Transactional Law Clinics Help Start-Up Microbrewery Raise Capital

Christine Marshall, J.D. ’14

By: Christine Marshall, J.D. ’14 

Recipe for an exciting start-up: begin with advanced fermentation technology, create an innovative craft microbrewery, and mix-in local urban growers. This is the strategic plan of one of our clients. In Fall 2013, the Transactional Law Clinics (“TLC”) helped this start-up company launch a small private placement offering to raise capital for its operations. The company is raising investment capital to start the first craft brewery of its kind in Somerville, Massachusetts. In addition to being a production facility and retail taproom, the company’s headquarters will also serve as a local foods hub by hosting a range of small urban growers in a communal space for manufacturing and direct retail. Within the next few years, the company anticipates launching a unique business incubator to drive development of interdisciplinary ventures in fermentation technology. Because the client expects to be continuing its private placement offering at the time this article was scheduled for publication, the company is not named in this article.

Four local entrepreneurs founded the business in January 2013. Three of the four are graduate students at MIT, Harvard, and Yale, and the fourth is a software engineer. Collectively, the four founders have a wealth of expertise in microbiology, computational biology, and engineering. They located their operations in Somerville because they believe that the local craft beer market is underdeveloped. As they explained, Somerville is a city of 76,000 people and the most densely populated township in New England, but does not have any production craft breweries. The founders estimate that the size of the Somerville beer market is about $50 million annually, assuming a price of $20 to $40 per gallon and beer consumption at the 2012 Massachusetts average of 26.2 gallons per legally-aged person.

TLC Student Karl Sigwarth ’14 began working with the company in Spring 2013 to draft an operating agreement.  The agreement was finalized in September 2013, but the Founders’ plans were unexpectedly delayed due to the federal government shutdown on October 1, 2013.  The company was unable to file its application for a federal brewing permit with the Alcohol and Tobacco Tax and Trade Bureau as planned, causing a setback of about a month.  With production delayed, the company reached out to TLC for help raising capital to bridge the gap.  Christine Marshall, TLC Student ’14, worked on the case, and was supervised by Joe Hedal, Deputy Director of TLC.

TLC recognized that there were limited choices available for fundraising since the company did not want to amend its operating agreement until after the permitting process was complete and, as a start-up, could not access traditional bank loans at desired rates.  With TLC’s guidance, the company is conducting a convertible note offering.  This structure enables the company to raise funds from investors immediately and repay them with equity when the notes convert.  Christine helped the company draft a convertible note and private placement memorandum, use an exemption from federal securities laws, and comply with applicable state securities laws.  Christine commented:  “While Rule 504 of Regulation D under the federal securities laws applies as expected, I was surprised by the variation in state securities laws.  In terms of the convertible note purchase agreement, I tried to keep the document as simple as possible since the company intends on offering the securities to friends and family investors.  I found it interesting and challenging to look at complex precedents from other deals and decide what concepts should be included in the note agreement to appropriately balance precision and completeness with simplicity. Overall, I think that both the PPM and convertible note purchase agreement will serve the client’s interests well and enable them to conduct a successful offering.”

The case was a wonderful opportunity for TLC students to learn how to conduct a small private placement offering and navigate securities laws, while providing valuable services to local entrepreneurs.  Professor Brian Price, Director of TLC, stated: “This case represents the kind of experience students are able to gain assisting clients to figure out and implement solutions in fast moving real time contexts handling challenging multi-doctrinal legal matters. Not only did Christine benefit from the learning experience but so too did her clinical student colleagues.”

The company is well on its way to achieving its capital target to fund its near-term operations and looks forward to a grand opening in Spring of 2014.  As one of the founders observed, “We never imagined that the government shut-down this past fall would delay our federal permitting and put our plans on hold.  The work and guidance provided by TLC and Christine was a great help to us as we navigated through this obstacle.”  TLC is pleased to have the opportunity to serve the local community and provide students with a variety of meaningful assignments that provide practical legal training while in law school.