Private Equity/Venture Services

Ice Miller has been one of the most active law firms in the private equity industry over the last decade, representing both entrepreneurs building great companies and the private equity firms and individuals that invest in them.  We have extensive experience with all types of funds (formations and operations); mezzanine and senior secured financings; leveraged buyouts, roll-ups, build-ups, and consolidations; divestitures and exits; and complex litigation on behalf of investors and privately financed companies.  In addition, over the past 10 years, Ice Miller has represented hundreds of emerging growth businesses in various industries on such matters as entity formation, capitalization, capital raising, alternative financing, intellectual property rights and protection, growth and exit strategies, corporate governance, tax matters, and many other legal issues that are critical to the growth and success of an emerging company.
 
Read the complete profile of the Private Equity and Venture Services Practice Group.

Janice Wilken is a partner at Ice Miller LLP and editor of Ice Miller's Private Equity/Venture Services blog.  Her primary area of concentration is corporate law. She also handles securities law compliance matters for public companies.

Companies Know About Data Security Problems, But Fail to Address Them

A newly published study of corporate data security policies has revealed that the majority of corporate technology executives have little knowledge of and control over sensitive data leaving their organization and have ignored the need for enhanced data security controls, even in the wake of large-scale data security breaches making national headlines.

Read the entire data security and privacy concerns article.

Registration is open for Indianapolis' Sixth Startup Weekend, an intense 54-hour brainstorming and business-building event that will be held April 8-10 at the Purdue Research Park of Indianapolis. The program, which is part of a global movement, typically results in the creation of several new businesses. It will culminate with a presentation on Sunday, April 10, 2011 as company founders have an opportunity to pitch their ideas for prizes and potential investors.

During Startup Weekend, a diverse group of developers, business managers, startup enthusiasts, marketing leaders, graphic artists and others gather to create and develop innovative new products, projects and companies. Many times, a viable company emerges, such as Pocket Tales, a company that turns reading books into an interactive game; ShoutNow Inc., an automated messaging system; StatsSquared Inc., a Twitter analytic tool; and EatDrink.it, a restaurant rating tool. It is an opportunity to connect with other professionals, and perhaps find a co-founder to turn ideas into reality.

Ice Miller LLP is proud to sponsor the Indianapolis Startup Weekend on April 8-10. To learn more, please visit the Indianapolis Startup Weekend's Web site or read Entrepreneur's article about Startup Weekend.

Although the political headlines of many states seem to indicate taxes might be on the rise, it appears that Indiana's state government might not be following suit, at least not when it comes to investments made in certain early stage Indiana companies. Indiana State Representatives Jerry Torr (District 39), Kathy Heuer (District 83) and Rebecca Kubacki (District 22) introduced House Bill No. 1008, which proposes certain pro-investment changes to Indiana's Venture Capital Investment Tax Credit legislation. House Bill No. 1008 was approved by the Indiana House of Representatives on February 17, 2011 and was then referred to the Indiana Senate where it is being sponsored by Brandt Hershman (District 7), Luke Kenley (District 20), and Jim Arnold (District 8).

Read the entire article about House Bill No. 1008 authored by Ice Miller attorney Bo Ramsey.

Who would imagine that you could, with the magic of the Internet and from the comfort of your living room, sell or buy shares of later stage private companies that you hear about over the Internet (or for some on TV or in old fashioned newspapers or magazines)?  Companies like Groupon, Twitter and Facebook come to mind.

For employees and other owners of promising young companies that are not yet public (or possibly may never be publicly-held), these new online “markets” are a potential source of liquidity.

Read the entire online trading article authored by Ice Miller attorney Joseph DeGroff for Inside INdiana Business.

A Year of Lessons Learned From 2010

Of all the pitfalls and challenges that businesses faced in 2010, the most overlooked issues may have been data security and the collection of consumer data, whether it be online or offline.  Although there were fewer data security breaches reported last year than the previous year, frequency is distinct from severity, and businesses must remain vigilant.  Data security issues are the quintessential iceberg: a recognized threat at the surface level, but capable of causing ruinous damage in a worst-case scenario – an average $6.6 million in costs and expenses according to one study.

Read the entire data security article authored by our data security attorneys.

We started 2011 with news around the proverbial water cooler focused on Facebook's $50 billion valuation.  According to the Associated Press, the social networking site's value is about equal to the open market value of more well-established companies like Boeing and Kraft.  The blogosphere has been ablaze with some calling the deal "genius" while others calling for greater Securities and Exchange Commission scrutiny of these types of secondary market transactions.  While the terms of the deal may be subject to interpretation, there is little doubt that companies in the tech sector will continue to make front page headlines in 2011.

Recently, we've seen a number of Indiana's tech companies rise in prominence.  In fact, in December 2010, Lead411 announced its list of the Technology 500. To be eligible, companies must be privately held, headquartered in the United States with over $1 million in revenue in 2009.  The rankings were determined by calculating the highest percentage revenue growth between 2007 and 2009.  Seven Indiana companies made the list to include Scale Computing (ranking an impressive second overall), BlueLock, Vontoo, Iasta, ExactTarget, Angie's List and Delivra.  Indiana is home to more companies on the list than Massachusetts, New York or Texas.

So, what makes the Crossroads of America so attractive to emerging tech companies and what drives their growth?  Some of the contributing factors are access to capital, competitive tax credits/incentives and a commitment to develop and commercialize advanced technologies in Indiana.

Read the entire article.

On Dec. 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the Act).  Among a variety of other matters, the Act includes an extension of favorable tax treatment relating to certain investments in small businesses made on or before Dec. 31, 2010.  The deadline for such investments to be eligible to receive favorable tax treatment is now Dec. 31, 2011.  

The previously enacted Small Business Jobs and Credit Act of 2010 created a temporary exclusion for 100 percent of any gain recognized on the sale of qualified small business stock (QSBS) acquired after Sept. 27, 2010, and before Jan. 1, 2011.  In addition, during this period, the excluded gain is not treated as a preference item for purposes of alternative minimum tax, although other limitations may apply.  The Act results in an extension of a potentially significant federal income tax benefit to non-corporate investors, essentially reducing to zero the federal tax rate for capital gains on QSBS to which the change applies.

Read an overview of the QSBS provisions.

If you have questions regarding the Act or QSBS provisions, please contact Kristine Danz or Janice Wilken.

After a detailed review of Lanham Act “exceptional case” jurisprudence in U.S. circuit courts, the U.S. Court of Appeals for the Seventh Circuit ruled Nov. 23 that abuse of process is the underlying principle for the finding and the consequent award of attorneys' fees to the prevailing party.

The court affirmed a district court's award of attorneys' fees to the defendant in the instant case after finding that the plaintiff made the claim solely in an attempt to force the defendant to supply products at a lower price.

Read more about the case and Ice Miller's involvement.

A proposed rule has been introduced by the U.S. Securities and Exchange Commission to exempt advisers of venture capital funds and other funds with less than $150 million in private fund assets under management from the registration requirements of the Investment Advisers Act of 1940 that were enacted in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Without this exemption in place, as of July 21, 2011, all advisers of private fund assets regardless of size would be required to be registered under and comply with the Investor Advisers Act of 1940.

Read the entire alert on the proposed exemption rule.

The Small Business Jobs and Credit Act of 2010 (the Act) was signed into law by President Obama on Sept. 27, 2010.  The Act includes a temporary exclusion for 100 percent of any gain recognized on the sale of qualified small business stock (QSBS) acquired after Sept. 27, 2010, and before Jan. 1, 2011.  In addition, during this period, the excluded gain is not treated as a preference item for purposes of Alternative Minimum Tax, although other limitations may apply.  This change results in a potentially significant federal income tax benefit to non-corporate investors, essentially reducing to zero the federal tax rate for capital gain on QSBS to which the change applies. Investors only have until Dec. 31, 2010, to take advantage of this tax benefit.

Read the entire article written by Kristine Danz about the Act's temporary provisions.

In the wake of the recent financial crisis, on May 20, 2010, the U.S. Senate voted to adopt sweeping financial reform.  The proposed Restoring American Financial Stability Act of 2010 would:

• create a number of new governmental bodies designed to protect investors;
• severely limit government bail-outs;
• streamline bank regulation;
• regulate trading of derivatives;
• increase regulation of hedge funds and credit rating agencies;
• affect executive compensation;
• undertake some reform of the SEC;
• strengthen the Federal Reserve; and
• increase regulation of securitization and municipal securities transactions. 

But, could it also affect the availability of private equity funds?

The bill aims to end so-called "too big to fail" bail-outs.  The Volcker Rule is part of that effort.  The rule prohibits banks and their affiliates from investing in or sponsoring hedge funds and private equity funds and otherwise requires limited relationships with hedge funds and private equity funds.  Non-bank financial institutions supervised by the Federal Reserve will also have restrictions on their hedge fund and private equity investments. 

Banks and other regulated financial institutions provide a significant portion of the capital for private equity funds.  Without that capital, private equity funds will likely be smaller and less inclined to make investments.  In many instances, private equity dollars are available to companies seeking funding in circumstances under which traditional banks would not lend.  In those cases, the limited availability of private equity dollars could damage companies seeking funding.  Those companies may not be able to obtain funds for operations, strategic acquisitions or expansion if private equity money is not available.

While the financial reform bill has many legitimate purposes, it may have consequences that were not anticipated by the drafters.  Those consequences will affect not only private equity funds themselves but also companies that rely on private equity as a source of funding.

With the passage of the Patient Protection and Affordable Care Act and related reconciliation bills (the Act), it is time to explore what is really in the law.  Colleges and universities might be surprised to learn the number of opportunities available to them.  Everyone knows the Act includes individual and employer mandates regarding health insurance and imposes a broad range of new requirements on the health care industry.  But, in addition to those types of provisions, the bill is a veritable Christmas tree in terms of the grants and opportunities it makes available to businesses both within and outside the traditional health care field, particularly colleges and universities.

Each grant or program generally requires that the prospective recipient submit an application to the federal government.  The applications are generally submitted online through a government-sponsored Web site.

Read a summary of many of the opportunities available to colleges and universities under the Act.

Congratulations!  You're one of few.  The next step is to negotiate the commitment letter.  There was a great article about negotiating loan commitments in the January/February 2010 issue of Business Law Today.  The article was titled "Negotiating the Loan Commitment:  The Borrower's Perspective" and was authored by John N. Oest.  Below are some of the major points made in the article: 

• Negotiate your important points up front before signing the commitment letter.  You will probably not get another opportunity.
   
• Understand that the commitment letter likely contains a number of conditions to the bank's commitment, and few for the borrower.  Some commitment letters contain an express agreement by the borrower to borrow the funds.
• Negotiate basic financial terms in the commitment letter, including amount of loan, interest rate, maturity date, fees, financial covenants and method of calculation of interest.
   
• Understand at the commitment letter stage how much money will actually be available to you.  For example, if your loan is based on "80 percent of Eligible Accounts Receivable" or some similar formulation, you'll need to understand up front what constitutes an Eligible Account Receivable.  If you do not, you could end up with less money available to you than you expect.
   
• Work through the prepayment rights and obligations at the commitment letter stage.  You may want to prepay the loan, but may find it triggers penalties or  yield protection payments .  Also, you need to understand when you will be required to repay the loan.  Often, an equity raise or a sale of substantial properties outside the ordinary course of business will trigger a prepayment requirement.
   
• Look for a due-on-sale clause.  Most mortgages contain these provisions that require repayment of the loan upon sale of the property.  These may be subject to limited enforceability in some states.
   
• Change of control provisions prohibit transfers of shares of a privately-owned company if the transfer would result in specified percentages of change of ownership.  The borrower should ask for some specific exceptions, including permitting transfers among owners and their affiliates, transfers for estate planning purposes and others.
   
• The commitment letter will generally limit other debt and other liens.  You should negotiate to obtain some standard exceptions such as unsecured trade debt, subordinated debt, intercompany debt, purchase money debt and capital leases.  You may also want to try to get a general basket for unsecured debt in a maximum amount.  With respect to liens, you should negotiate to allow existing liens, liens imposed by operation of law, liens security purchase money debt and other liens. Depending on your company's structure, the lender may require guarantees of the loan.  You and the guarantors will need to understand the scope of those guarantees.  

 
The basic point is, don't take the commitment letter lightly.  The early stage is when the key terms of the credit are mutually established, so pay attention to the details of the commitment letter and negotiate the issues most important to you at this stage.

During the financial crisis, private equity, mezzanine and venture capital firms have spent a lot of time "cleaning house."  The financial crisis has made cheap debt less available and thus private equity and other firms are not able to complete deals with the huge leverage ratios that existed prior to the crisis.  So, they have taken a close, hard look at existing investments in order to determine which could be saved and have allocated resources appropriately.  

This sort of review has included, from a legal perspective, review of debt covenants and commercial contracts.  The firms have wanted to determine which of their portfolio companies are in danger of violating a financial covenant or failing to perform under a critical contract. 

Recent reviews have also included analyses of potential exit strategies in a down economy.  The potential strategies include the traditional options of bankruptcy, sale and IPO.  IPO's have been down sharply until very recently, so this option has not been given much consideration.  Sales have continued, but with valuations low, this is often not a favored option.  Bankruptcy is, as always, fraught with difficulties as firms consider the opposition of creditors as well as the value of their secured positions, if any.

Throughout the financial crisis, distressed investing has continued.  With the credit markets tight, private equity and other firms have taken some opportunities to fund companies that have not been able to get credit in the traditional credit markets.  These efforts persist, and the firms continue to focus sharply on the fundamentals of these companies in order to protect their investments. 

If you haven't read the thousands of pages of the current Senate-proposed version of the Patient Protection and Affordable Care Act (that's the formal name of the proposed healthcare reform bill), you might be surprised by the kinds of opportunities that are available for businesses.  This commentary may be a bit premature given that a bill has not been passed, but because the Senate-proposed bill is currently forming the basis for congressional debates, it could become relevant to businesses very soon.

Everyone knows that the bill would require universal health insurance and impose a broad range of new requirements on the healthcare industry.  In addition, the bill has a variety of grants and opportunities it makes available to businesses both within and outside the traditional healthcare field. 

There are numerous grant opportunities for states, and in many cases, the state can allocate funds through a bidding process.  Traditional healthcare organizations such as hospitals are eligible for a large number of grants and funded study and training projects.  Nonprofits have a number of opportunities available, too.  And colleges and universities also can take advantage of a wide range of potential grant and award programs.  Funds are also available for other businesses, such as grants to implement comprehensive workplace wellness programs or contracts to establish Web sites.

It will be an interesting road to see what happens to healthcare reform in the next weeks and months.  We will keep you posted on the funding opportunities that might be available for your business.

According to a recent survey of middle market companies in the southeastern United States, there may be a bit of a debt maturity crisis approaching.  AlixPartners conducted a study of 142 companies and found that there is approximately $6.3 billion in debt scheduled to mature in 2010.  In 2009, those companies had overall debt of $64 billion but generated revenue of only $59 billion.  This, along with a general shortage of working capital within the companies, points to a strong need for credit availability this year.

Now, we all know that the credit markets have opened up a bit.  Both 2009 and early 2010 have certainly been better than 2008.  However, they haven't opened up that much.  As a result, working capital management will be more important than ever as companies try to weather this storm.  According to the AlixPartners study, companies included in the study had only 8.9 days in working capital coverage.  The study stated, "Like the old saying goes, 'cash is king' – and both generating and husbanding cash through all means possible is going to be key for companies in this region this year, starting with having cash for debt service.  That's the only way to make sure this debt powder keg doesn't turn into a bomb."

Move over Sarah Palin. While "Going Rogue" may be the talk inside the beltway, there's a new book that has captured the attention of many on Wall Street: "The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis".  The author, Joshua Kosman, forebodes the possible collapse of many companies owned by private equity firms.  While it certainly isn't clear whether what Kosman's is prophesying about will in fact turn into a significant chapter in U.S. history books, it's an interesting read nonetheless.  A short excerpt on NPR can be found at:

http://www.npr.org/templates/story/story.php?storyId=120391729