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March 16, 2023

Business Vantage Point Blog

From the Editor
The venture capital and emerging company communities were rocked last week by the collapse of Silicon Valley Bank (SVB) and the subsequent collapse of Signature Bank. While the federal government stepped in on Sunday to assure depositors that all insured and uninsured deposits are safe and SVB is up and running through a newly formed bridge bank in an almost business-as-usual fashion in the US, the reality is that the future is unclear for the bank on which much of the community has depended for over 25 years. There is still much to learn about the situation beyond the obvious that has already been widely reported. The coming weeks will uncover more about the who, what and why of what happened; what can be done to shore up the US banking system further and avoid similar situations in the future; and whether SVB will be sold in whole, in parts, wound down or file for bankruptcy (among the many options). However, one thing that is certain at this point is that this changes the landscape in the near term for both debt and equity venture financing – the loss of SVB as a significant player, especially in the venture debt space, is a void that needs to be filled by viable alternatives beyond the current alternative of much more limited, costly, private debt sources.

I sincerely hope the community pulls together to ensure minimal fallout, not just financially but to the lives of individuals who devoted themselves to supporting the emerging company community. Stradley Ronon will be monitoring this situation closely, and we are available to assist clients impacted by this situation.

Lori Smith

Below is a recap of recent posts to the Stradley Ronon Business Vantage Point blog. Articles on timely topics applying to all businesses written by our team of trusted advisers in our corporate & securities practice are posted to the site regularly.

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TJCA Restriction on Interest Payment Deductions: More Relevant Than Ever
Confidentiality Is Key In Stockholder Information Rights
M&A Brokers Now Statutorily Exempt From SEC Registration
Privacy From Birth: Incorporating Privacy Concerns Into Your Product Development Cycle  

TJCA Restriction on Interest Payment Deductions: More Relevant Than Ever
A recent WSJ article highlighted that, given the tightened equity financing market for early and growth-stage companies and the corresponding decrease in valuations, more such companies might be turning to venture debt to bridge the gap in their financial needs. This shift appears to be driven, at least in part, by a desire to avoid selling equity in a down round at lower valuations than the previous round of financing. However, there can be several risks associated with such debt, as described in the article, including high and increasing floating interest rates, loans that may still involve the issuance of equity kickers such as dilutive warrants to purchase equity, and the potential for balloon payments that may come due when the company does not have sufficient readily available cash or an alternative source of funding. This is “real” debt as opposed to the traditional convertible note financing that is very customary and converts into equity on the next equity round. Read More...

Confidentiality Is Key In Stockholder Information Rights
One of the most important yet overlooked aspects of any commercial or corporate transaction involves confidentiality obligations. Often, parties gloss over the scope of the covenants, treat them as boilerplate using precedent without thinking through the details, such as what information needs to be protected in the particular transaction at hand, who should be subject to the restrictions, what limitations need to be imposed on the use of any disclosed information and sometimes, forget to include the covenant or enter into a separate confidentiality agreement altogether. Read More...

M&A Brokers Now Statutorily Exempt From SEC Registration
The Consolidated Appropriations Act, 2023 (the Act), signed into law by President Biden on Dec. 29, 2022, included a long-awaited federal exemption from registration with the Securities and Exchange Commission (SEC) for brokers engaged in merger and acquisition (M&A) transactions among certain privately held companies (the Exemption). There has long been an issue, particularly with smaller privately held companies, including venture capital and private equity-backed lower middle market companies, hiring unregistered brokers or finders to assist with M&A transactions in exchange for a success fee. Read More...

Privacy From Birth: Incorporating Privacy Concerns Into Your Product Development Cycle
In 1736, Ben Franklin warned the fire-threatened city of Philadelphia that “an ounce of prevention is worth a pound of cure.” When it comes to data privacy and security, emerging companies and start-ups may struggle to follow this advice during the cost-sensitive early years. Many state privacy laws only become fully effective upon reaching certain thresholds for revenue or consumer data, and it may be tempting to push compliance off into a future product cycle. Read More...

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

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