What does the legal opinion cover?
Takeaway: The legal opinion covers a variety of topics but the most important one by a mile is the capitalization. Investors want assurance that the company’s lawyers have diligenced the cap table and are comfortable standing behind the numbers.
Legal opinions are sometimes given by a company’s law firm to assure investors about the legality and enforceability of the transaction. A legal opinion is a written statement provided by the company's legal counsel, addressing specific legal matters related to the financing. In this post, we will discuss the key aspects typically covered in a legal opinion for venture capital financings.
Capitalization
A capitalization opinion is an essential component of a venture capital legal opinion, which provides investors with assurance regarding the company's capital structure. It confirms the accuracy and completeness of the startup's capitalization table, verifying the number of authorized and outstanding shares of each class of stock, along with the rights, preferences, and privileges attached to them. Additionally, it attests to the validity of any issued stock options, warrants, and convertible securities. By providing this capitalization opinion, the company's legal counsel ensures that investors have a clear and accurate understanding of the startup's ownership structure and the impact of the new financing on existing stockholders.
Valid Issuance of Preferred Stock
One of the primary concerns for investors in a venture capital financing is the valid issuance of the preferred stock being offered. The legal opinion confirms that the preferred stock has been duly authorized and, upon issuance, will be validly issued, fully paid, and non-assessable. This assurance provides investors with confidence that their investment is legally sound and protected.
Company's Good Standing
The legal opinion verifies that the company is in good standing in its state of incorporation. This means the company has met all the legal requirements and filings mandated by the state, such as the payment of franchise taxes and the filing of annual reports.
Enforceability of Definitive Agreements
The legal opinion addresses the enforceability of the definitive agreements executed in connection with the financing, such as the stock purchase agreement, investors’ rights agreement, right of first refusal and co-sale agreement, and voting agreement. The legal counsel confirms that these agreements have been properly executed and delivered and are binding obligations on the parties.
Compliance with Securities Laws
Investors want assurance that the financing complies with applicable securities laws. The legal opinion confirms that the offer and sale of the preferred stock comply with federal and state securities laws, including any registration or exemption requirements.
No Conflicting Agreements
The legal opinion states that the financing does not conflict with any existing agreements or legal obligations of the company. This includes the company's charter documents, material contracts, and any applicable laws or regulations.
Regulatory Compliance
If the startup operates in a regulated industry, the legal opinion may address the company's compliance with applicable laws and regulations, such as licensing requirements, privacy laws, and industry-specific regulations.
Conclusion
A legal opinion in venture capital financings provides investors with critical assurances about the legality and enforceability of the transaction. Key aspects typically covered in a legal opinion include capitalization, the valid issuance of preferred stock, the company's good standing, enforceability of definitive agreements, compliance with securities laws, and confirmation of no conflicting agreements. By addressing these issues, legal opinions help build investor confidence and pave the way for a successful financing.