While both categories are designed to identify investors capable of participating in higher-risk investment opportunities, qualified investors are subject to significantly higher financial thresholds and typically gain access to a broader range of investment vehicles.

Accredited Investors vs. Qualified Investors

An accredited investor generally qualifies based on income or net worth. The typical standards include:

• Annual income of at least $200,000 for an individual (or $300,000 jointly with a spouse); or
• A net worth of at least $1 million, excluding the value of a primary residence.

A qualified investor, by contrast, must meet much higher investment thresholds. Under standards derived from the Investment Company Act of 1940, a qualified investor typically must have:

• At least $5 million in investments for individuals, excluding primary residences and personal property;
• At least $25 million in investments for entities such as trusts, corporations, or partnerships.

Because of these higher thresholds, qualified investors are generally considered to have greater financial sophistication and the capacity to withstand potential investment losses.

Access to Exclusive Investment Opportunities

Qualified investors often have access to investment opportunities that are not available to the general public, including:

• Hedge funds
• Private equity funds
• Venture capital funds

These investment vehicles can offer the potential for higher returns, but they also involve greater risk and complexity. Regulators restrict access to these opportunities because they require investors who can both understand the risks and absorb potential financial losses.

Verification and Documentation Requirements

To participate in offerings restricted to qualified investors, individuals must undergo a verification process to confirm their eligibility.

This typically involves providing documentation such as:

• Brokerage account statements;
• Financial statements demonstrating investment holdings;
• Other documentation confirming ownership of qualifying assets.

Verification is often conducted by investment funds, financial institutions, or third-party verification services that specialize in reviewing investor qualifications. Accurate documentation protects both the investor and the issuer from potential legal issues.

Regulatory Protections and Disclosure

Even though qualified investors are considered more financially sophisticated, regulatory protections still apply. The U.S. Securities and Exchange Commission (SEC) imposes disclosure requirements designed to ensure transparency and reduce the risk of fraud.

Funds that accept qualified investors typically must provide detailed disclosures regarding:

• Investment strategies;
• Associated risks;
• Financial performance;
• Operational structures.

These funds may also be subject to audits and regulatory review to ensure compliance with federal securities laws.

Why Qualified Investor Status Matters for Private Placements

For companies conducting private placements, determining whether potential investors qualify as accredited or qualified investors is an important part of regulatory compliance.

Companies must perform appropriate due diligence to ensure that only investors who meet the financial and sophistication standards required by law participate in certain high-risk investment offerings.

These safeguards help:

• Protect less experienced investors from complex investment risks;
• Maintain integrity and stability in financial markets;
• Ensure compliance with federal securities regulations.

Legal Assistance with Private Placements

Private placement offerings require careful preparation of legal documentation and compliance with federal securities laws.

At Corporate Securities Legal, LLC, our attorneys prepare Private Placement Memoranda (PPMs) and related documentation for delivery to qualified prospective investors and assist companies throughout the private placement process.

The agreement typically specifies key details of the investment, including:

• The number of shares or securities being purchased;
• The price per share or unit;
• The total investment amount;
• Investor rights and limitations of liability;
• The intended use of investment funds;
• Confidentiality provisions and risk disclosures;
• The governing law and obligations of both parties.

A subscription agreement differs from a shareholder agreement, which governs the relationship between shareholders after they already own shares. Subscription agreements focus on the initial investment transaction, while shareholder agreements address long-term governance matters such as voting rights, board appointments, and restrictions on share transfers.

Role in Private Placement Transactions

Subscription agreements are most commonly used in private placements, where securities are sold without registering the offering with the U.S. Securities and Exchange Commission (SEC).

Private placements frequently rely on exemptions under Regulation D, including:

• Rule 506(b), which allows companies to raise capital privately without general solicitation;
• Rule 506(c), which allows limited advertising but requires stricter verification of investor accreditation.

These exemptions allow companies to raise unlimited capital from investors while avoiding the time and expense associated with registering a public offering.

However, companies must comply with certain requirements, including:

• Limiting participation to accredited investors or qualified investors;
• Taking reasonable steps to verify accredited investor status;
• Conducting the transaction in a private manner consistent with the exemption used.

Benefits for Investors

For investors, subscription agreements provide a structured framework that outlines the risks and responsibilities associated with the investment.

In many cases, investors participate as limited partners, meaning:

• Their financial risk is limited to their initial capital investment;
• They generally do not participate in day-to-day management of the business;
• Their liability does not extend beyond their invested capital.

This structure allows investors to provide funding while avoiding direct operational responsibility.

Advantages for Companies

Subscription agreements can be particularly valuable for companies seeking early-stage financing. Businesses that are not yet ready to attract venture capital firms or investment banks may still raise capital from private investors through private placement offerings.

Key advantages include:

• Avoiding the cost and complexity of SEC registration;
• Raising capital more quickly than through public offerings;
• Accessing private networks of accredited investors.

Potential Disadvantages

Despite their advantages, subscription agreements also present certain limitations compared with other investment arrangements.

Common drawbacks may include:

• Investors typically do not receive voting rights in company governance;
• Investments are often made in one lump sum, rather than through incremental purchases;
• The investment may lack liquidity because there is no public market for the securities;
• Investors may face limited transparency since private placements are not subject to the same ongoing disclosure requirements as public companies.

Because of these factors, investors often need to rely on contractual rights and direct communication with management to remain informed about company operations.

Why Legal Guidance Is Important

Subscription agreements can be complex and must be carefully drafted to address the unique needs of both the company and its investors. Properly structured agreements help ensure compliance with securities laws while protecting the rights and expectations of all parties involved.

The attorneys at Corporate Securities Legal LLP have extensive experience drafting and negotiating subscription agreements and advising clients on private placement transactions.

Contact Corporate Securities Legal LLP to ensure your investment agreements comply with securities regulations and effectively protect your financial interests.

When starting a business, advance planning can significantly reduce tax liability when the time comes to sell the company—whether through retirement, acquisition, or other liquidity events. The Qualified Small Business Stock (QSBS) exemption, authorized under Internal Revenue Code Section 1202 and enhanced by recent legislation, allows eligible business owners to exclude substantial capital gains realized upon the sale of their company stock.

For qualifying stock, business owners may exclude up to $15 million in gain above their tax basis when the business is sold, creating powerful long-term tax advantages for founders and early investors.

Key Benefits of the QSBS Exemption

The enhanced QSBS benefits apply only to stock purchased on or after July 4, 2025, and provide several important advantages.

Increased Exclusion Limits
Eligible shareholders may now claim up to:

• $15 million gain exclusion for qualifying stock acquisitions;
• An increase from the prior $10 million exclusion applicable to earlier stock purchases.

Reduced Holding Periods with Partial Benefits
The revised rules allow partial exclusions based on holding duration:

• 50% exclusion for stock held 3–4 years;
• 75% exclusion for stock held 4–5 years;
• 100% exclusion for stock held 5 years or longer.

Previously, shareholders were required to hold stock for at least five years to receive any exclusion benefit.

Higher Gross Asset Threshold
The qualifying company asset limitation has increased:

• From $50 million to $75 million in gross assets;
• Asset valuation is based on tax basis, not fair market value.

These benefits apply only to newly issued stock and do not apply to shares obtained through stock conversions or exchanges.

Company Eligibility Requirements

To qualify for QSBS treatment, a company must meet several structural requirements:

• The business must be organized as a C-Corporation;
• The entity must be organized and registered within the United States;
• Stock must be purchased directly from the corporation using money, property, or services;
• Purchases from existing shareholders do not qualify.

Entities such as LLCs, partnerships, and S-corporations are not eligible for QSBS treatment.

Active Business Requirement

The corporation must operate an active trade or business using at least 80% of its assets in operational activities. Passive investment companies do not qualify, although reasonable working capital reserves and research and development activities are permitted.

Certain industries are specifically excluded, including:

• Professional service firms (law, medicine, accounting);
• Banking, insurance, and financial services businesses;
• Farming and natural resource extraction companies;
• Hospitality businesses such as hotels and restaurants;
• Businesses primarily dependent on employee reputation or personal skill.

Calculating the QSBS Exclusion

Determining the available tax exclusion requires applying two limitations in a specific order.

Dollar Limitation
The maximum exclusion depends on the acquisition date:

• $10 million for stock acquired before July 4, 2025;
• $15 million for stock acquired on or after July 4, 2025.

Alternatively, shareholders may exclude gains equal to ten times their stock basis, recalculated annually—often benefiting founders contributing appreciated property.

Percentage Limitation
After applying the dollar limitation, the allowable exclusion percentage is determined based on holding period requirements.

When exclusions are less than 100%:

• Non-excluded gains are subject to a special 28% federal capital gains tax rate;
• Gains exceeding dollar limitations are taxed at standard capital gains rates.

Strategic Planning Opportunities

Proper planning can substantially increase QSBS benefits. Effective strategies may include:

• Timing and structuring stock issuances;
• Property contribution planning;
• Multi-entity ownership structures;
• Integration with family and estate planning objectives.

Early legal and tax planning ensures eligibility requirements are preserved long before a liquidity event occurs.

The securities lawyers at Corporate Securities Legal LLP advise founders, investors, and growing companies on structuring businesses to maximize QSBS eligibility and long-term tax efficiency.

Contact Corporate Securities Legal LLP to schedule a consultation and learn how advance planning can help you capture the full benefits of the QSBS tax exemption.

After a few years of declining merger and acquisition (M&A) activity, transaction volume is beginning to rise again, making this an important time for companies to prepare for potential deal opportunities. Whether a company intends to expand through acquiring additional products or services or seeks to combine with a complementary business, preparation is essential to successfully execute a transaction when opportunities arise.

Advance preparation positions a company as a viable and attractive candidate for merger and acquisition activity.

Increased Capital Driving M&A Activity

Recent dry powder surveys demonstrate that significant funding remains available for mid-market and smaller M&A transactions. “Dry powder” refers to uninvested cash or liquid assets held by investors—particularly private equity and venture capital firms—for future deployment.

These funds are maintained to allow investors to:

• Quickly pursue acquisition opportunities;
• Respond to favorable market conditions;
• Navigate economic downturns without liquidating existing investments;
• Compete effectively for strategic transactions.

Current estimates place available dry powder at approximately $1.3 trillion, with nearly 24% held for four years or longer. This prolonged capital reserve creates mounting pressure on private equity firms to deploy funds efficiently in an increasingly competitive marketplace.

Modern M&A participants now include:

• Private equity firms;
• Sovereign wealth funds;
• Direct corporate investors;
• Large family offices.

Evolving Deal Structures and Market Confidence

Today’s M&A environment increasingly relies on creative transaction structures designed to allocate risk and preserve financing flexibility. Common approaches include:

• Club deals involving multiple investment partners;
• Private credit financing arrangements;
• Strategic risk-sharing between buyers and sellers;
• Enhanced due diligence practices.

Improved financing conditions, increased corporate confidence, and expectations of a more relaxed regulatory environment have further contributed to renewed acquisition activity.

Programmatic M&A as a Growth Strategy

Research conducted by McKinsey & Company indicates that companies engaging in programmatic M&A strategies consistently outperform competitors. Successful acquirers commonly demonstrate several shared characteristics.

Expansion Beyond Core Markets

Effective acquirers frequently pursue transactions outside their traditional business lines, targeting:

• Adjacent sectors within the same industry;
• Emerging markets offering higher growth potential;
• Strategic expansion opportunities beyond core operations.

By anticipating natural growth slowdowns in established markets, programmatic acquirers position themselves to capture future expansion opportunities.

Strategy-Driven Decision Making

Successful dealmakers remain disciplined in following clearly defined acquisition strategies. Rather than pursuing transactions opportunistically, they evaluate deals based on long-term value creation and competitive positioning.

Prioritizing Value Over Purchase Price

High-performing acquirers focus on whether a transaction creates measurable value rather than whether it offers the lowest acquisition price. Even higher-cost acquisitions may be justified when projected synergies and operational efficiencies exceed total transaction costs.

Active Portfolio Management

Leading acquirers also recognize the importance of divestitures. Strategic capital reallocation—including both acquisitions and dispositions—often distinguishes companies that maximize shareholder value from those focused solely on expansion.

Why Preparation Matters

The manner in which a company approaches merger and acquisition activity can ultimately determine the success or failure of the combined enterprise. Companies that maintain organized financial records, clear strategic objectives, and sound legal structures are better positioned to respond quickly when acquisition opportunities arise.

The securities lawyers at Corporate Securities Legal LLP have extensive experience guiding clients through M&A strategy, transaction structuring, and financing solutions designed to support successful business combinations.

Contact Corporate Securities Legal LLP to discuss how proper preparation can position your company to capitalize on today’s growing M&A opportunities.

Shareholders of public companies do not manage the day-to-day operations of a company, but they retain one of the most important governance rights—the ability to elect members of the Board of Directors. Through informed voting decisions, shareholders influence corporate strategy, oversight, and long-term policy direction.

The number of directors and the length of their terms are established in a company’s articles of incorporation or bylaws. As a result, shareholders understand the governance impact of their votes prior to participating in director elections.

Director Nominations and Shareholder Voting Rights

Director candidates are typically recommended by company management; however, shareholders also have the right to nominate alternative candidates whom they believe better represent their interests or strategic vision for the company.

Director elections occur during the company’s annual shareholder meeting. Because relatively few shareholders attend these meetings in person, most voting occurs through proxy authorization.

Historically, proxy voting created structural disadvantages for shareholders participating remotely.

Limitations of the Traditional Proxy System

Under prior rules, proxy voters were required to select between competing ballots:

• A proxy card supporting management’s full slate of director nominees; or
• A proxy card supporting the dissident shareholder slate.

This system effectively created a winner-take-all voting structure, favoring management nominees. Shareholders voting by proxy were unable to mix and match candidates from competing slates, even though shareholders attending meetings in person retained that flexibility.

The disparity frustrated proxy voters and limited meaningful shareholder choice in contested director elections.

SEC Adoption of Universal Proxy Card Rules

To address this imbalance, the U.S. Securities and Exchange Commission (SEC) adopted final rules in 2021 requiring the use of universal proxy cards in contested director elections.

Under these rules, proxy cards must include all duly nominated director candidates, regardless of whether they are proposed by management or dissident shareholders. The amendments allow shareholders voting by proxy to select their preferred combination of nominees in the same manner as shareholders voting in person.

Key Requirements Under the Universal Proxy Rules

The SEC’s amendments impose several procedural and disclosure requirements on both registrants and dissident shareholders, including:

• Providing proxy cards listing all management and dissident nominees;
• Exchanging advance notice identifying director nominees;
• Complying with established filing deadlines;
• Meeting minimum solicitation requirements applicable to dissident parties;
• Following standardized presentation and formatting requirements for proxy cards;
• Clearly specifying shareholder voting options;
• Disclosing the effect of a shareholder’s decision to withhold votes from nominees.

To ensure that shareholder-nominated candidates demonstrate meaningful investor support, dissident parties are also required to solicit shareholders representing at least 67% of the voting power of outstanding shares.

Implications for Corporate Boards and Executives

Universal proxy rules place proxy voters and in-person voters on equal footing, significantly increasing shareholder influence in contested elections. As a result, companies must prepare more carefully for annual meetings and potential activist challenges.

Corporate leadership can mitigate risk by:

• Maintaining transparency in governance practices;
• Providing shareholders with clear and comprehensive information regarding director qualifications;
• Demonstrating board effectiveness and strategic alignment;
• Engaging proactively with shareholder concerns prior to proxy contests.

Well-informed shareholders are more likely to evaluate candidates based on experience, integrity, and strategic value rather than name recognition or tenure alone.

The Importance of Strong Board Governance

Effective board composition remains central to sustaining corporate strategy and protecting shareholder value. Universal proxy voting increases accountability while reinforcing the importance of maintaining a qualified, independent, and strategically aligned Board of Directors.

The securities attorneys at Corporate Securities Legal LLP have long advised corporate boards on governance preparedness, proxy compliance, and shareholder engagement strategies. Proactive legal guidance helps companies preserve board stability while ensuring compliance with evolving SEC regulations governing contested director elections.

Whether you are launching a startup or expanding an established business, the need for outside financing often arises at critical moments. You may be seeking capital to bridge a temporary slowdown, fund growth initiatives, or pursue new market opportunities. Regardless of the reason, securing outside investment requires careful preparation and a strategic approach.

Investors expect companies to be organized, transparent, and legally prepared. Taking the proper steps in advance can significantly improve your chances of a successful financing transaction.

Building the Right Advisory Team

Outside professionals play an essential role in preparing a company for financing. Accountants, market analysts, and business planners each bring valuable expertise, but the most critical advisor throughout the financing process is an experienced business law attorney.

Your attorney will not only draft and negotiate key transaction documents, but will also identify the information and records required for investor due diligence. Proper legal guidance helps ensure that your materials are complete, accurate, and presented in a way that supports negotiations for fair and balanced investment terms.

Understanding and Negotiating the Term Sheet

One of the first and most important documents in an outside financing transaction is the term sheet. The term sheet outlines the basic economic and control terms of the proposed investment and serves as the framework for the final financing documents.

Key provisions commonly addressed in a term sheet include:

• Company valuation;
• Ownership dilution;
• Liquidation preferences;
• Voting rights and board representation.

Although often described as “non-binding,” many term sheet provisions have lasting consequences once accepted. A clear understanding of industry norms and the legal implications of these terms is essential. Your attorney can help you evaluate these provisions and prepare the definitive agreements that follow the term sheet.

Preparing a Clear Capitalization Table

A capitalization table provides a comprehensive snapshot of the company’s ownership structure. It identifies all issued and outstanding equity interests and the rights associated with each class or instrument.

A well-prepared capitalization table typically includes:

• Common and preferred stock;
• Stock options and option plans;
• Convertible notes and other convertible securities;
• Warrants and rights to purchase equity;
• Ownership or control interests in other business entities.

Pro forma capitalization tables are particularly valuable, as they model various financing scenarios and illustrate the dilutive impact of proposed deal terms. Investors rely on this information to understand their prospective ownership position and economic return.

Organizing Corporate and Legal Records

Investors will conduct thorough legal due diligence before committing capital. As part of this process, they will expect access to well-organized corporate records and documentation, including:

• Formation documents, articles of incorporation, and bylaws;
• Equity issuance records and shareholder agreements;
• Material contracts, leases, notes, and loan agreements;
• Employment, consulting, and confidentiality agreements;
• Board and shareholder meeting minutes and resolutions;
• Judgments, liens, mortgages, and regulatory filings.

Investors will also evaluate whether their investment could trigger conflicts with existing agreements or create liens on company assets. Clear documentation demonstrates good corporate governance, compliance, and operational reliability.

Why Legal Preparation Matters

Proper preparation for outside financing reduces risk, strengthens negotiating leverage, and builds investor confidence. Companies that fail to address legal and structural issues early often face delays, reduced valuations, or unfavorable deal terms.

The business lawyers at Corporate Securities Legal LLP have extensive experience guiding clients through the preparation and execution of outside financing transactions. Their strategic approach helps companies present themselves professionally, protect their interests, and move efficiently toward closing.

Contact Corporate Securities Legal LLP to schedule a consultation and begin preparing your business for successful outside financing.

When two companies begin exploring a potential merger or acquisition, each must gain access to sensitive information about the other in order to evaluate the proposed transaction. At the same time, both parties must protect their own proprietary information, including operational data, strategic plans, financial records, and confidential information relating to customers, suppliers, and employees.

A properly drafted, legally binding non-disclosure agreement (NDA) allows both objectives to be achieved. By governing how confidential information is shared and used, an NDA enables meaningful due diligence while preserving each company’s competitive position.

Why NDAs Are Essential in the M&A Process

An NDA should be one of the first agreements executed once merger or acquisition discussions begin. It establishes trust between the parties, defines clear rules for handling sensitive information, and ensures that proprietary data is not misused or disclosed prematurely.

The primary purpose of an NDA in the M&A context is to ensure that confidential information exchanged during due diligence:

• Remains protected from disclosure to third parties;
• Is used solely to evaluate the proposed transaction;
• Is not exploited for improper purposes, such as soliciting employees or interfering with customer or supplier relationships.

By addressing these risks early, an NDA helps prevent significant legal and competitive harm.

Defining Confidential Information

To be effective, an NDA must contain a clear and comprehensive definition of what constitutes confidential information. Overly broad or vague language can expose a company to unfavorable interpretations and weaken enforcement.

A well-drafted NDA should specifically identify categories of protected information, including:

• Financial information – Historical financial statements, projections, budgets, cost structures, revenue breakdowns, pricing models, and bidding information.
• Strategic and operational data – Marketing plans, sales data, go-to-market strategies, competitive positioning, market research, and internal processes.
• Products and intellectual property – Current and future products, patents, trade secrets, software, research and development materials, product roadmaps, engineering drawings, and technical specifications.

Careful itemization reduces ambiguity and strengthens the enforceability of the confidentiality obligations.

Exclusions From Confidential Treatment

An NDA should also clearly identify information that is not considered confidential. Typically excluded are:

• Information that is already publicly available or later becomes public through no fault of the receiving party;
• Information the receiving party already possessed prior to disclosure;
• Information independently developed by the receiving party without use of the disclosed materials.

These exclusions help ensure that confidentiality obligations are fair and legally defensible.

Use Limitations and Duration of the NDA

An NDA should narrowly limit the use of disclosed information to evaluating the potential merger or acquisition. Confidential information may not be shared simply to educate the receiving party about the disclosing party’s operations or for any unrelated business purpose.

The duration of the NDA depends on the outcome of the negotiations:

• If the transaction closes
  The NDA is typically replaced by new confidentiality provisions governing officers and employees of the combined entity.
• If negotiations fail
  Confidentiality obligations generally continue indefinitely.

In the event of unsuccessful negotiations, the NDA should also require:

• The return or destruction of all confidential materials;
• Continued non-disclosure to third parties, except where disclosure is legally required or expressly authorized;
• Recognition that disclosure does not transfer ownership or diminish the disclosing party’s rights in the information.

Why Careful Drafting Matters

A well-drafted NDA signals that both parties are serious, prepared, and professionally advised. It sets the tone for negotiations and provides essential legal protection throughout the M&A process.

The securities attorneys at Corporate Securities Legal LLP bring decades of experience advising clients on NDAs and complex M&A transactions. Their disciplined approach and industry knowledge help clients protect their interests while advancing deals efficiently and strategically.

Contact Corporate Securities Legal LLP to ensure your NDA is carefully structured, enforceable, and aligned with your broader transaction goals.

Raising capital through a private offering, rather than an Initial Public Offering (IPO), offers certain advantages, including lower visibility and reduced regulatory burdens. However, private offerings are still subject to strict legal requirements and carry meaningful risks.

Failure to comply with all applicable restrictions can result in the loss of the private offering exemption, exposing the issuer to significant regulatory and liability consequences.

Regulatory Framework for Private Offerings

The primary exemption from the IPO registration requirement is governed by Regulation D under the Securities Act of 1933. To maintain this exemption, issuers must strictly comply with the following requirements.

Key Requirements Under Regulation D

• Securities may be offered only to accredited investors
• Up to 35 non-accredited but sophisticated investors may participate, provided enhanced disclosures are made
• The issuer must take reasonable steps to verify accredited investor status
• All information provided to investors must be truthful, complete, and not misleading; federal anti-fraud rules apply
• A private placement memorandum (PPM) is typically used instead of a prospectus
• Securities are generally subject to transfer restrictions, often lasting six to twelve months

Common Risks Associated With Private Offerings

Despite their advantages, private offerings involve several risks that issuers must carefully manage.

Risk of Losing the Exemption

• Failure to comply with any Regulation D requirement—including general solicitation rules, investor qualification standards, or disclosure obligations—can invalidate the exemption
• Loss of the exemption may require rescission of the offering and repayment to investors

Investor Rights and Liability Exposure

• Investors may gain the right to demand their investment back if disclosures were misleading or omitted material information
• Both federal and state regulators may limit or prohibit future capital-raising efforts
• Private investors are often more willing than public shareholders to pursue direct legal action

Governance and Control Risks

• Investors with veto rights can exert substantial influence over company operations
• Sophisticated investors frequently demand enhanced protections and oversight
• Board seats and preferred rights are commonly required as a condition of investment

Risks Posed by Sophisticated and Accredited Investors

Accredited investors, particularly when dealing with inexperienced issuers, may leverage their position to secure favorable terms.

Common issues include:

• Company undervaluation or acceptance of unfavorable deal terms
• Early credit or liquidation preferences that deter future investors
• Expectations of ongoing financial reporting beyond legal requirements
• Reputational damage from a poorly structured or unsuccessful offering
• Demands for preferred equity, control provisions, or board representation

The Importance of Professional Guidance

Choosing between a private offering and an IPO requires a comprehensive understanding of the regulatory requirements, costs, risks, and long-term operational consequences of each approach.

The attorneys at Corporate Securities Legal, LLP have extensive experience advising business owners and companies seeking to raise capital and ultimately go public. Our team helps clients:

• Evaluate private offering versus IPO strategies
• Structure offerings to maintain regulatory exemptions
• Minimize liability exposure
• Protect long-term control over company operations

Careful planning and experienced legal guidance can help ensure that a private offering delivers the intended benefits without jeopardizing the company’s future. We invite you to contact our attorneys to discuss your goals and develop a strategy tailored to your business.

When companies decide to merge, one of the most critical—and often contentious—issues is determining the value being exchanged. While it may seem like a straightforward financial exercise, company valuation is rarely simple. Multiple valuation methodologies exist, and parties often disagree over which factors deserve the greatest weight.

Differences in assumptions, strategic objectives, and risk tolerance frequently lead to divergent views of value.

Identifying Valuable Company Assets

Tangible assets are generally the easiest to value. These assets are often assessed based on purchase price, adjusted for depreciation. However, a company’s true value extends well beyond its physical assets.

Intangible Assets and Internal Value Drivers

Key non-tangible components that significantly affect valuation include:

• Intangible assets
• Customer relationships
• Intellectual property
• Brand reputation
• Pending litigation
• Contingent liabilities

External Factors Affecting Valuation

A company’s value is also influenced by conditions outside the organization, including:

• Broader market conditions
• Regulatory changes
• Industry trends
• Macroeconomic factors

Common Valuation Methods in Mergers

Disputes often arise not because one party is “wrong,” but because different valuation methods reflect different strategic priorities. Common approaches and points of disagreement include:

• Overstating projected cost savings from combining operations
• Valuing intellectual property, patents, and brand equity
• Selecting accounting models such as comparable transaction analysis versus discounted cash flow analysis
• Assessing the negative impact of legal disputes, environmental exposure, or pension liabilities
• Valuing the company based solely on total assets minus liabilities
• Relying on valuations from comparable mergers within the same industry

Each approach can produce materially different outcomes.

Why Buyers and Sellers Value Companies Differently

Understanding valuation disagreements requires examining each party’s objectives.

Seller Perspectives

Sellers often emphasize future growth and recent performance trends. Their valuation typically reflects optimism about continued expansion and the realization of projected synergies.

Buyer Perspectives

Buyers, lacking deep historical insight into the target company, tend to adopt a more conservative posture. They focus on:

• Market volatility
• Competitive pressures
• Downside risk
• Integration challenges

Additional Factors Driving Divergent Valuations

Several structural issues also contribute to valuation differences:

• Discount rates: Higher perceived risk leads to higher discount rates and lower valuations
• Standalone vs. combined value: Determining a company’s standalone value is usually easier than estimating post-merger synergies
• Lack of perfect comparables: No two transactions are identical, and differing interpretations of market data often yield different results
• Tax treatment: Tax consequences vary depending on deal structure
– Earn-out payments are generally treated as ordinary income
– Asset purchases may qualify for capital gains treatment
– Buyers and sellers often benefit differently from each structure

Maximizing Value in a Merger

The ultimate goal of a merger is to create greater value than either company could achieve independently. Achieving that outcome requires realistic assumptions, disciplined analysis, and careful planning.

The attorneys at Corporate Securities Legal, LLP bring financial insight, industry knowledge, and strategic judgment to help clients achieve accurate valuations and informed decision-making. Our team actively identifies and mitigates risks that are frequently overlooked, including:

• Unrealistic cost-saving or revenue assumptions
• Rapid industry shifts
• Competitor responses
• Changing customer expectations
• Inadequate due diligence
• Post-merger operational integration challenges

With experienced legal and strategic guidance, companies can navigate valuation disputes effectively and position themselves for long-term success following a merger.

How is the definition of an accredited investor being expanded?

The proposed rule will amend the definition of an “accredited investor” as follows:

With regard to individuals, the proposed rule would add the term “spousal equivalent” to the definition of a spouse, and give accredited investor status to individuals:

• that have certain professional certifications or designations or other credentials; or
• whose status as a private fund’s “knowledgeable employee.”

With regard to entities, the proposed rule would expand the list of entities, including, but not limited to:

• entities that meet an investments test; and
• family offices with at least $5,000,000 in assets under management and their family clients.

Background

Under the U.S. federal securities laws, a company that offers or sells its securities must register the securities with the Securities and Exchange Commission (“SEC”) or qualify for an exemption from registration.[1] Regulation A+ and crowdfunding provide an exemption from registration that allow the company to raise capital to with unaccredited investors, however, the process for preparing these offering documents can oftentimes be just as burdensome on the company as registering the securities. Rule 506 of Regulation D provides additional exemptions from registration; for these exemptions, we recommend only raising capital from accredited investors. If the SEC is successful in broadening the scope of who is considered to be an accredited investor, more investors will hold accredited investor status, making it easier for private companies trying to raise capital using Rule 506.

What is an accredited investor?

Rule 501 of Regulation D of the Securities Act of 1933 (the “Securities Act”) defines an accredited investor. In summary, an accredited investor is: an individual that has a net worth of $1,000,000, excluding their primary residence; or an individual that has an annual income of $200,000 or more (or $300,000 combines with their spouse) for two years and has a reasonable expectation of meeting those income requirements in the upcoming year. Additionally, Rule 501 defines specific types of entities; and directors, executive officers, or general partners of the issuing company as being accredited.

Public Policy

The SEC depicts the “accredited investor” definition as a central component of Regulation D, stating that it is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary.”[2] Considering this definition, it’s clear why the SEC would like to expand the definition of an accredited investor to “identify more effectively institutional and individual investors that have the knowledge and expertise to participate in our private capital markets and therefore do not need the additional protections of the registration under the Securities Act.”[3]

Wilson Bradshaw LLP is a boutique securities law firm in Irvine, California and New York City. We help businesses solicit investors for both public and private companies in a compliant manner. We restrict our practice to securities law, focusing on private and public offerings and SEC enforcement work.

[1] U.S. Securities and Exchange Commission, Accredited Investor, Fast Answers (Nov. 27, 2017), https://www.sec.gov/fast-answers/answers-accredhtm.html.

[2] U.S. Securities and Exchange Commission, Report on the Review of the Definition of “Accredited Investor”, Files (Dec. 18, 2015), https://www.sec.gov/files/review-definition-of-accredited-investor-12-18-2015.pdf.

[3] U.S. Securities and Exchange Commission, 17CFR Parts 230 and 240, Release Nos. 33-10734; 34-87784; File No. S7-25-169, Amending the “Accredited Investor” Definition (Dec. 18, 2019), https://www.sec.gov/files/review-definition-of-accredited-investor-12-18-2015.pdf.

Section 4(a)(2) of Rule 506(b) provides a “safe harbor” for companies that comply with certain requirements. In addition to a prohibition from using general solicitation to market securities, the requirements of the exemption include:

• A company may sell its securities to an unlimited number of “accredited investors” and up to thirty-five other purchasers
• A company’s information provided to accredited investors must not violate antifraud provisions of federal securities laws, and must not contain false or misleading statements
• Companies must make themselves available to prospective purchasers to answer questions

Rule 506 does not limit how many people the issuer may offer securities. However, offers to a significant number of people may be considered a general solicitation resulting in the loss of the private placement exemption.

Once you have lost your exemption then you must file a registration statement in order to register the securities. Alternatively, you must halt fundraising for six months before you can start a new offering of the same type.

For example, sending an email to every person in your contacts list stating that you are planning to raise money soon might qualify as general solicitation if the message was sent to enough people to be considered public and the email’s text was related to the offering.

According to an analysis conducted by Kilpatrick Townsend & Stockton LLP of a recent SEC disciplinary action opinion, the SEC has a “zero-tolerance” policy regarding general solicitations. (See: https://www.lexology.com/library/detail.aspx?g=ca800c6d-58dd-42dc-99c8-d3092f9e75490 ) According to the facts of the disciplinary action, an issuer went ahead and accepted funding from accredited investors they had a pre-existing relationship with after they were informed that their prior newspaper advertisement was general solicitation. The issuer thought they could continue with the offering because they had complied with all other requirements of the Rule 506(b) safe harbor. However, in the disciplinary action opinion, the SEC explicitly stated that regardless of whether the other terms with complied with, the company lost its ability to rely on 506(b) as soon as they generally solicited.

See: https://www.crowdfundinsider.com/2017/05/100000-blow-reg-d-offering-general-solicitation/

Making sure you are in full compliance with all SEC regulations and procedures is the primary focus of the law firm of Wilson, Bradshaw & Cao, LLP. Your success in going public and staying in good standing with the SEC will bring lasting benefits to your company.