The Venture Alley

Obama Moves to Curb Patent Trolls

Asher Bearman — Thu, 13 Jun 2013 11:27:05 -0600

Article prepared by and republished courtesy of our colleagues in the Intellectual Property and Technology practice group of DLA Piper; originally published here: http://www.dlapiper.com/obama-moves-to-curb-patent-trolls/.

President Barack Obama has announced a new executive and legislative initiative aimed at curbing patent infringement suits by "patent trolls," who generate revenue through extortionate litigation, not real innovation.

As the White House press release notes, the proposed legislative agenda would:

1.	Increase transparency in patent litigation (and presumably settlement negotiations), by requiring any party sending demand letters, filing an infringement suit or seeking USPTO review of a patent to file updated ownership information and enabling the USPTO or district courts to impose sanctions for non-compliance.
2.	Give trial judges more discretion to award attorneys’ fees to prevailing parties in patent cases as a sanction for abusive litigation (similar to the legal standard that applies in copyright infringement cases).
3.	Expand the USPTO’s transitional program for business method patents to include a broader category of computer-enabled patents and permit a wider range of challengers to petition for review of issued patents before the Patent Trial and Appeals Board.
4.	Protect off-the-shelf purchasers by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use. Also, under the initiative, judicial proceedings against such consumers would be stayed when an infringement suit has also been brought against a vendor, retailer or manufacturer.
5.	Change the ITC standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied by the ITC and district courts.
6.	Incentivize public filing of demand letters in a way that makes them accessible and searchable to the public to help curb abusive suits.
7.	Ensure that the ITC has adequate flexibility in hiring qualified ALJs.

To enhance these proposed new rules, the White House is taking a series of executive actions to increase transparency, tighten functional claiming, empower downstream users and strengthen enforcement.

Learn more about the impact of the President’s proposals and their meaning for your business.

Tax Reform Update: Impact on Private Equity, Hedge Funds, and Real Estate Partnerships

Asher Bearman — Wed, 12 Jun 2013 11:25:56 -0600

CONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

Interesting tax update courtesy of Bruce Thompson, a Senior Policy Advisor with DLA Piper. He continues to see momentum for comprehensive tax reform and wrote the following summary of what that might mean for fund managers and partnerships:

"The Chairmen of the Tax Committees in the House and Senate---Rep. Dave Camp and Sen. Max Baucus---are committed to moving a major tax reform bill, and the House leadership has reserved HR 1 for the tax reform bill.

Congressional tax writers are laying the groundwork for legislation that would lower individual and corporate tax rates and broaden the base by repealing or limiting many individual and corporate tax breaks. Both Chairmen have said that “everything is on the table,” and the nearly 200 tax expenditures are under review.

Major tax reform could also have a significant impact on private equity firms, hedge funds, and real estate partnerships. A number of proposals under consideration in the tax committees would involve major changes in the tax treatment of many investment management firms. These proposals include:

Taxing carried interest as ordinary income. The President has once again proposed taxing carried interest as ordinary income in his recent budget, and the proposal will be considered in the tax reform legislation. Consideration could also be given to a proposal to require owners of certain investment services businesses to pay tax at ordinary income rates on the gain from the sale of enterprise value.
Limiting the interest deduction for debt. A number of tax reform proposals call for limiting the interest deduction for debt. The President’s business tax reform report recommended reducing the deductibility of interest to reduce the tax code’s “bias toward debt financing.” Congressional tax writers are considering proposals to limit the interest deduction by a specified amount or by the value of inflation.
Taxing large partnerships and other pass-through entities as corporations. The President’s tax reform report said that many businesses are organizing as pass-through entities to avoid corporate tax liability, and said that taxing large partnerships as corporations would improve equity, reduce business distortions, and raise revenue to finance lower tax rates.
Revising partnership rules. Congressional tax writers are considering proposals to revise the tax rules applying to all partnerships, S corps, and limited liability corporations. Options under consideration would streamline and simplify some rules, while tightening others in order to limit “the use of partnerships as tax avoidance structures,” according to a committee draft.
Taxing financial products. Congressional tax writers have released a discussion draft of proposals to reform the tax treatment of financial products. Proposals under consideration would impose mark-to-market accounting for financial derivatives, reform hedging tax rules, and revise the tax-basis calculation for securities sales. Committee documents say the proposals would “update and rationalize” tax rules, while opponents argue that taxing hedging strategies would penalize all investors.
Strengthening FATCA. Legislation has been introduced in the House and Senate to give Treasury new authority to prohibit US firms from doing business with any foreign jurisdiction or institution which is deemed to impede US tax enforcement efforts."

"Venture Capital Fund" Flowchart for Exemption Under the Investment Advisers Act of 1940

Asher Bearman — Fri, 07 Jun 2013 11:09:16 -0600

CONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

This article is appearing simultaneously on The Venture Alley and on Startup Law Blog.

The below flowchart may be helpful to you in answering the question whether you qualify for the exemption for “venture capital funds” under Section 203(l) of the Investment Adviser’s Act of 1940 ( the “Advisers Act”), pursuant to the final rules promulgated by the SEC.¹ In all cases you should consult with an attorney. For more detailed information regarding the federal exemption, check here. Note that the Washington State Department of Financial Institutions (DFI) has proposed rules that are going to require many fund managers to register with the State as investment advisors. We plan to prepare a separate flowchart to help you understand those rules once they are finalized.

(i) http://www.theventurealley.com/vc-and-pe-funds/private-fund-adviser-exemption-150m-from-registration-under-the-advisers-act-final-dodd-frank-act-ru/

(ii) http://www.theventurealley.com/vc-and-pe-funds/reporting-requirements-for-funds-exempted-from-investment-advisers-act/

(iii) http://www.theventurealley.com/vc-and-pe-funds/washington-state-to-regulate-fund-managers/

¹ Here is the full text of Section 203(l): “EXEMPTION OF VENTURE CAPITAL FUND ADVISERS.—No investment adviser that acts as an investment adviser solely to 1 or more venture capital funds shall be subject to the registration requirements of this title with respect to the provision of investment advice relating to a venture capital fund. Not later than 1 year after the date of enactment of this subsection, the Commission shall issue final rules to define the term ‘‘venture capital fund’’ for purposes of this subsection. The Commission shall require such advisers to maintain such records and provide to the Commission such annual or other reports as the Commission determines necessary or appropriate in the public interest or for the protection of investors.”

² “Investment adviser” means, generally, any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities.

³ “Qualifying investments” means (i) an “equity security” issued by a “qualifying portfolio company” that has been acquired directly by the private fund from the “qualifying portfolio company;” (ii) any equity security issued by the qualifying portfolio company in exchange for an equity security issued by the qualifying portfolio company described in section (i) above; or (iii) any equity security issued by a company of which a qualifying portfolio company is a majority-owned subsidiary, as defined in section 2(a)(24) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(24)), or a predecessor, and is acquired by the private fund in exchange for an equity security described in sections (i) or (ii) above.

⁴ “Qualifying portfolio company” means any company that: (i) at the time of any investment by the private fund, is not reporting or foreign traded and does not control, is not controlled by or under common control with another company, directly or indirectly, that is reporting or foreign traded; (ii) does not borrow or issue debt obligations in connection with the private fund’s investment in such company and distribute to the private fund the proceeds of such borrowing or issuance in exchange for the private fund’s investment; and (iii) is not an investment company, a private fund, an issuer that would be an investment company but for the exemption provided by Section 270.3a-7, or a commodity pool.

⁵ “Equity security” means any stock or similar security; or any security future on any such security; or any security convertible, with or without consideration, into such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right; or any other security which the Commission shall deem to be of similar nature and consider necessary or appropriate, by such rules and regulations as it may prescribe in the public interest or for the protection of investors, to treat as an equity security.

⁶ An exempt reporting adviser is an adviser that has to make public filing of certain information, despite being exempt from registration. For example, here is the exempt reporting adviser Form ADV for Union Square Ventures.

Comment Letter Response to Washington State's Plans to Regulate More Fund Managers

Asher Bearman — Tue, 28 May 2013 10:34:16 -0600

CONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

As readers of this blog know, Washington State is proposing new rules that will require more fund managers to become registered investment advisers. These rules were originally proposed in the second half of last year and, in response to preliminary comments, the Securities Division of the Washington State Department of Financial Institutions (DFI) proposed new rules for comment by May 21, 2013. Quoting from the DFI's Notice to Interested Parties dated March 27, 2013:

In August 2012, the Securities Division circulated an early draft of rule amendments to the interested parties list. We also conducted a small business economic impact survey. In response to comments received from interested persons, and in response to the results of the small business economic impact survey, the Securities Division made certain changes to the proposed rules compared to the earlier draft...

The Securities Law Committee of the Business Law Section of the Washington State Bar Association, representing attorneys practicing in this area throughout Washington State, submitted formal comments to the DFI's request. Their comment letter is included below. Full disclosure, I'm not a member of the Committee, but they asked me to help them in drafting their formal response with respect to how the rules relate to private fund advisers.

This letter may be of interest in summarizing the concerns of many practitioners with the DFI's proposed rules.

Investment Adviser Comment Letter 17 May 2013

Vanessa Fox and Nine by Blue Join RKG

Megan Muir — Thu, 23 May 2013 19:08:57 -0600

CONTRIBUTED BY
Megan Muir
megan.muir@dlapiper.com

Congratulations to Vanessa Fox, one of the Women in Tech we've profiled in the past. Vanessa has joined forces with RKG, a search and digital marketing agency, combining her enterprise-level search analytics platform with the fast growing agency. Some of the press around the deal can be found on Geekwire, Business Wire and RKG’s Blog.

Washington State to Regulate Fund Managers

Asher Bearman — Mon, 20 May 2013 10:43:46 -0600

CONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

This article is appearing simultaneously on The Venture Alley and on Startup Law Blog. Readers may feel free to re-post this content elsewhere as well.

The world is changing for venture funds and similar funds in Washington State, and not necessarily for the better. It used to be the case that managers of venture or other private funds did not need to file anything with the SEC or state securities regulators (other than Forms D incident to their fundraisings). Dodd-Frank changed all that – but provided that investment advisers solely to venture capital or other small private funds may be exempt (based on Congress’ belief that these funds posed no systemic risk to the nationwide financial system).

There are now SEC regulations that define the new exemptions for the managers of venture funds (discussed in more detail here) and for the managers of private funds with less than $150M management (discussed in more detail here). Even if exempt, however, managers of venture funds and private funds with AUM of less than $150M now must publicly report certain high-level information, which becomes publicly available. For example, here is the exempt reporting adviser Form ADV for Union Square Ventures.

These rules settled out a few years ago. Right now, the bigger issue is with state regulators. State regulatory regimes need to be updated in order to conform to Dodd-Frank. The North American Securities Administrators Association (NASAA) created model rules for state regulators to follow, which adopted the same venture capital and private fund exemptions. Many states, including California, have now adopted the NASAA model rules.

In Washington State, the Securities Division (Division) of the Washington State Department of Financial Institutions (DFI) is in the process of updating its rules to conform to Dodd-Frank. Unfortunately for fund managers, DFI does not believe the SEC and NASAA Model Rules are enough regulation. Their proposed rules provide that, if you don’t fall within the definition of a “venture capital fund” (as defined in the federal rule), you will generally have to register as an investment advisor in Washington State unless you are managing funds comprised only of super accredited investors (think $5M instead of $1M for individuals) – known as “qualified purchasers”. This is going to create significant problems for funds that don’t fit the narrow confines of the “venture capital fund” definition (below). We are actively trying to get these proposed rules changed before they are adopted, urging conformity with the federal rules, but so far the DFI has not agreed to make this change.

Here is more information on the Washington State proposed rules, from the DFI website:

Rulemaking: Investment Adviser Rules

The Securities Division is soliciting comments on proposed amendments to the investment adviser rules set forth in Chapter 460-24A WAC.

The proposed amendments would update various provisions of the investment adviser rules, including the rules regarding financial reporting requirements, custody, books and records, and unethical practices. The proposed amendments would add new rule sections addressing proxy voting, advisory contracts, and compliance procedures and practices, and would create exemptions from registration for certain private fund advisers and venture capital fund advisers. Many of these changes would make Washington’s rules consistent with current federal law and NASAA model rules.

Please find a copy of the proposed rule making notice and the text of the proposed rules below.

Public Hearing - May 21, 2013 - 1 PM

A hearing will be held on the proposed rulemaking on May 21, 2013 at 1:00 pm at the Department of Financial Institutions office in Tumwater, Washington. See: Directions to DFI.

Documents

Proposed Amendments (PDF)*

Small Business Economic Impact Statement (PDF)*

March 27, 2013 Memo Regarding Proposed Amendments (PDF)*

CR-102 (PDF)*

08/13/12: Update Regarding Possible Amendments to Rules (PDF)*

Draft Rule Amendments (PDF)*

CR-101 (PDF)*

WAC 460-24A

Submit Your Comments

If you have any questions or comments, please contact Jill Vallely at (360) 902-8801 or by email at jill.vallely@dfi.wa.gov.

Below is the relevant text from the Washington proposed rules, and a summary of the federal rules and filing requirements.

Proposed Washington Regulations

Here is the relevant WAC provision in the proposed rules regarding exemption for venture capital fund managers:

WAC 460-24A-072 Registration exemption for investment advisers to venture capital funds.

(1) Exemption for venture capital fund advisers. You are exempt from the registration requirements for investment advisers in RCW 21.20.040 if you are exempt from registration under Section 203(l) of the Investment Advisers Act of 1940, 15 U.S.C. 80b-3(l), and Rule 203(l)-1 adopted thereunder, 17 C.F.R. 275.203(l)-1, provided you satisfy each of the following conditions:

(a) Neither you nor any of your advisory affiliates are subject to a disqualification as described in WAC 460-44A-505(2)(d); and

(b) You file with the division each report and amendment thereto that an exempt reporting adviser is required to file with the Securities and Exchange Commission pursuant to Securities and Exchange Commission Rule 204-4, 17 C.F.R. 275.204-4.

The tricky thing here is the rules surrounding what constitutes a venture capital fund. There are mathematical tests, prohibitions on leverage, redemption prohibitions, etc.:

Venture Capital Fund Defined

Under the SEC’s regulations, a venture capital fund is any private fund that:

(1) Represents to investors and potential investors that it pursues a venture capital strategy;

(2) Immediately after the acquisition of any asset, other than “qualifying investments” (see definition below) or short-term holdings, holds no more than 20 percent of the amount of the fund's aggregate capital contributions and uncalled committed capital in assets (other than short-term holdings) that are not qualifying investments, valued at cost or fair value, consistently applied by the fund;

(3) Does not borrow, issue debt obligations, provide guarantees or otherwise incur leverage, in excess of 15 percent of the private fund's aggregate capital contributions and uncalled committed capital, and any such borrowing, indebtedness, guarantee or leverage is for a non-renewable term of no longer than 120 calendar days, except that any guarantee by the private fund of a qualifying portfolio company's obligations up to the amount of the value of the private fund's investment in the qualifying portfolio company is not subject to the 120 calendar day limit;

(4) Only issues securities the terms of which do not provide a holder with any right, except in extraordinary circumstances, to withdraw, redeem or require the repurchase of such securities but may entitle holders to receive distributions made to all holders pro rata; and

(5) Is not registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), and has not elected to be treated as a business development company pursuant to section 54 of that Act (15 U.S.C. 80a-53).

A lot of funds in the area are going to be what can be thought of as so-called “hybrid” funds. Those funds are going to be in a tough spot under the new proposed rules if they have plain old fashioned “accredited investor” LPs, since they will not qualify as managers of “qualifying private funds” and may have to register as investment advisors in Washington State.

Here is the relevant WAC provision in the proposed rules regarding exemption for qualifying private fund managers:

WAC 460-24A-071 Registration exemption for investment advisers to private funds. (1) Exemption for private fund advisers. You are exempt from the registration requirements for investment advisers in RCW 21.20.040 if you are a private fund adviser as defined in WAC 460-24A-005 and you satisfy each of the following conditions:

(a) Neither you nor any of your advisory affiliates are subject to a disqualification as described in WAC 460-44A-505 (2)(d); and

(b) You file with the division each report and amendment thereto that an exempt reporting adviser is required to file with the Securities and Exchange Commission pursuant to Securities and Exchange Commission Rule 204-4, 17 C.F.R. 275.204-4.

WAC 460-24A-005 Definitions. For purposes of this chapter: * * *

(8) "Private fund adviser" means an investment adviser who provides advice solely to one or more qualifying private funds.

(9) "Qualifying private fund" means a private fund that meets the definition of a qualifying private fund in Securities and Exchange Commission Rule 203(m)-1, 17 C.F.R. 275.203(m)-1, other than a private fund that qualifies for the exclusion from the definition of "investment company" provided in section 3(c)(1) of the Investment Company Act of 1940, 15 U.S.C. 80a-3(c)(1).

Exempt Reporting Adviser

Under the Washington proposed rules, even if you meet the above definition, you will still have to file report as an exempt reporting adviser.

Conclusion

We should know more in the coming weeks but please contact us if you share our concerns with the proposed rules or would like more information on how to provide comments.

Asher Bearman asher.bearman@dlapiper.com

Joe Wallin JoeWallin@dwt.com

Investigative Crises: Surviving Until Help Arrives

Trent Dykes — Tue, 14 May 2013 19:18:36 -0600

Article prepared by and republished courtesy of our colleagues in the White Collar, Corporate Crime and Investigations practice group of DLA Piper; originally published here: http://www.dlapiper.com/investigative-crises-surviving-until-help-arrives-05-02-2013/.

The first minutes and hours after the government executes a search warrant, serves a subpoena, or otherwise lets you know you’re under investigation can be critical in determining the investigation’s eventual outcome. A company’s immediate response may make the difference between an investigation that goes nowhere and one that leads to the company’s demise.

This handbook outlines the key do’s and don’ts for company executives and in-house counsel during the initial period before counsel arrives. It covers in the most basic terms what to do when:

The government executes a search warrant, either at corporate headquarters or a corporate facility.
The government serves a grand jury or administrative subpoena requiring production of vast quantities of documents in a very short time.
Government agents appear at a company’s manufacturing or other facility and start interviewing low-level employees.
Company counsel learns that government agents have been contacting employees at home in order to interview them or serve grand jury subpoenas.
Government agents show up unannounced at company headquarters and ask that a company executive speak with them “voluntarily.”
A government contracting officer shows up at an otherwise routine audit with a small army of other government agents.
OSHA agents arrive at a company facility immediately after an employee is seriously injured or killed in an explosion or industrial accident.
A news reporter calls with questions about an allegedly nefarious company practice, drawing on information received from a whistleblower.

Although every situation is different and calls for case-specific advice from experienced white collar counsel, general guidelines on how to act in such situations should help prevent the company from making grave mistakes while counsel can be notified and arrive on the scene to assist. This handbook lays out those guidelines. It also includes a sample US federal search warrant as well as attachments to advise employees of their rights during an investigative crisis.

2013 Private Equity Survey Indicates Cautious Optimism

Megan Muir — Sun, 12 May 2013 20:45:48 -0600

CONTRIBUTED BY
Megan Muir
megan.muir@dlapiper.com

The 2013 Private Equity Survey of McGladrey, done by the research unit of SourceMedia, indicates growth and optimism in the PE sector although the funds remain cautious about the broader economy.

Some findings of the 2013 survey:

Funds see "management capabilities and effective strategy and execution as primary drivers of successful portfolios."
Outdated IT systems, under-qualified IT personnel and inadequate infrastructure become apparent following acquisitions, often impacting critical areas of the business.
Active integration leadership and experienced team members are important to success.
Firms frequently find weaknesses in financial reporting (including the frequency, accuracy and efficiency of reporting as well as the tracking of operational metrics).

Download the full survey report here.

Pitching Angel Investors: Advice from Jonathan Sposato

Megan Muir — Thu, 09 May 2013 00:32:41 -0600

CONTRIBUTED BY
Megan Muir
megan.muir@dlapiper.com

Investor and serial entrepreneur Jonathan Sposato has seen enough startup pitches in his day to know what he likes. In this Geekwire post from earlier this year, he shares his three favorite things to hear from founders seeking an investment. One key piece of advice from Joanathan that is simple and straightforward: your investors want to know their money is going to be put to good use.

With that in mind, he advises founders to “speak provocatively and ambitiously about their concept,” to share names of other well-respected investors who are already on board, and to provide a detailed plan for using the funds they are requesting.

Jonathan’s suggested approach in one sentence:

Please tell me: How you’re going to crush it, who else agrees with you besides me, and how you are going to spend my money.

Seattle Office Real Estate Market Review for Q1 2013

Trent Dykes — Fri, 03 May 2013 07:57:06 -0600

Compliments of Jason Smith of Kidder Mathews, attached is a Seattle-area office real estate market review for Q1 2013. As the report notes, the first quarter included a quiet encore of the performance seen near the end of 2012. Leasing activity was modest, but positive, tenants showed renewed interest in the middle of the Seattle central business district (CBD), Amazon leased any large space that came available in the CBD, and investors continued to be bullish on the Seattle office market.

The performance of the office market is especially encouraging in light of the fact that general economic indicators continue to vacillate. One example significant to the office market is that after six quarterly increases in forecasted 2013 job growth, the March 2013 Puget Sound Economic Forecaster reduced the growth rate to 2.6%. It was a minor adjustment, reflecting the inability of the national economy to gain consistent momentum and the likely effects of the sequester. Nonetheless, the overall performance of the office market is still expected to be similar to that seen in 2012.