Laws Impacting Venture Capital Operations
With respect to the appkcable laws governing venture capital activity, it is important to remember that venture capital law is not one clearly defined set of laws; rather, it is a conglomerate of multiple laws, both federal and state. These include laws regarding the offenng and issuance of secunties, such as laws that may apply to the persons offenng the secunties (broker-dealer laws) and laws affecting the entity advising the venture fund as to the investments to make (such as the Investment Advisers Act of 1940 and any similar state laws). There are also vanous laws that impact the formation of the investment vehicles, such as federal tax laws, federal and state bankruptcy laws, and state laws governing corporations, limited liability companies, and general and limited partnerships. Also, once the investment fund is operational, attorneys specializing in venture capital assist in investments being made or liquidated by the fund, which includes counseling in the navigation of considerable federal and state laws and regulations.
Most Common Mistakes Made by Venture Capitalists
From a business point of view, the biggest mistake clients often make in their venture capital dealings is failing to think through an investment and not doing the necessary due diligence before committing the capital.
From a legal point of view, the biggest legal nsk is usually related to how the offering is conducted and the danger that a pnvate offenng will turn into an unregistered public offenng and violate federal and state secunties laws.
Establishing venture capital operations can be a costly business. Typically, the most expensive venture capital legal issues for clients are, particularly for new players, the costs involved in the preparation of the offenng documents (i.e., pnvate placement memorandum). The cost of prepanng the offenng documents increases unnecessarily due to lack of up-front planning. Careful planning includes, among other things, knowing the exact parameters and types of investments to be made, and how to actually manage those investments. Also, even at the early stage, the venture capitalist should be able to explain the anticipated exit strategies. Often, it takes the drafting of the offenng document for a client to focus on those details, which can lead to frequent re-drafting and thus significant costs.