Investment Lawyers
Why Investment Lawyers Do More Than Follow The Law
For any large business, in the modern world, investment lawyers are needed. They not only assure that all of your deals are fair and compliant with the law but help with your company’s financing almost directly. Investment lawyers do this by making sure that deals fall through without any suspicion and also to get your money back from a fraudulent corporation if you have invested in one. They keep your investments safe, informative, and profitable. So why do they have to go above and beyond in their line of work? And how come they only work for large corporations? Here we’ll cover what they bring to the table, and how.
Why Study to Become Investment Lawyers?
If you’ve already spent time or even finished a bachelor’s degree in law then you might consider entering the field of Investment Lawyers. One thing you can do is work for a bank and eventually go to business school. This can be tricky to pull off since most banks don’t take fresh graduates when it comes to attorneys at least. If you do want to do this but find trouble doing so, taking a few years under a law firm should just about be enough help to enter the field. Assuming it was the other way around, then having financing experience and moved over to law it might be easier to become an investment lawyer. To be an Investment lawyer however you don’t really need to go to business school unless your specialization is completely unrelated.
Being a lawyer, in general, is already pretty good as the average annual salary in the US is $145,300 as of 2019. There’s no need to worry about not living well as an investment lawyer. Specifically, though the hourly pay for an investment lawyer can range between $200 to $450 an hour. This service includes the asking of questions, any legal advice, and drafting of any documents of any legal or financial nature.
What is Needed to Become an Investment Lawyer?
One important aspect that we touched on earlier is the specialization you take as a lawyer. Of course, eventually, you’ll want to pick exactly what you’ll specialize in, which can be venture capital, security, private equity, or private market, more on that later. Preferably you would’ve taken corporate law, this will get you the best odds of being taken in. If however, you took something like intellectual property, environmental, criminal, health care, or any other type of law then it might be a bit difficult. The reason for this is that corporate lawyers are well-versed in business and can gain an extra set of skills to become investment lawyers. But those that are not involved in the business sector, becoming investment lawyers can get difficult.
If you did specialize in any of the other given fields of law you can still become an investment lawyer. However, you will probably need to put in a few years and work in the financial sector to gain trust. This is all because employers want someone fit for the job, and knows the ins and outs of a business.
It’s also good to stay in touch with contacts you’ve made since they can help you out. Finding places that need you or directly refer you to any place in need of investment lawyers is a great way to seek out opportunities in this field. Finding work in specific fields can also prove helpful like dealing with a lot of tech companies instead of just approaching banks. This can give you an edge in technology-focused investment firms.
How to Handle interviews
The most important aspects that you need to sell to your employer are your financial abilities and your familiarization with the specific laws. Having strong financial skills is still important as you’re going to help out with making contracts and doing investigations on possible mismanagement.
Because of this, you not only need to know the laws but also how to mess with the finances in a company. This will ensure that you can spot fraud or possible mismanagement. Letting your employer know you have these skills is all you have to do as these are the most important parts of the job as investment lawyers.
Two Different Fields of Work For Investment Lawyers
We covered earlier how you could specialize further from corporate law into investment lawyer-specific fields. Now let’s look in detail at the different fields for investment lawyers.
Two general groups cover similar types of cases. These two are venture capital and private equity, and security and private market laws. Let’s go over what each of these even is and as a lawyer what kind of work you can expect entering these fields.
Venture Capital and Private Equity Law
This area of law focuses on private investment, specifically for funding or providing startup capital. Of course, depending on the level of investment the regulations vary but they all fall under both venture capital and private equity laws.
Venture Capital Laws
On the surface, venture capital funding agreements work similarly to loans or equity investments. Venture capital has a very different group of business expectations, legal terms, and systems. So while loans and equity investments where the expected returns are from interest over several years with predictable growth, venture capital financing expects rapid growth from the new business that it chooses to invest in. This means that the returns are extremely high from the business as its growth is rapid. Because the returns are potentially volatile, typically the investors work much more closely with the company it has invested in, in both legal and practical terms.
Since venture capital funding contracts pretty much need the venture capitalist to care about the company they invested in, it creates a situation where the venture capitalist actively helps the company grow as this helps them both predict and increase the potential returns they can receive. Of course, legally these investors still have to follow securities laws that do apply in venture capital funding. The best way a venture capitalist can secure their returns besides helping the company comes down to the terms that they agree on. Typically this will be in the form of having part of the company owned by the venture capitalist.
Private Equity Laws
Private equity is a form of investment where the investor buys out an existing business. The main goal of this is to increase the value of the company they bought out. This is usually done by helping increase profits and growth through any possible means. Then after a few years of doing this, the investors sell back their shares of the company to make their profits.
Private equity laws are the laws that dictate what is allowed within this idea of buying out companies to sell them back. This is just an investment whereby the time you sell the shares back you make a profit. An important part of private equity law is that the company is not publicly traded, hence the private part. The main difference between private equity and venture capital is that private equity relies on established companies.
There is also how private equity deals have the investors gain a majority hold on the company shares. While venture capital deals are for startup companies and still see the company in control. In cases of private equity deals, the regulations are more strict typically involving securities laws and similar law requirements.
What do Investment Lawyers do for Venture Capitalists and Private Equity Investors?
Investment lawyers help with the negotiations between the investor and the company. This determines several things like how much cash will be contributed as well as where these investments should go.
One of the main aspects is making sure that both parties conform to the law. This means that the investment lawyer will make a finance document and help in building a financial and legal structure for the company.
Day-to-Day Duties of Investment Lawyers
As mentioned previously, investment lawyers create financial and legal documents to maintain fairness among investors and companies. They are responsible for creating or drafting the following.
- Term Sheets – The term sheet specifies what it is the company and investor are agreeing to for the investment. This includes the agreement of investment, considerations for the financial structure, corporate governance, and liquidation.
- Investor Rights Agreement – This section highlights all of the investor’s rights’ as shareholders of the company. An investor rights agreement also considers minority investor rights. This part will define all the financial disclosure requirements, observer rights, and what rights the investors have when it comes to inspection of the company or raising concerns.
- Stock Purchase Agreement – The stock purchase agreement specifies any terms and conditions that come with purchasing the company’s shares.
- Amended and Restated Certificate of Incorporation – The amended and restated certificate of incorporation is completed and given right before a venture capital funding deal is allowed to go through. This officially states any of the requested changes to the business structure and corporate governance. It also states that both parties agree with the stock purchase agreement, investor rights agreement, and any other venture capital transaction documents.
Within these financial documents, there are also key terms and provisions. These are subject to change based on the parties involved, the situation, and as assessed by the investment lawyers present:
- Anti-Dilution Protection – This protects all existing investors during any attempt at venture capital financing. This is up to the investment lawyers. Mainly though it gives investors in the company before the venture capital financing to still participate in any future financing to prevent any dilution.
- Right of First Refusal – This allows the option for any existing shares held by current shareholders to be sold to other parties. For venture capital and private equity financing, it is allowed that the company has the right of first refusal when it comes to the sale of the stock of the current shareholders. And several certain stockholders can do vice versa, having the right of first refusal to the investing company in case of selling existing shareholder’s stock. Existing stockholders can also choose to withhold the right of first refusal on any new issuances. Right of first refusal is a countermeasure to ensure that any parties involved can have a bit of leeway.
- Right of Redemption – This gives the investor the ability to demand that the company it’s invested in buys back the shares at a specific price. This is either outright stated or determined by a formula. This can only be used under specific circumstances that will vary depending on the investment lawyer and parties involved.
- Restrictive Covenants – Typically only used in early-stage documents or unusual situations investments, restrictive covenants do their best to limit the actions that the company can take without receiving express permission from a specified person or group. This can be the investor or board of directors. A restrictive covenant may be many things such as spending caps, sales of important company assets, share issuances, debt issuances, and dividends. The main reason why restrictive covenants are used is to defend venture capital investors from any mismanagement or future risk.
- Tag-Along Rights – Tag-along rights aim to provide a certain level of protection for investors with smaller shares. This is done by highlighting their rights to partake in any sale of shares done by majority shareholders to third parties. This participation right is typically on a pro-rata basis.
- Drag Along Rights – If there is an event where a specified percentage of shareholders elect to sell their shares, drag-along rights may apply. Drag along rights make it so that this majority of shareholders require that the remaining shareholders also participate in the selling of these shares.
- Subsequent Round Protections – Subsequent round protections are designed to ensure that all the earlier investors have several maintained rights. These are enumerated during subsequent rounds of funding.
- Board Seats – These seats are typically a topic of intense negotiation because becoming a member of the board comes with many ongoing inputs on the actions of the company. Alongside this, is overseeing actions done by the executive team.
- Merger, Acquisition & Other Major Corporate Events – These are a special set of provisions typically reserved for mergers, acquisitions, and other major corporate transactions. This is defined by a specific set of rules that need to be approved. They will highlight specific economic outcomes for the future of the shares.
- Key Person Clause – A key person clause, also referred to as a key man clause. Investment lawyers’ goals are to assist in protecting investors. This is done by keeping an eye on their investment and maintaining that any key individuals or groups of individuals are kept in the company. This is because these people are referred to as key employees and are seen as necessary for the successful operation of the company. The most common person to receive a key employee status is usually the founder of a venture capital-funded operation. The clauses are also used to ensure that the co-founders and other potential key members stay with the company to protect the investor’s investment of venture capital funding in them. This is done not only by keeping them in the company but also by highlighting many requirements that they must meet. These can vary and are up to the investment lawyer to decide alongside the investor. This can include things like how many working hours they must meet, or how quickly their goals need to be met. Upon failure for any key employee to meet these requirements, the investors are no longer obligated to continue the investments in the company. This is to help secure the expected returns that the investor is working towards with the company.
- Registration Rights – This is to ensure that the investor’s shares will be usable in the future. This is done as registration rights will make sure their preferred share will convert to a public stock, which can be traded in the general market.This right is important for the investor as only the company is allowed to make the decision to be publicly traded. This is done when the company chooses to register its company securities. However there are two main types of registration rights, these two are demanding rights and piggyback rights. For demand rights, it permits the investors to require the company to register their shares with the SEC. This will make it so that their company’s stock can be traded on the general market. Now, this might sound like a simple move but registering with the SEC takes a lot of time and is very expensive for a company. Of course, there are many limitations in place with the use of the demand registration rights. One of the more ordinary ones is that there is a specified amount of time before an investor is allowed to exercise demand registration rights. As for piggyback rights, it allows for investors to require the company to allow the investors to participate in a public offering started by the company. These rights limit the investors from registering with the SEC. What it does is allow the investors’ shares to be included in any public offering the company decides to initiate and partake in. The limitations held on piggyback rights by the company are for example with limiting how much of the investor’s shares are to be registered for sale.
- Lockup Period – The purpose of a lockup period is to dictate that an investor has a certain amount of time to wait before selling or trading their shares. This only applies after a recent transaction has been made. A common amount of time for a lockup period to apply is between 90 and 180 days. This is discussed between the investor, the company, and the investment lawyers. Keeping anyone who holds the company’s stock and has financed a recent transaction to wait the specified time from financing repeatedly is done to secure company security as doing this helps build confidence as it negates insiders. This is done to prevent insiders from financing and selling their shares immediately as this damages the faith of potential buyers in the company.
Security or Capital Market Laws
Security of capital market laws is the laws that govern and regulate any issuances of security. A security is defined as a financial instrument that is typically made to create profit for a business with the use of investors in the business. Security laws highlight what the corporation is to do to be able to receive these investments from public investors. This is to safeguard both the company and those who would want to invest in said company publicly.
Security in the financial world is an investment. These are offered by corporations to help finance and raise capital for their business. Security can come in many forms. An example of security is bonds, mortgages, and loan packages. Because of this, securities are by nature meant to finance a business or to allow investors to invest in a business.
Naturally, any investors who buy securities aim to profit off of the transaction. And the corporations that sell said securities want the money from these investors to build capital. Since securities are an important part of business, there are security laws to keep this intact. Security laws make it so that this part of the business can operate fairly for all those who are involved. These laws typically only cover public trading, however, there are several private scenarios where they can apply.
The need for security laws is because of the stock market crash of 1929. This led to lawmakers creating new legislation for securities. What the lawmakers saw was that many large companies weren’t able to meet the promises they made to their potential buyers.
This inaccuracy in claims made it so that any investors were fooled as they lacked the appropriate information to make wise investments in these companies. So the lawmakers at the time made rulings to provide more information to the public. This was to make it fair for both the investors and companies. That way companies that did have promising futures would receive investment from investors that could reasonably make these decisions as some of the companies’ information was public.
Because of the way the U.S. is, there are many federal laws as well as state-specific ones. The main federal security laws are the Securities Act of 1933 and the Securities Exchange Act of 1934. These apply throughout the U.S. Investment lawyers then work with their clients, whether they be investors or companies, on how to ensure and implement the rules that apply with public trading.
Types of Security Laws
There are a few types of security laws in place as it covers all transactions in the public market. They are transactional, regulatory, litigation, and administrative.
- Transactional security laws – To be able to offer security. The corporation needs to assure that the investment for the offer is prepared. Investment lawyers in this case help advise their clients how exactly they should go about the public exchange. This involves preparing the documents and negotiating terms. It is then discussed as to how the investment will go through, the investment lawyer then reviews the documents for their client and proceeds with the investment.
- Regulatory securities law – The goal of regulatory security laws is to make it so that clients can more easily comply with dozens upon dozens of state and federal regulations. As a transaction is made many regulatory filings need to be fulfilled both before and after the public transaction. These filings and statements must be prepared for quarterly and yearly cycles. They are to contain mandatory information disclosures. This helps investment lawyers with assisting their clients to comply with the regulatory processes by being able to review these mandatory disclosures.
- Litigation securities law – In cases where there are accusations flung around in the buying and selling of securities investment lawyers become litigators. They prepare all filings needed for court and perform the traditional activities when it comes to litigation. These include discovery, motion practice, and trial.
Typically litigation cases end up in arbitration so investment lawyers or more specifically security lawyers must be adept at arbitration. Investment lawyers may represent either side of a corporation or investors. If the investors believe that the corporation is a suspect of fraud or has failed to meet any of the security regulations, they may seek help. Investment and security lawyers can help them in chasing after the corporation to demand reparations. Vice versa if a company is to rely on investment lawyers as they can be used to defend themselves against accusations of fraud. - Administrative securities law – On top of what has been covered in transactions, regulations, and litigation, there is also the practice of security laws that concern administrative hearings. In the case where the Securities and Exchange Commission or SEC suspects fraud, they can bring a civil action to an administrative law judge. This judge will come from the SEC itself. This SEC judge will hear out the suspicions of the non-compliance of the security laws. Investment lawyers can and will work both for or against clients and the SEC in defending the corporations or seeking possible violations on behalf of the SEC.
How Investment Lawyers Help a company in Security and Capital Market Laws?
The main thing investment lawyers and security lawyers can do for their clients, whether they are investors or corporations, is guide them through the regulations. Though they do vary from state to state, here are a number of the most prevalent and important federal ones.
- Securities Act of 1933 – This act sees to it that all corporations that choose to participate in public selling of investments must register with the SEC. This goes for every investment they receive and sell. The act also calls for mandatory disclosures from the corporation to give adequate information for investors to decide if they wish to invest or not.
- Securities Exchange Act of 1934 – For all of the stock exchanges and trading that are handled and regulated by the Securities Exchange Act of 1934. It does not matter if any investment made was good, all it requires is that the corporations must do so lawfully. This Act’s main purpose is to give any private party the right to bring forward a case if they find the corporation to be a suspect of fraud. This is unlawful on the part of those who issued the security.
- National Securities Markets Improvement Act – The National Securities Markets Improvement Act or NSMIA is an update that adds to the existing securities laws, it was passed in 1996. The main purpose of the NSMIA is to help streamline and make the security laws more organized and uniform.
The body that oversees all of this is The Securities and Exchange Commission or SEC. This is a federal government agency made up of five commissioners and a couple of hundred employees. They are stationed in all the large cities across the U.S.
The SEC does its best in maintaining fair trading in the public market. To achieve this they enforce the security regulations and bring civil enforcement proceedings or case litigations to the U.S. Department of Justice. A part of the federal laws calls for the five SEC commissioners to be from different political parties. This is to ensure that there can never be a sole political party that holds control of all SEC activities.
Beyond the cases of criminal penalties for fraud, the SEC is also allowed to look for civil remedies. This can include revoking licenses, fines, and injunctions. The SEC may also issue subpoenas to further investigations and carry out more work.
What to Look For in Investment Lawyers?
Investment lawyers as we have covered do more than just make sure you are on the right side of the law. They also advise any of the terms for when you make acquisitions or any sort of investment. Helping point you towards better deals and making it so you can make the most possible money in these situations are all responsibilities of investment lawyers. Besides all of this, since they work with all of your companies large transactions they keep it all confidential.
With all of these factors, it is important that not only is your investment lawyer familiar with finance and the laws around it. But they must be willing to put in the hours since making every deal work well is their whole job. And finally finding investment lawyers that you can trust with all of your company’s information is vital. So beyond hardworking and intelligent, they must also be completely trustworthy.