By Lucy Parkinson, Director of Research, LSN

Earlier this year, we offered an in-depth exploration of foundations that provide funding to startup companies. Many foundations and patient groups are now interested in working with startup companies to fund projects that further their mission, and while many life science companies could benefit from approaching foundations for funding, there are certain criteria that foundations typically have to follow in order to bring their support for startup companies in line with their broader mission.

While each foundation is unique, here are a few criteria that we’ve repeatedly seen raised by foundations. If you’re pitching to a foundation for funding, you may wish to keep the following considerations in mind.

Will your company commit to supporting the foundation’s mission?

One fear shared by several foundations that we’ve spoken with is that they’ll provide capital to a startup company and that capital will then not be used in a way that benefits the foundation’s mission. For example, a foundation might provide financing to trial an asset in a specific indication area, but the startup may later pursue a different primary indication in order to access a more attractive market opportunity. This can be a particular frustration for foundations focused on rare diseases with few or no current treatment options. Similar situations may arise for foundations that have broader missions, such as supporting regional economic development or improving access to healthcare.

For this reason, foundations that support startups are often concerned about their ability to provide direction to a company, as well as financing. The foundation may wish to take a board seat, or to acquire rights to an asset they’ve funded in order to have a say in its future development process. To win the support of a foundation, it’s essential to demonstrate a commitment to their goals.

Can the asset be de-risked with a low-cost study?

As we reported previously, foundations generally focus on funding preclinical studies; when working with a startup company, the foundation’s goal is generally to produce evidence that will make the asset more attractive to financially motivated investors, who can then fund further development. If it’s possible to produce compelling proof of concept data with an exploratory study, a foundation may be very interested in your work.

Is the company developing a sustainable solution?

In the past, foundations have generally focused on basic research; if a foundation is interested in working with startups, it’s because they want to see the discoveries they’ve funded turned into cures that can be used by patients. However, in order to bring a product to market, it’s essential that the startup have the ability to become a sustainable business over the long term. While a VC might just be looking for one or two home runs in a broad portfolio of life science assets spread across different indications, a foundation wants every dollar to count in the fight against a rare disease. Therefore foundations sometimes fear that startup funding may be wasted due to the startup becoming reliant on philanthropic support, or failing to raise follow-on financing.

In addition to asking the kind of due diligence questions that you might expect from a financially motivated investor, the foundation might have concerns that include the ability of patients to access the product, and the willingness of other investors to finance the later stages of clinical trials.

Does this investment fit in with the foundation’s other programs?

While some foundations solely focus on funding medical research, many have a broader mission to care for patients with a particular disease; for these foundations, funding may be split between advancing medical knowledge and providing care to patients in the present. Foundations are often concerned about balancing these two goals when working with a startup company. Can the startup’s long-term financing needs be addressed without conflicting with the foundation’s other programs? Some foundations are wary of the conflicting demands of an investment that may generate ROI and their broader, purely charitable programs.

LSN has often stressed that CEOs will have to pitch in different ways to different types of investors; if you’re applying to a foundation for funding, the above points will guide you in positioning your company. Foundations often have significant value add as investors, with access to patients, key opinion leaders, and deep expertise in their fields; it’s important to understand what they will need from you in return for their support.

By Nicholas Civitarese, Research Analyst, LSN

Keeping up with the trends and changes of the investor landscape is no easy task. For fundraising companies, however, being familiar with the rules and regulations of raising capital is an important component of the process. On March 25, 2015, the Securities and Exchange Commission adopted a significant amendment to Regulation A in accordance with Section 401(a) of the JOBS Act. Having been largely ignored by most fundraising companies, with these changes Regulation A could become a viable alternative for those who can’t meet the costs or size requirements of an IPO.

Here’s what you need to know about the updated law.

Previously, fundraising companies could raise no more than $5 million in a 12-month period and were forced to comply with each individual state’s “blue sky laws.” These laws are designed to protect investors against securities fraud and require issuers to verify their financial data and register their offerings with each state in which the company is looking to raise funds. However, because each state has its own small but equally important stipulations, this can be a confusing, expensive, and time-consuming process for companies raising funds across multiple states.

Unlike Regulation D, which provides companies with a uniform code to follow because the securities are backed by the National Securities Markets Improvement Act, Regulation A relies on state regulators. State regulators are geographically close (and therefore accessible) to these investors and are also familiar with local economic factors. Thus, they’re considered to be in a better position than the SEC to protect investors when dealing with these types of offerings.

Previously, the low limit of funds ($5 million) that could be raised, in combination with having to adhere to each state’s unique laws, made Regulation A widely unpopular. But the updated version, or “Regulation A+” as it is frequently called, has been expanded to include two different tiers and reduces the involvement of state regulators.

Regulation A+ now allows issuers to sell securities to an unlimited number of non-accredited investors, provided they abide by a few stipulations. These stipulations vary depending on which tier the issuer chooses. Tier 1 is similar to the old Regulation A, while Tier 2 is the expanded offering. The changes have been summarized below.

Both Tiers

• Issuers are no longer limited to accredited investors – friends, family, and everyone in between is allowed to invest. Tier 2 prevents an investor from contributing more than 10% of their net worth.
• There is no longer a limit to the number of people that can make investments – therefore opening up the market to people of all income levels and creating the potential for many smaller investments.
• Unlike Rule 506(c) under the JOBS Act, Investors (not issuers) are now able to self-certify their net worth for the purposes of investment limits. Documentation is no longer required.
• Issuers are allowed to advertise and solicit their offering in any manner they see fit. This includes demo days, television commercials, social media, radio, or word of mouth.
• The issuer must file a disclosure document and their financials with the SEC and have them approved prior to making any sales. This “offering circular” will receive the same level of scrutiny as a Form S-1 in an IPO.
• Issuers are allowed to “test the waters” and see if there is an interest or market for their offering. This is useful for those who are afraid to gamble on fundraising expenses, such as the legal and accounting fees needed to create an “offering circular.”
• All securities issued are unrestricted and freely transferable; however, some issuers may choose to impose contractual limits to these transfers.
• Investment companies are NOT allowed to use Regulation A to raise capital.

Tier 1 – Similar to the old Regulation A

• Tier 1 issuers are still subject to state registration and qualification.
• They may raise up to $20,000,000 in a 12-month period.
• There can be no more than $6 million in secondary sales by affiliates, and they are limited to less than 30% of the total offerings for the first 12 months.
• The issuer must have their financials reviewed (not audited) by the SEC, in combination with the “offering circular.”

Tier 2

• May raise up to $50,000,000 in a 12-month period.
• Secondary sales by affiliates are limited to $15 million and to less than 30% of the total offerings for the first 12 months.
• Individual, non-accredited investors can only invest a maximum 10% of their net worth per Regulation A offering.
• The issuer is required to provide two years of AUDITED financial statements to the SEC, in combination with the “offering circular.”
• The issuer is required to create an annual disclosure filing, a semi-annual report, and a current report. These reports will require ongoing audited financials and are toned-down versions of a Form 10-K, Form 10-Q, and Form 8-K. The issuer is allowed to terminate these disclosures if the shareholder count drops below 300.
• The issuer is NOT required to abide by a state’s blue sky laws. This is a major advantage over Tier 1 because those issuers are required to register their securities in every state where they make an offer or sale. This benefit may be extended to Tier 1 in the future, depending on a review by the North American Securities Administrators Association.

With possible investments coming from a multitude of sources—such as venture capital, angel investors, and family offices—the changes made to Regulation A could make this one more tool in the toolbox for raising capital. LSN looks forward to updating our readership on further developments in the life science fundraising landscape.