Readiness
Any transaction is going to include an element of due diligence and, in today’s market, a good amount of it. This involves investors’ advisors (such as lawyers, tax advisors and accountants) asking questions and reviewing various information relating to your business. Typically this information is uploaded to an online file sharing platform, usually referred to as a data site. This review exercise is time and resource intensive (see 2 below!) but there is a lot you can do in advance to smooth this process:
- Work with your own advisors to prepare for this as much as possible in advance. Your own financial advisors and lawyers in particular, can give you a typical list of due diligence questions which you can use as a framework for building your datasite.
- Consider from the point of view of the reviewer – although file names and a filing system may make perfect sense to you, will they to me? Try to organise your information so that a third party could work out the contents of a document without having to open it. Use a formal online data room rather than just file sharing. In the context of a funding round, they are not expensive and the short-term inconvenience will be outweighed by the subsequent benefits.
- Be open in your disclosures. Your investors will be working with you for a number of years, so be clear with them both in your conversations and disclosures about the risk areas for your business. Anticipate the awkward questions.
Resource
Any transaction will be time intensive, requiring material input from senior decision makers and a lot of administration. We often see business underestimate this time commitment, resulting in one or two key people becoming bottle necks for all important information flow.
The most effective way to deal with this is to make sure you have the right resource available – senior decision makers can sometimes get bogged down in the admin of due diligence questionnaires and building datasites. Having some extra help to deal with the administration will free up the right people for the key discussions, management presentations and negotiations where their input is most critical.
Regulation
In the digital assets and blockchain space, external investors and buyers are – particularly in today’s environment - likely to include financial institutions, whose appetite for risk when it comes to their regulatory environment is low. Regulatory compliance will be a key focus of due diligence and we have seen investment rounds fail because businesses have out of date advice, or advice which is no longer relevant as the business has pivoted to meet new needs.
Regulatory compliance is critical to ensuring a successful transaction. You should talk to your lawyers on this topic, but a few items to consider:
- Bring historic advice up to date. Regulation of digital assets and blockchains moves quickly, and what worked a year ago may not work now.
- Advice should fit the jurisdictions you operate in and where your customers are (and not just where your legal entities are incorporated). Just because something is permitted in one country, does not mean it is permitted in all countries. In the US, regulation varies state-by-state.
- Advice should match your current business model. We often see businesses in the digital assets and blockchain sector whose business models have evolved (sometimes quite quickly). This can often mean that prior regulatory advice is no longer relevant because the business now operates on a different model.
Regulation does not just cover financial services though. Institutional investors and buyers will often look very closely at how you comply with regulatory topics such as sanctions, data protection, anti-bribery and corruption and money laundering. This is a constantly evolving area, and so investors and buyers will be looking to see well thought out and tailored policies and procedures, which are applied day-to-day.
Hogan Lovells is uniquely placed to advise on Transactions in the digital assets and block chain space. Our global team of regulatory and transactional lawyers has deep experience advising investors and investees, buyers and sellers in this asset class.
Authored by Simon Grimshaw.
