Posted on September 18, 2012 by Epstein Becker & Green

Katherine Lofft on the Perils of Using Unlicensed Brokers to Connect to Investors

Katherine LofftFrom our colleague at Epstein Becker Green Katherine R. Lofft, on the TechHealth Perspectives blog:

There are myriad opportunities right now for new businesses and talented entrepreneurs targeting healthcare, particularly in the IT sector. It’s an exciting time for people and companies looking to harness the promise of innovation and the power of technology to improve health care delivery, empower patients and lower costs.

However, even the best ideas usually require money to get off the ground. Sometimes they require more capital than the founders or management, or their family and friends, have available. While there are many individuals and institutions around the country with money to invest, it can be hard for the average start-up or emerging business to identify and appeal to them, or to distinguish itself from competing investment opportunities.

In view of existing prohibitions on the use of general solicitation and advertising in private offerings of equity, many entrepreneurs, founders and early-stage business leaders turn to so-called “finders” (sometimes called “brokers” or “promoters”) to access capital. Finders are typically individuals, often with no other relationship to the company, who commit to leverage their network of contacts and connections to help a company identify investors and/or secure funding. The consideration under these arrangements often involves payment of a fee or commission based on a percentage of the funds invested.

Now, you might be asking, what’s the problem with this kind of arrangement? Only this: If an individual is involved in the purchase or sale or securities and receives or expects to receive a commission (whether payable in cash or other consideration, such as stock) as a result of the transaction, the individual must be properly licensed under federal, and often under state, law. The use of unlicensed “finders” or brokers can result in serious consequences not only for the individual finder or broker, but also for the company/issuer.

Read the full post on the TechHealth Perspectives blog

Posted on June 29, 2012 by Hylan Fenster

HIT OR MISS?

VC firms have been funding, and M&A transactions should continue to increase in the health information technology (HIT) sector

“We are gearing up!”  I heard this statement and other similar statements from many VC firms when I recently attended “The World Congress Annual Leadership Summit on Mergers & Acquisitions in the Health Care” in Orlando, Florida.  Consistently, panelists and attendees at the conference noted that VC firms are funding for M&A transactional opportunities within the heath information technology (or HIT) sector.  According to many managing directors who spoke at the conference, there will be many such transactions because many hospitals and health systems throughout the country may need to update their older systems to keep up with emerging technologies that allow for better care for patients.  During 2012, many VC firms have been involved in numerous HIT deals.  For the remainder of 2012 and beyond, those firms are forecasting a wave of new technology, which should include, in addition to a complete overhaul of computer systems, an expansion of new applications to run on those computer systems in order to better help providers and patients within the healthcare sector.  Strong M&A activity within the healthcare provider IT market should continue as a result of solid demand for quick, efficient technologies and lower healthcare costs.

According to Mercom Capital Group, LLC, a global communications and consulting firm:

  • VC funding in the HIT area in Q1 2012 was $184 million in 27 deals (the highest number of deals ever recorded since Mercom started collecting data in Q1 2010).
  • A total of 46 different VCs invested in Q1. 
  • In Q1 2012, M&A activity in the HIT sector was strong with 34 M&A transactions.

The increase in M&A activity could lead to more technologies “merging” to build better systems for information, storage and transporting health care data, and communication for decision making.  In addition to better utilization, the increase in the implementation of HIT may lead to:

  • Lower health care costs
  • Increased access to affordable care
  • Fewer mistakes
  • Improved care quality
  • Improved organizational efficiencies
  • Reduced administrative burdens

Healthcare Growth Partners, an investment banking and strategic advisory firm, has concluded recently that “the HIT surge shows no signs of subsiding”, and overall, there is a lot of optimism around the opportunity within the market…private equity interest is high and valuations are often equal to or above strategic estimations.

It appears that the M&A market in the HIT sector has been hot since Q1 2012 with new technologies and opportunities in health care available.  VC firms appear to be concentrating on technologies that help lower costs and improve the quality of care.  The conference was a chance to hear firsthand from VC firms who have been carefully planning their strategies with regards to HIT.  Now appears to be the time that these firms are stepping up to the plate; hoping that they won’t swing and miss.

 

Posted on May 01, 2012 by Michelle Capezza

Source Code Escrow When Entering into a Software License Agreement--Is it Necessary?

Our colleague, Hylan Fenster, shares his thoughts on source code escrow agreements:

Despite the burst of the dot.com bubble, many companies, notably small and mid-sized businesses, continue to rely on licensed software to perform their critical business operations. Source code escrow can provide the business with some protection if the software provider faces bankruptcy or stops maintenance or support for the licensed software.

Software License and Escrow Agreements

Licensees should ensure that their contracts with software providers contain provisions protecting source code rights. Source code is programming language written by a programmer that can be translated to machine language, which a computer would understand.  Unless a licensee has access to the source code, they cannot read or modify the program being licensed.  Licensees typically request source code escrow, which is the deposit of the source code of the software with a third party escrow agent.  Source code escrow is generally negotiated as a part of the initial software license agreement.  This request is made to ensure that the licensee will have continuing access to the software even if the licensor becomes defunct.   Pursuant to the specific terms of the contract, the escrow agent is authorized to release the source code to the licensee upon the occurrence of certain triggering events.

The licensor and licensee must agree not only whether to enter into a source code escrow agreement but also who should bear the expense.  Typically, a source code escrow agreement is entered into among the licensor, the business licensee and an unrelated third party escrow agent.

In addition, bankruptcy laws should be reviewed when drafting a source code escrow agreement as such laws may disallow the release of the source code escrow to the licensee, and the licensor’s creditors may be entitled to seize the licensor’s assets, which may include the escrowed source code.

Source code escrow agreements should provide for the following:

(i)               subject of the escrow,

(ii)              release events,

(iii)             duty of licensor to provide updates to the source code to the escrow agent,

(iv)             fees associated with the escrow agent’s services,

(v)              licensee’s rights upon release of the source code, and

(vi)             ongoing obligations of the escrow agent, if any.

The licensor will often resist entering into a source code escrow agreement due to the proprietary nature of the source code.  However, the licensee should be afforded some protection in the event the licensor is no longer complying with its obligations under the software license agreement.   A source code escrow provision in the license agreement protects the licensee and his business from potential events that may render the licensor unable to provide service or support.

Posted on April 16, 2012 by Michelle Capezza

JOBS Act Provides Encouragement for Start-Ups and Emerging Growth Companies

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act or JOBS Act.  In light of the sharp decline in the number of companies entering the U.S. capital markets through IPOs over the last ten years, Congress recognized a need for this legislation since small companies are critical to economic growth and job creation.  To promote growth and assist small companies in gaining access to capital, the JOBS Act amends the securities laws in several ways, which include the following:

(i)                  Establishes a new category of issuers known as “Emerging Growth Companies” (EGCs) which are issuers that have total annual gross revenues of less than $1 billion (after December 8, 2011).  EGCs  are exempt from certain regulatory requirements until the earliest of the date (a) five years from the date of their IPO, (b) they have $1 billion in annual gross revenue or (c) they become a large accelerated filer (i.e. a company with worldwide public float of $700 million or more);

(ii)                While EGCs must comply with SEC-mandated quarterly and annual disclosures, they would be exempt from Section 404(b) Sarbanes-Oxley requirements regarding auditor attestations of management’s assessment of its internal controls, for a transition period of up to 5 years.  EGC management would still need to establish and maintain internal controls over financial reporting and its CEO and CFO would still need to certify the company financial statements;

(iii)               Allows EGCs to provide audited financial statements for the two years prior to registration rather than three years.  Within a year of an IPO, the EGC would report three years’ worth of financial statements;

(iv)              Provides exceptions to rules on mandatory audit firm rotation;

(v)                Exempts EGCs from certain requirements under Dodd-Frank legislation such as the say on pay requirements and disclosure of median compensation ratios of all employees compared to the CEO.  EGCs would still comply with corporate governance and listing requirements including board member independence rules;

(vi)              Provides for more communications and information flow to investors and special provisions for providing draft registration statements for non-public review.  On April 10, 2012, the SEC Division of Corporate Finance issued FAQs addressing questions relating to the confidential submission of registration statements;

(vii)             Provides special exemptions in connection with solicitation and advertising to accredited investors;

(viii)           Establishes new thresholds for registration; and

(ix)              Sets forth special rules for a “Crowdfunding” exemption-Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure. This allows for aggregate sales to all investors up to $1 million using web-based platforms (up to the greater of $2000 or 5% of the annual income/net worth of such investor (with additional requirements)).

Start-ups and emerging growth companies should take the time to explore the JOBS Act and the related guidance being issued.  The new law may address a particular hurdle previously faced which would allow certain companies to move forward and grow.