Beware, Forms D Are Public

Forms DBy Christina Chan & Joe Wallin

If you haven’t been through the process of raising money for a startup before, you may not be aware of this, but when you raise money from angels or VCs you are generally required to file a Form D with the SEC and state securities regulators.

You can find the Form D at the following link:

Now, in general, filing a Form D might not sound too bad.  After all, it is only 4 pages long before the instructions and continuation pages (and 11 pages with all of those included), and the disclosure required is not that onerous (e.g., names of officers and directors, amount to be raised, amount raised so far).  But there are a few rubs.

Forms dFirst, the fact of disclosure itself.  What if you and your co-founders are working this startup as your “side hustle”?  What if you all have day jobs at big companies around town and you don’t necessarily want your name on a public document filed with the SEC saying you are the executive officer of a startup?  Unfortunately, the form requires all directors and executive officers to be disclosed.

forms dSecond, there are deadlines for filing the Form D.  Under the current rules, the Form D is supposed to be filed with the SEC no later than 15 days after the date of the first sale of securities (even the IRS gives you 30 days to file an 83(b)).  The rules define “date of first sale” as follows:  “the date on which the first investor is irrevocably contractually committed to invest.  If the due date falls on a Saturday, Sunday or holiday, it is moved to the next business day.”  So, you have a relatively short timeline in which to file your Form D timely.  It is actually pretty easy for a company to miss this deadline.  The deadline is especially short because you can’t just file the form.  First, you have to get Edgar filing codes and that form must be notarized.  Obtaining the filing codes typically takes a couple of days in and of itself.

forms dThird, the form you file, the Form D, is a public filing.  Forms D used to be paper filed only.  But they are now required to be filed electronically and various media outlets monitor these filings to report on them.

The Press

You may be alarmed when, after filing your Form D, the press reports about your fundraising efforts, or an article is written about your fundraising efforts.  You may be even more alarmed when a reporter calls out of the blue and wants you to talk about your financing raising efforts for an article.

Be careful if your offering is ongoing because if you are conducting a non-generally solicited Rule 506(b) offering, you cannot comment on your offering to the press.  Even if the press reports about your Form D filing incorrectly, you do not want to call and correct them.

To protect your 506(b) status, the safest thing to do if contracted by a reporter who is asking questions about your offering is tell the reporter, “Due to SEC rules, I am unable to provide details at this time.” That refers them to the SEC regulation rather than delving further into your offering and may help clarify the reporter’s understanding of the regulations.

Christina Chan – Associate – DWT – Christina focuses on representing startups and emerging companies and mature public and private companies.

Posted in Financings | Tagged , , , , , , , , , | 4 Comments

Raising Money – The Law Side

Raising MoneyListen to the podcast:

A friend peppered me with questions about startup fundraising and recorded it. I thought you might find it informative and enjoy listening in. The transcript is below. Feel free to keep the dialogue going in the comments section.

What Do You Do?

My name is Joe Wallin and I’m a startup lawyer in Seattle, Washington.  I work at the law firm of Davis Wright Tremaine and I work with a lot of startup and emerging companies.

How Do Startups Raise Money by Selling Securities?

The best and easiest way for a startup to raise money is:

  • to rely upon federal securities Rule 506;
  • not generally solicit or generally advertise your offering;
  • work from contact to contact, with people you know; and
  • only take money from accredited investors.

What Is An Accredited Investor?

An accredited investor is an investor with over a $1 million net worth, excluding their primary residence or more than $200,000 in income each year over the last two years with the expectation of the same in the current year, or, with their spouse, $300,000 of income each year over the last two years with the expectation of the same in the current year.

What Do The Securities Laws Require?

First off, what you should know is, before you can sell any security, you have to either register the security with the SEC and with state securities departments in states in which you wish the sell the securities, or you have to find an exemption from registration.  Registration is a very expensive process, so finding an exemption is a critical step in a fundraising.

Most startup and early-stage companies rely on the federal exemption known as Rule 506.  That is an exemption that allows you to raise an unlimited amount of money as long as you raise it from accredited investors.  The requirements for using Rule 506 are not that burdensome.  So, for example, you have to ensure that your investors are accredited.  You have to file forms with the SEC and in each state in which you have investors.  But there are no specific information requirements.  You do not have to have multiple years of audited financials or any sort of detailed or lengthy prospectus, as long as you’re taking money solely from accredited investors.

What About Raising Money from Non-Accredited Investors?

Raising money from non-accredited investors involves a lot more complexity and expense.  This is why most startup companies will limit their rounds to solely accredited investors.

Can you Generally Solicit Your Securities Offering?

Rule 506 was recently amended, so now, under Rule 506, you have what could be referred to as a non-generally solicited Rule 506 offering, and then you also have what could be referred to as a generally solicited Rule 506 offering.

I think right now, and probably for the foreseeable future, most companies are going to stick to the non-generally solicited Rule 506 offering.

So, if you’re going to go with what we’re referring to as the non-generally solicited offering, you cannot advertise your offering.  You can’t publicize it; you can’t post it on the Internet.  You can’t use Twitter or Facebook to promote the offering.  You’ve got to work from one contact who you know to another contact who you know, with whom you have a preexisting, substantive relationship.

I think, for the most part, companies are going to continue to use the old Rule 506, which is the non-generally solicited Rule 506 and not generally solicit their offerings.  And the reason for this is because if you generally solicit your offering, you have to ask your investors for proof that they’re accredited investors, proof of their income, proof of their net worth, and there is a potential reluctance on the part of investors to share that information with companies in which they are considering making an investment.

What If You Generally Solicit and an Investor Won’t Give You the Information?

So, there are third-party services.  Suppose you’re a company raising money in a Rule 506 offering and you’ve chosen to solicit your offering, advertise your offering, and so now you have to ask your investors for their financial statements or proof of their income or net worth, and suppose your investors say they don’t want to give that information to you, the company.  What are your alternatives?

There are third-party service providers like Second Market or or Second Market or Seed Invest that will work with the investor to verify the investor’s net worth or income, and then send you, the company, a letter saying that they have done that.

Has The Jobs Act Made Life Better for Startups?

There was a lot of hope surrounding the Jobs Act, and there was a lot of optimism that it was going to make things easier for companies.  Unfortunately, the SEC rules implementing the Jobs Act hamper the promise of the Jobs Act.  A lot of companies, I think, are going to generally steer away from generally soliciting their offerings just because of the additional work involved and the potential investor reluctance to share their personal financial information.

Isn’t There Such a Thing As a Friends & Family Offering?

There’s no such thing as Friends & Family Securities Law exemption.  The easiest securities law exemption is going to be the all-accredited investor exemption under federal securities Rule 506, and so you generally don’t want to take any money from any friends or family unless they are accredited investors.

What Do You Recommend Startups Do When Raising Money?

If you’re trying to keep your legal costs down, you’re trying to keep your life as administratively simple and easy as possible, the answer is:

  • don’t generally solicit;
  • take money from only accredited investors; and
  • use what’s known as federal securities Rule 506(b), the non-generally solicited Rule 506 offering.

State Securities Law Compliance

Remember, if you are raising money, you need both a federal and a state securities law exemption.  If your federal securities law exemption is Rule 506, you will need to make state securities law filings.

Posted in Startup Law | Tagged , , , , , , | 3 Comments

Going, Going, Gone: Qualified Small Business Stock


You may or may not be aware of this, but come December 31, 2013, one of the most exciting tax incentives for investing in startups is going to expire.  What am I talking about?  The 100% exclusion from tax for investing in qualified small business stock.  This benefit expires on December 31, 2013, and it is unclear whether Congress will renew it.  What I mean by this benefit expiring is, if you want to set yourself up to take advantage of this benefit down the road (you have to hold the stock for 5 years to avail yourself of the tax break), you have to acquire the qualified small business stock before the end of this year.

What does the 100% exclusion entitle you to?

Up to $10M in capital gains can be entirely excluded from tax, including the alternative minimum tax.  What you generally have to do to qualify for exclusion is:

  • Form or invest in a C corporation before the end of this year.
  • Have that C corporation start actively conducting a business this year.  (Under IRC Section 1202, stock is not treated as qualified small business stock unless, during substantially all of the taxpayer’s holding period for such stock, the corporation was engaged in an active trade or business.)  What this means is it is not good enough to simply incorporate this year; the new corporation has to do business this year as well.  Obtain your business licenses, open your bank accounts, and do business.
  • Have that business qualify as a “qualified small business.”  For example, software and Internet companies typically qualify.

For a more thorough discussion, check out my post on Section 1202.

What should you consider doing?

  • If you are pondering an investment in a C corporation that you could close either this year or next year, you may want to close it this year, so that you can potentially take advantage of this tax benefit down the road.
  • If you have an LLC that you have been considering converting to a C corporation, you might want to do it before year end.
  • If you formed a C corporation this year, and you were thinking you made a mistake and should have been doing business as an LLC, this information may provide you with an additional reason  to remain a C corporation.

Call your tax lawyer or tax accountant if you are on the fence about what to do.

Posted in Business Entities, Equity Compensation | Tagged , , , , , | 2 Comments

Tune Up Your Employee Handbook

Employee Handbook

Get your Employee Handbook ready for 2014!

Employment attorneys Mark BerryMary Drobka and Gillian Murphy will work with you to create or update your organization’s employee handbook.

  • Ask questions.
  • Get valuable advice.
  • Make your organization’s handbook an important tool for employee success.

Workshop Materials

Receive DWT’s new edition of the Model Employee Handbook (retails for $750). It includes:

  • Updated policies related to religious accommodations, cell phone use, Seattle’s new criminal background check ordinance, and much more!
  • Optional modifications to ensure compliance in California, Oregon, and Alaska.

Register Here


    Tuesday, December 10, 2013
    7:30 a.m. – 8:00 a.m. Registration & Continental Breakfast
    8:00 a.m. – 1:00 p.m. Workshop & Lunch


    $500 for first registrant, $75 for each additional registrant from same organization (Includes one Model Employee Handbook per organization)


    4.0 HRCI and CLE credits pending


    Park free in DWT building lot with validation from the seminar.


    Davis Wright Tremaine LLP
    1201 Third Avenue, Suite 2200, Seattle, WA 98101

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Rules for Unpaid Interns and Volunteers

Rules for Unpaid Interns and VolunteerBy Mary E. Drobka and Joe Wallin

We’ve been getting a lot of calls recently about interns and “volunteers.”  A lot of folks want to know how to have people work for them for free.  We have gotten to the point of saying:

“Outside the world of charities or government agencies, there is no sure thing when it comes to being an unpaid intern or volunteer.  To be safe, you have to pay everyone.” 

The Legal Punch Line

The reality is — there is no risk-free way for a “for profit” business (as opposed to a charity or government employer) to use unpaid “volunteers.” So if someone wants to gain experience by working for your company without pay, be forewarned: If the relationship sours, you could face a claim for unpaid minimum wages and overtime.  You may also be liable for unpaid Social Security, unemployment and workers’ compensation payroll taxes, as well as for failure to withhold taxes and penalties.

And perhaps even more importantly, there is the matter of intellectual property.  What happens if your unpaid intern or volunteer designs a great logo for you?  Or writes or contributes to a key piece of software?  If you haven’t paid that person anything, how will an IP assignment document they may have signed be enforceable?  Wouldn’t it fail for lack of consideration?  People remember that great story about Phil Knight and how he paid $20 or thereabouts for the Nike swoosh.  When they tell this story, they seem to focus on what a great deal he got.  But they miss the key point of the story – the fact that he paid for it.  If he hadn’t, he would have paid a lot more later when he was sued for using someone else’s IP.

What about using student interns?

There is a very limited exception under the federal and state wage and hour laws governing when companies may use unpaid student interns. These individuals should only be “shadowing” or “observing” a regular employee, or doing make-work assignments.  And you must be spending time with them – actually teaching and mentoring them!

Employers must meet the following five conditions to safely categorize someone as an unpaid student intern:

  1. The intern must receive on-the-job training similar to that which would be provided through a school;
  2. The primary benefit of the internship must be for the intern;
  3. The intern must not displace regular employees;
  4. The employer must reach an understanding up front with the individual that the intern is not entitled to pay or benefits during the internship or a job at the end—savvy companies require interns to sign a statement documenting their status and acknowledging that they are not entitled to compensation or a job at the end of an internship;
  5. The employer gets no immediate advantage from the intern’s activities—in fact their presence is supposed to impede your operations on occasion, based on the assumption that you are spending time training and educating them.


Not paying people who work for you is generally a bad idea.  Volunteers may appear to be an inexpensive alternative, but in reality, they are not.  Internships are a theoretical possibility but it is hard to use them correctly, and in compliance with the law.

If you have any questions regarding employee staffing or payroll classifications, please contact Mary Drobka, Joe Wallin or your regular employment law attorney.

Posted in Business/Corporate Law | 1 Comment