy if the loans cannot be restructured.
Conclusions
The issuance of convertible promissory notes can be an effective means for start-up companies to raise capital. However, before raising capital through the issuance of promissory notes, investors and companies need to carefully evaluate the risks associated with the issuance of promissory notes in comparison to other financing alternatives.
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Jonathan Friedman discusses how convertible promissory notes often provide a fast and cheap way for start-up companies to raise capital. However, before raising capital through the issuance of promissory notes, companies need to evaluate the potential impact of convertible debt on the company’s future capital structure, and investors need to evaluate whether a straight equity investment is preferable to the purchase of debt. Jonathan’s practice focuses on venture capital and corporate finance, intellectual property licensing, mergers and acquisitions, securities law and general corporate and business matters. Jonathan has represented corporations and other entities in a wide variety of industries, including Internet and e-commerce, apparel, medical devices, entertainment and high technology.
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For more information regarding promissory notes, raising capital, or similar inquiries, please contact Jonathan Friedman at (818) 444-4514 or .