National Business Incubation Association; Your source for knowledge and networks in business incubation

Staying on the right side of the SEC

by Meredith Erlewine

February 2001

Most professionals involved in incubation focus on selecting clients, identifying their needs, and developing ways to best serve them. Developers of for-profit incubators also must decide how much equity to take in client firms, how to compensate incubator staff in relation to the upside that the most successful client companies may realize, and how to generate revenue and guarantee a return on investment.

Many factors figure into the final equation – including compliance with rules and regulations of the U.S. Securities and Exchange Commission (SEC). To find out exactly what the dynamic is between U.S.-based for-profit incubators and the SEC, NBIA interviewed Christopher Wilson, a partner at longtime member Pillsbury Madison & Sutro LLP, in Costa Mesa, Calif. Wilson specializes in securities law and counsels for-profit incubators,

According to Wilson, if a for-profit incubator does not act prudently and work closely with an attorney who is versed in key securities issues, the incubator may inadvertently be an investment company and thus be forced to comply with the Investment Company Act of 1940 – the same rules, regulations and laws applicable to mutual funds. That "mutual fund" designation brings burdensome requirements that may limit an incubator's business operations and impose additional costs.

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Keywords: evaluation -- incubator performance

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