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I enjoyed reading this article by Thomas Hauser on some of the purported discrepancies that exist in some of the drug testing procedures implemented in the sport of boxing by some of the preeminent anti-doping agencies in the world.On December 30, 2009, Manny Pacquiao sued Floyd Mayweather Jr., Floyd Sr. (Floyd’s father), Roger Mayweather (Floyd’s uncle and trainer), Mayweather Promotions, Golden Boy Promotions CEO Richard Schaefer and Oscar De la Hoya for defamation. Pacquiao’s complaint, filed in the United States District Court of Nevada, alleged that each of the defendants had falsely accused him of using, and continuing to use, illegal performance-enhancing drugs.Mayweather has gone to great lengths to position himself in the public mind as a “clean” fighter. For his three most recent fights (against Shane Mosley, Victor Ortiz and Miguel Cotto), he has mandated that he and his opponent be subjected to what he calls “Olympic-style testing” by the United States Anti-Doping Agency (USADA).USADA is an independent non-governmental sports drug-testing agency whose services are utilized by the United States Olympic and Paralympic movement. It receives approximately $10,000,000 annually in public funding, more in years when the Olympics are held. USADA was paid a reported $100,000 per fight for the drug-testing services it performed in conjunction with Mayweather’s outings.Victor Conte is one of the most knowledgeable people in sports with regard to the use of, and testing for, performance-enhancing drugs. In 1984, Conte founded the Bay Area Laboratory Co-Operative (BALCO), which was at the heart of several much-publicized PED scandals. In 2005, he pled guilty to charges of illegal steroid distribution and tax fraud and spent four months in prison. After being released from incarceration, Conte moved to the side of the angels and is now a formidable advocate for “clean” sport.“Mayweather is not doing Olympic-style testing,” Conte states. “I’ve never liked the use of that phrase. ‘Olympic’ means 24-7-365. To be effective, drug testing has to be 24 hours a day, seven days a week, 365 days a year. The benefits that an athlete retains from using anabolic steroids and certain other PEDs carry over for months. That means athletes can develop their strength and speed base early and the benefits of PED use will last after that use has been discontinued. If you wait to start testing until eight to 10 weeks in advance of a fight, which is what Mayweather does, that’s not Olympic-style testing. Who knows what Mayweather or his opponent has been doing during the previous six months?”Tests for a Mayweather fight generally begin around the time of the kick-off press tour heralding Floyd’s annual ring appearance. Floyd and his opponent agree to keep USADA advised as to their whereabouts and submit to an unlimited number of unannounced blood and urine tests. Other details (such as what drugs are being tested for, how samples are analyzed and what happens in the event of a positive test) are murky.Mayweather and his promoter (Golden Boy Promotions) have gone to great lengths to propagate the notion that they’re in the forefront of PED testing to “clean up” boxing. In return, they’ve reaped a public relations bonanza. But some members of Team Mayweather haven’t been content to simply disseminate a positive message with regard to Floyd’s conduct. They’ve chosen instead to brand Pacquiao (Mayweather’s chief rival) as a PED user.Floyd Mayweather Sr. declared, “[Pacquiao] can’t beat Clottey without that sh*t in him. He couldn’t beat De la Hoya without that sh*t. He couldn’t beat Ricky Hatton without that sh*t. And he couldn’t beat Cotto without that sh*t. I don’t even think he could beat that kid from Chicago [David Diaz] without that sh*t. He wouldn’t be able to beat any of those guys without enhancement drugs.”Not to be outdone, Roger Mayweather proclaimed, “This mother**ker don’t want to take the test. That’s why the fight [Mayweather vs. Pacquiao] didn’t happen. He got that sh*t in him. That’s why he didn’t want to take the test.”References to Pacquiao’s alleged PED use by the other defendants in the defamation action were more subtle. But their message was similar.The court case moved slowly as litigation often does. Last year, the claims against Schaefer and De la Hoya were dismissed with the consent of Pacquiao’s attorneys after Richard and Oscar apologized and stated that they had never meant to suggest that Manny was using performance-enhancing drugs.The Mayweathers continued to fight the complaint. Floyd’s conduct in failing to appear for a scheduled deposition on several occasions displeased the court and infuriated Pacquiao’s attorneys. The case looked like it would be a long battle of attrition. Then things changed dramatically.Under standard sports drug-testing protocols, when blood or urine is taken from an athlete, it’s divided into an “A” and “B” sample. The “A” sample is tested first. If it tests negative, end of story. If the “A” sample tests positive, the athlete then has the right to demand that the “B” sample be tested. If the “B” sample tests negative, the athlete is presumed to be clean. But if the “B” sample also tests positive, the first positive finding is confirmed and the athlete has a problem.On May 20, 2012, a rumor filtered through the drug-testing community that Mayweather had tested positive on three occasions for an illegal performance-enhancing drug.More specifically, it was rumored that Mayweather’s “A” sample had tested positive on three occasions and, after each positive test, USADA had found exceptional circumstances in the form of inadvertent use and gave Floyd a waiver. This waiver, according to the rumor, negated the need for a test of Floyd’s “B” sample. And because the “B” sample was never tested, a loophole in USADA’s contract with Mayweather and Golden Boy allowed the testing to proceed without the positive “A” sample results being reported to Mayweather’s opponent or the Nevada State Athletic Commission (which had jurisdiction over the fights).In late-May, Pacquiao’s attorneys heard the rumor. On June 4, 2012, they served document demands and subpoenas on Mayweather, Mayweather Promotions, Golden Boy and USADA calling for the production of all documents that related to PED testing of Mayweather for the Shane Mosley, Victor Ortiz and Miguel Cotto fights.The documents were not produced. There was a delay in the proceedings while Floyd spent nine weeks in the Clark County Detention Center after pleading guilty to charges of domestic violence and harassment. Upon his release from jail on August 2nd, settlement talks heated up.On September 25, 2012, a stipulation of settlement ending the defamation case was filed with the court. The parties agreed that the terms of settlement would be kept confidential. Prior to the agreement being signed, two sources with detailed knowledge of the proceedings told this writer that Mayweather’s initial monetary settlement offer was “substantially more” than Pacquiao’s attorneys had expected it would be and an agreement in principle was reached soon afterward.As part of the settlement, the Mayweathers and Mayweather Promotions issued a statement that read: “Floyd Mayweather Jr., Floyd Mayweather Sr., Roger Mayweather and Mayweather Promotions wish to make it clear that they never intended to claim that Manny Pacquiao has used or is using any performance-enhancing drugs nor are they aware of any evidence that Manny Pacquiao has used performance-enhancing drugs. Manny Pacquiao is a great champion and no one should construe any of our prior remarks as claiming that Manny Pacquiao has used performance-enhancing drugs.”I don’t know if Floyd Mayweather or Manny Pacquiao has used performance-enhancing drugs or not.I do know that, if Mayweather’s “A” sample tested positive for a performance-enhancing drug on one or more occasions and he was given a waiver by USADA that concealed this fact from the Nevada State Athletic Commission, his opponent and the public, we have an ingredient that could contribute to the making of a scandal.Any analysis of PED use and boxing should start with the acknowledgement that chemistry is now part of sports.We know certain things about the use of illegal, performance-enhancing drugs:(1) PEDs offer more than a shortcut. They take an athlete to a place that he or she might not be able to get to without them. When undertaken in conjunction with proper exercise and training, the use of PEDs creates a better athlete.(2) PED use is often difficult to detect.Sophisticated users evade detection in the face of rigorous testing. The more money an athlete spends, the less detectible PED use is. Also, in many instances, the testing is erratic, inadequate and even corrupt. Three years ago, Victor Conte declared, “Boxing’s testing program is beyond a joke. It’s worthless. The loopholes are so big that you could drive a Mack truck through them. Many of the people who are supposed to be regulating this don’t want to know.” Now Conte says, “In some respects, things have gotten worse.”(3) PED use is more prevalent in boxing now than ever before, particularly at the elite level. For many fighters, the prevailing ethic seems to be, “If you’re not cheating, you’re not trying.”Fighters are reconfiguring their bodies and, in some instances, look like totally different physical beings. In a clean world, fighters don’t get older, heavier and faster at the same time, but that’s what’s happening in boxing. Improved performances at an advanced age are becoming common. Fighters at age 35 are outperforming what they could do when they were 30. In some instances, fighters are starting to perform at an elite level at an age when they would normally be expected to be on a downward slide.(4) The use of PEDs threatens the short term and long term health of the user. It’s illegal and gives an athlete who uses them an unfair competitive advantage. It also endangers fighters who are getting hit in the head harder than before by opponents.Earlier this year, a handful of high-profile cases became part of boxing’s PED dialogue.On May 4, 2012, WBA/IBF 140-pound champion Lamont Peterson learned that his “A” and “B” urine samples had tested positive for the presence of an anabolic steroid. Peterson had been scheduled to defend his titles in a rematch against Amir Khan. The fight was canceled.Two weeks later, the “A” and “B” urine samples of WBC 147-pound champion Andre Berto tested positive for Norandrosterone (an anabolic steroid). Berto was slated to defend his belt against Victor Ortiz. That fight was also canceled.On June 22nd, it was revealed that, subsequent to Antonio Tarver’s June 2nd fight in California against Lateef Kayode, Tarver’s pre-fight urine sample had tested positive for the anabolic steroid Drostanolone. On fight night, the bout had been declared a draw. The result was changed to “no contest.”Finally, on October 18th, two days before Erik Morales’s scheduled rematch against Danny Garcia for the latter’s WBA and WBC titles, word leaked to the media that Morales had tested positive for Clenbuterol. Initially, the public was led to believe by the promotion that only Morales’s “A” sample had tested positive and there was a need for his “B” sample to be tested (which couldn’t be done until after the fight). Then it was learned that Morales had been tested on two occasions earlier in the month and, each time, both his “A” and “B” samples had tested positive. Despite that revelation, Garcia vs. Morales II was allowed to take place.In seeking out the truth behind the aforementioned matters, this writer interviewed dozens of participants and observers. Two people of note declined to be interviewed.Richard Schaefer sent a November 1st email that read in part, “We are trying to do something positive and yet it seems that media and others are attacking us. It would be easy for us to do nothing just like all other promoters. But by trying to support the fighters’ desire for additional testing, we are getting criticized.”Beyond that, Schaefer chose not to discuss the issues involved. Instead, his email referenced my relationships with Dr. Margaret Goodman and Maxboxing’s own Gabriel Montoya and stated, “I consider you a friend and really don’t want this Margaret Goodman, Gabriel Montoya vs. Golden Boy witch hunt to affect our relationship. I have my opinion about Margaret and Gabriel, and you have yours. I respect your opinion, and I hope you respect mine.”Dr. Goodman was once chief ringside physician for the Nevada State Athletic Commission. She is now president and board chairperson of a drug-testing organization known as VADA (Voluntary Anti-Doping Agency).The drug tests on Lamont Peterson and Andre Berto that came back positive were carried out under the supervision of VADA.Dr. Goodman is a friend. We’ve talked at length over the years about medical issues and boxing. She has been a valuable resource to me in my writing. We’ve also shared thoughts and offered advice to each other on a variety of subjects, both personal and professional.Gabriel Montoya has written a series of significant articles on the use of PEDs in boxing. Earlier this year, I spoke with Schaefer on Montoya’s behalf after Gabriel was denied access and credentials for certain Golden Boy events. I also spoke with Montoya about his problems with Golden Boy and what might be done to remedy the situation. Gabriel is a casual acquaintance.I should add that, although I sometimes disagree with things that Richard Schaefer has done (just as he sometimes disagrees with what I write), I admire his skills and we’ve maintained a cordial relationship over the years.USADA CEO Travis Tygart also declined to be interviewed for this article and instructed that questions be addressed to USADA’s media relations manager, Annie Skinner. On November 2nd, this writer sent a series of preliminary questions to Ms. Skinner. There was no response.At this point, it makes sense to take a closer look at the recent positive drug tests referenced earlier in this article.In March 2012, Lamont Peterson and Amir Khan submitted applications to VADA pursuant to which their blood and urine were tested in conjunction with their scheduled May 19th fight. The first samples were taken on March 19th, the only day on which the fighters knew in advance that they would be tested.On April 12th, VADA was advised by the UCLA Olympic Analytical Laboratory that Peterson’s “A” sample had tested positive consistent with the administration of an anabolic steroid. On April 13th, the Peterson camp was notified of that fact by FedEx and email. In keeping with VADA’s protocols, Peterson was given one week to challenge the “A” test result and ask for his “B” sample to be tested with one of his representatives present.The Peterson team waited eight days (until April 21st) to respond. Then it chose to challenge the positive test result, asserted its right to be present when the “B” sample was tested, and asked that the “B” sample be tested on Friday, April 27th. The UCLA laboratory advised VADA that Friday was an inappropriate day to begin testing because four consecutive days were needed to complete the test.The testing of Peterson’s “B” sample began on Monday, April 30th. On May 3rd, VADA was advised by the laboratory that this sample had also tested positive. The Peterson camp was so notified by FedEx and email on May 4th. That same day, VADA also sent a letter by FedEx and fax to Keith Kizer (Executive Director of the Nevada State Athletic Commission) stating the facts of the matter.The Peterson-Khan rematch was canceled.Richard Schaefer was livid at the way in which drug testing for Peterson-Khan II unfolded. Golden Boy was to have promoted the fight, and he felt that VADA should have notified him as soon as Peterson’s “A” sample tested positive.Margaret Goodman says that, after Peterson’s “A” sample tested positive, she asked Lamont’s attorney (Jeff Fried) whether there was an agreement between Peterson and Golden Boy that authorized VADA to release the “A” test results to the promoter. Fried told her that no such authorization existed.Ryan Connolly is counsel for VADA. In the late 1990s, he was the business manager for the UCLA Olympic Analytical Laboratory. He’s now an attorney in private practice with an expertise in PED testing in the context of competitive sports. In that role, he oversaw the process outlined in a May 10th document titled “Statement of VADA.”“When VADA became involved with the Peterson-Khan fight,” that statement reads, “the individual athletes signed up for the VADA program and executed the proper documentation. VADA was told that GBP [Golden Boy Promotions] also wanted a contract so that GBP would be authorized to receive the testing results, including the preliminary results from an ‘A’ sample analysis. In order for VADA to release the preliminary ‘A’ sample results to a third party such as GBP, VADA requires an executed authorization allowing us to do so. VADA sent GBP a draft contract for its signature which would have authorized the preliminary ‘A’ sample results to be released to GBP. This initial draft, which was never signed, contained a clause pursuant to which GBP would have represented that it had obtained the necessary authorization from the fighters. GBP’s legal team rejected this clause and instead suggested making the fighters signatories to the contract with their signatures being the necessary authorization. VADA’s counsel made it clear to GBP that, if GBP wanted to handle it this way, GBP must take responsibility for obtaining the athlete’s signatures. Unfortunately, GBP never obtained the signatures.The bottom line is that VADA had no contract with GBP. This is not a mere technicality. It involves issues of medical ethics. VADA needed a signed contract in order to deviate from its Results Management Policy (posted on our website) and release the preliminary and personal medical information to a third party.VADA would have been happy to inform GBP of the preliminary ‘A’ results. But we needed a signed authorization allowing us to do so, which we never received. VADA has complied in every way with all signed contracts that we had and will continue to do so.”Dr. Goodman elaborates on that theme, saying, “As per our contracts and protocols, VADA gives certain test results to the athletic commission in any jurisdiction where the fighter holds a license or a request for a license is pending. We also release certain results to FightFax, the Association of Boxing Commissions, and whomever else the athlete asks us to release them to. We’d be happy to release any and all results to a fighter’s promoter, but we need an authorization from the fighter to do so. That‘s the law and those are the terms in the Results Management Policy posted on the VADA website.”As a postscript, the Peterson camp later claimed that Lamont had tested positive because of the surgical implantation of “testosterone pellets” to correct a testosterone deficiency known as hypogonadism.That led Ryan Connolly to observe that more than a few elite athletes suffer from hypogonadism and note, “This may seem odd since these athletes are physical specimens. How can they be so muscular and fit but have natural testosterone production deficiencies at a higher rate than ordinary people? The dirty little secret is not necessarily that these athletes are lying about their hypogonadism. The dirty little secret is the likely cause of the hypogonadism in the first place - past anabolic steroid abuse.”Meanwhile, even before the Peterson controversy subsided, a new controversy was brewing. Andre Berto and Victor Ortiz had submitted applications for VADA testing in advance of their scheduled June 23, 2012 fight. On May 11th, Dr. Goodman was advised by the UCLA Olympic Analytical Laboratory that an “A” sample urine specimen taken from Berto had tested positive for norandrosterone (an anabolic steroid) at a level above the permitted amount.On May 12th, following VADA protocols, Goodman notified the Berto camp. Berto was advised by FedEx. Tony Morgan (Berto’s trainer, who had been listed on notice forms as a designated recipient of information) was advised of the finding by email, as was Al Haymon (Berto’s manager).Dr. Goodman’s email to each recipient read in part, “VADA urges you to immediately notify Golden Boy Promotions [the lead promoter on the fight], DiBella Entertainment [Berto’s promoter], and the California State Athletic Commission of this positive “A” sample finding by forwarding each party a copy of this notification so that it is received by each party as quickly as possible but no later than 3:00 p.m. on Monday, May 14th. Please confirm to VADA in writing that you have forwarded a copy to each party by that time.”The requested confirmation was not forthcoming. Instead, on May 14th, Dr. Goodman received a letter from Howard Jacobs (an attorney retained by Berto), who warned that telling anyone other than Berto’s representatives about the “A” sample positive could result in “civil liability on the part of VADA.”On May 15th, Goodman sent an email to Al Haymon that read, “Dear Al, as you are aware, Mr. Berto has asserted a medical privilege insofar as VADA is concerned. I would think that you will be held personally accountable by Golden Boy Promotions and DiBella Entertainment for your failure to notify them of this issue in a timely manner. Please advise us with regard to whether or not you have notified GBP and DBE. Thank you, Margaret Goodman.”There was no response.That same day, Ryan Connolly sent an email to Howard Jacobs urging similar notification.On May 18th, Dr. Goodman was advised by the UCLA Olympic Analytical Laboratory that Berto’s “B” sample urine specimen had tested positive. VADA then notified Berto, his designated representatives, and the California State Athletic Commission.Haymon, in turn, notified Richard Schaefer. Lou DiBella says that, despite the fact that he was Berto’s promoter, neither Schaefer nor Haymon advised him that Andre’s “A” and “B” samples had tested positive until plans were underway to replace Berto as an opponent for Victor Ortiz with Josesito Lopez (another Haymon fighter, who was promoted by Golden Boy in conjunction with Goossen Tutor).“How do you think that makes me feel?” DiBella asked rhetorically. “I raised the issue with Al afterward, and he didn’t say anything. That told me all I needed to know.”Haymon, like Richard Schaefer and Travis Tygart, declined to be interviewed for this article.Berto later told RingTvOnline, “To all of my fans who have been supportive, you know, everybody who knows me, they know that everything that I’ve always accomplished has just been through hard work. And when it comes to the positive test, that was just a situation that was unfortunate. It was a situation that didn’t get properly explained to the public on what it was and what caused it. I believe that’s what really made an uproar about everything. You know, like I’ve said, I’ve never been a cheater. Never have and never will. I’ve never injected anything in any type of situation at all. So when it comes up as a positive test, it didn’t have anything to do with any type of drug enhancement or any type of testosterone or EPO or none of that type of stuff that a lot of guys probably use. It was, after we got the positive test, we just needed to know what it was because we knew that everything that we were doing was straightforward. After they put the news out, that’s when we found out exactly what it was. Then I had to go through all of the right processes and the hiring of the lawyers and things like that. So it was basically just taking my sample test and just really proving the fact that it was a contamination of something. I couldn’t believe it happened the way it did with no explanation for it to the press or the public. The way it was put out there without explaining exactly what it was and how much upset me. Nothing was really explained to the public.”There’s a bit of hypocrisy there. Berto expressed unhappiness that news of his positive tests “was put out there without explaining exactly what it was…to the public.” But as previously noted, his own lawyer had made it clear to VADA that the dissemination of information to third parties should be kept to a minimum under threat of civil liability on the part of VADA.Given Golden Boy’s professed commitment to making boxing a clean sport, Richard Schaefer might have been expected to commend VADA for its findings with regard to Peterson and Berto. Instead, he seemed intent on attacking Dr. Goodman and VADA.On May 22nd, Arnold Joseph, counsel for Golden Boy, sent a letter to Goodman stating Golden Boy’s intention to sue VADA for not notifying the promoter that Peterson’s “A” sample had tested positive, a failure that Joseph claimed was magnified by VADA reporting the “B” sample positive to the Nevada State Athletic Commission and not to Golden Boy.To date, no lawsuit has been filed. But three days later, Golden Boy terminated a column on medical issues that Goodman had written monthly for The Ring magazine (now owned by Golden Boy) since 2004.“I guess the only question I have is why it took so long for Richard to fire me,” Dr. Goodman said afterward. “Once Golden Boy bought the magazine, I was told I couldn’t cover certain topics like more insurance coverage for catastrophic injuries suffered by fighters. Michael Rosenthal [the editor who replaced Nigel Collins at The Ring] is a great guy. He’s been very supportive but I could see the writing on the wall. You know, the first column I wrote for Ring eight years ago was about Fernando Vargas testing positive for Winstrol. It was called ‘JUICED!’ How ironic is that?”At the same time Golden Boy was attacking Margaret Goodman, it also took aim at Gabriel Montoya.Montoya, as previously noted, has written a number of articles on the use of PEDs in boxing. On May 20, 2012, a source with extensive knowledge in the area of drug testing told him he believed Floyd Mayweather had tested positive on three occasions for performance-enhancing drugs and that, in each instance, the test results had been covered up by Golden Boy and USADA.Montoya did what a responsible journalist is supposed to do. He began to question people in boxing and the world of PED testing about the rumors. On May 23rd, he received a letter from Jeffrey Spitz (an attorney for Golden Boy).Montoya says that the Spitz letter mischaracterized the nature of his investigation. There was no mistaking the fact that the letter accused him of making false and defamatory statements with regard to Golden Boy and threatened legal action against him.“There was an earlier time when Golden Boy wouldn’t credential me for its fights because I sent out some tweets that Oscar didn’t like,” Montoya recounts. “But I spoke with Schaefer and we worked past that. Then I started looking into the issue of Floyd’s drug tests. I got the threatening letter from Spitz, which I posted on Maxboxing. And I was banned again from Golden Boy fights.”For example, Montoya was told he would be credentialed for the June 30th fight card headlined by Cornelius Bundrage vs. Cory Spinks at Fantasy Springs Resort Casino. Then, on June 29th, he received an email from Anndee Laskoe (public relations manager for the Cabazon Band of Mission Indians), who wrote, “I have been asked by Golden Boy Promotions to remove your name from the press credential list for the June 30th fights at Fantasy Springs. I am sorry for any inconvenience this may have caused you.”Golden Boy publicists Monica Sears and Ramiro Gonzalez were copied on the email.Golden Boy did credential Montoya for at least one subsequent show.Meanwhile, other troubling incidents were brewing.In mid-May, Winky Wright was preparing to fight Peter Quillin in a June 2nd bout promoted by Golden Boy at the Home Depot Center in Carson, California.“Everybody kept popping up positive for all this stuff,” Wright told Montoya. “Boxing isn’t always a fair game. I figured I should get this [testing] too. So I called Golden Boy and said, ‘Why we ain’t doing it?’ They was like ‘Uh, etcetera, etcetera, this and this and that, and someone didn’t want to pay.’ I said ‘Okay; I’m going to pay for it. I just want to play on the same field.’”Wright and Quillin entered into a May 21, 2012 contract with Golden Boy and USADA pursuant to which USADA was to provide drug testing services in conjunction with their fight.“I didn’t know the difference between [USADA and VADA].” Wright says. “I just told Golden Boy I wanted to be tested and they came back with USADA.”On or about May 23rd, USADA collected blood and urine samples from Quillin. Wright gave samples on May 24th.“They came to my house at six in the morning,” Winky recalls. “They took urine, blood, everything.”Then, without warning, Wright was told that the testing was off.“I think it was like two days later,” Winky told Gabriel Montoya. “Golden Boy called and told Damian [Ramirez, Wright’s manager], and Damian told me. I don’t understand it. All I’m asking is, ‘How do you take urine and take blood and then, all of sudden, you say you aren’t going to test it?’ Then they tried to make up an excuse and say they wanted to teach us. There ain’t nothing to teach. They took blood. They told us we would take a test and either come up positive or negative. That’s it. All I want to know is, are we playing on the same field? So my lawyer called and asked for it to be tested and they told him they threw it out. They told my attorney they threw it out. That’s crazy. Why would they throw it out? They just finished [taking samples] and they’re going to throw it out already? Does this sound crazy? We gave samples. Let’s test that and let me see the result. They threw it out. I just don’t understand that.”Quillin-Wright went ahead as planned with Quillin winning a unanimous 10-round decision. Quillin, like Andre Berto and Floyd Mayweather, is managed by Al Haymon.The contract that Wright and Quillin entered into with Golden Boy and USADA specifically provided, “USADA will be responsible for storing the samples after collection and transporting them safely and securely to a laboratory for analysis…USADA will send all samples for analysis to a WADA [World Anti-Doping Agency] accredited laboratory under contract to USADA…USADA shall maintain Sample Collection Documentation, including test results for testing conducted under this Master Agreement, for a period of six years.”“The destruction of samples isn’t supposed to happen,” Ryan Connolly states. “If that happened in an Olympic context, it would set off alarms in a lot of places. There would likely be a thorough investigation by the International Olympic Committee and WADA.”Victor Conte adds, “The trend in drug-testing now is to save samples longer than before, not pour them down the drain.”But the worst was yet to come.Scott Hale runs a small website called Halestorm Sports Network. On Thursday, October 18, 2012, at approximately 8:30 a.m. Pacific Coast Time, Hale got a telephone call from a source in New York who told him that Erik Morales (who was scheduled to fight Danny Garcia two days later on a Golden Boy Promotions card at Barclays Center in Brooklyn) had tested positive for a banned substance.“I knew they were about to start the [final pre-fight] press conference,” Hale recalls, “and I assumed the fight would be canceled. Four hours later, I went online and saw that the fight was still on and the story hadn’t broken. So I made some follow-up calls and a second source confirmed the story. Then a third source called me to confirm, but I still didn’t know what the drug was.”“At that point,” Hale continues, “I called USADA and Golden Boy. Neither of them would confirm the story. One of my partners called the New York State Athletic Commission. They said they didn’t know anything about it, but our sources were solid. All three of them are reliable. So we decided to go with the story.”The snowball rolled from there.Initially, Golden Boy and USADA engaged in damage control.Dan Rafael of ESPN.com spoke with two sources and wrote, “The reason the fight has not been called off, according to one of the sources, is because Morales’s ‘A’ sample tested positive but the results of the ‘B’ sample test likely won’t be available until after the fight. ‘[USADA] said it could be a false positive,’ one of the sources with knowledge of the disclosure said. ‘But from what I understand, they won’t know until the test on the ‘B’ sample comes back. That probably won’t be until after the fight.’”Richard Schaefer told Chris Mannix of SI.com, “USADA has now started the process. The process will play out. There is not going to be a rush to judgment. Morales is a legendary fighter. And really, nobody deserves a rush to judgment. You are innocent until proven guilty.”Also on Thursday, Schaefer told Rick Reeno of BoxingScene.com, “I think what is important here is that there is not going to be a witch hunt against Erik Morales. Let’s allow the process to play out.”The New York State Athletic Commission was blindsided on the Morales matter. The first notice it received came in a three-way telephone conversation with representatives of Golden Boy and USADA after the Thursday press conference. In that conversation, the commission was told there were “some questionable test results” for Morales but that testing of Morales’s “B” sample would not be available until after the fight.Then, on Friday (one day before the scheduled fight), Keith Idec revealed on BoxingScene.com that samples had been taken from Morales on at least three occasions. Final results from the samples taken on October 17th were not in yet. But both the “A” and “B” samples taken from Morales on October 3rd and October 10th had tested positive for Clenbuterol. In other words, Morales had tested positive for Clenbuterol four times.Clenbuterol is widely used by bodybuilders and athletes. It helps the body increase its metabolism and process the conversion of carbohydrates, proteins, and fats into useful energy. It also boosts muscle growth and eliminates excess fats caused by the use of certain steroids.Under the WADA code, no amount of Clenbuterol is allowed in a competitor’s body. The measure is qualitative, not quantitative. Either Clenbuterol is there or it’s not. If it’s there, the athlete has a problem.After the positive tests were revealed, Morales claimed that he’d inadvertently ingested Clebuterol by eating contaminated meat. No evidence was offered in support of that contention.Nor was any explanation forthcoming as to why USADA kept taking samples from Morales after four tests (two “A” samples and two “B” samples from separate collections) came back positive. Giving Morales those additional tests was like giving someone who has been arrested for driving while intoxicated a second and third blood test a week after the arrest. The whole idea behind “cycling” is that it enables an athlete to use illegal PEDs, stop using them at a predetermined point in time, and then test clean in the days leading up to an event. A fighter shouldn’t be given the opportunity to test again and again until he tests clean.Also, Richard Schaefer vigorously attacked Dr. Margaret Goodman and VADA for not advising him that Lamont Peterson’s “A” sample had come back positive. But not only did Schaefer fail to notify Lou DiBella (Andre Berto’s promoter) in a timely manner that Berto had tested positive for Norandrosterone, Schaefer didn’t tell the New York State Athletic Commission in a timely manner that Morales had tested positive for Clenbuterol. Rather, it appears as though the commission and the public were deliberately misled with regard to the testing and how many tests Morales had failed.The moment that the “B” sample from Morales’s first test came back positive, that information should have been forwarded to the New York State Athletic Commission. The fact that USADA had positive test results from two “A” and two “B” samples and didn’t transmit those results to the NYSAC raises serious questions regarding USADA’s credibility.WOULD USADA HANDLE THE TESTING OF AN OLYMPIC ATHLETE THE WAY IT HANDLED THE MORALES TESTING?“The Erik Morales case is a travesty,” says Victor Conte. “Golden Boy and USADA seem to have made up a new set of rules without telling anyone what they are. What are the rules? Explain yourself, please! In ‘Olympic-style testing,’ you don’t have an ‘A’ sample and a ‘B’ sample test positive, and then another ‘A’ sample and ‘B’ sample test positive, and keep testing until you get a negative. What happened with Erik Morales should put everything that USADA and Golden Boy have done in boxing under a microscope. This is more than suspicious to me. It’s outrageous.”Incredibly, Garcia-Morales II was allowed to proceed. This, in effect, amounted to a “Get out of Jail Free” card for Garcia. Morales, a heavy underdog, was knocked out in the fourth round. But had Erik won the fight, the positive drug tests (which had been concealed prior to the leak on Halestorm Sports) could have been used to overturn the result and give Garcia back his belts.Garcia is managed by Al Haymon and is considered by Golden Boy to be one of its future stars.Since the Morales incident, people in the PED-testing community have begun to question the curious role played in boxing by USADA. When someone hears “USADA testing,” the assumption is that it’s legitimate. In that light, the reports that Erik Morales’s “A” and “B” samples tested positive for Clenbuterol on two occasions without notification to the New York State Athletic Commission are extremely troubling.Don Catlin founded the UCLA Olympic Analytical Laboratory in 1982 and is one of the founders of modern drug testing in sports.“USADA should not enter into a contract that doesn’t call for it to report positive test results to the appropriate governing body.” Catlin states. “If it’s true that USADA reported the results [in the Morales case] to Golden Boy and not to the governing state athletic commission, that’s a recipe for deception.”When asked about the possibility of withholding notification because of inadvertent use (such as eating contaminated meat), Catlin declares, “No! The International Olympic Committee allowed for those waivers 25 years ago, and it didn’t work. An athlete takes a steroid, tests positive, and then claims it was inadvertent. No one says, ‘I was cheating. You caught me.’”But more importantly, Catlin says, “USADA is a testing organization. USADA should not be making decisions regarding waivers and exemptions. That would make USADA judge and jury.”Ryan Connolly is in accord and adds, “There is no such thing in the Olympic world as an inadvertent use waiver. Athletes are strictly liable for what they put in their bodies. Inadvertent use might affect the length of an athlete’s suspension, but the athlete would still be disqualified from the competition that he, or she, was being tested for.”“I’m not sure what rules USADA is following,” Connolly continues, “but under WADA protocols, you wouldn’t see samples being destroyed and you wouldn’t see retests for Clenbuterol positives.”In other words, USADA seems to have one set of rules for testing Olympic athletes and another set of rules when it tests fighters for Golden Boy.“It looks to me like USADA and Golden Boy are making up the rules as they go along,” says Victor Conte. “One of the things that enables them to do it is that there’s no transparency to USADA’s testing for any of the fighters. What drugs are they testing for? What tests have been performed? What were the results? Why is Travis Tygart doing this?”One might also ask why Golden Boy and Richard Schaefer are doing this.“I think that Richard really wanted to be in the forefront on drug testing when he first got involved,” one Golden Boy employee (who, for obvious reasons, wishes to remain anonymous) says. “He knew it would ingratiate him with Floyd. It would get him some good PR. And it was a way to stick it in [Bob] Arum’s ear. But talking with him, I also felt that he thought it was the right thing to do. Then he realized that things were a lot more complicated and, probably, a lot dirtier than he’d thought. And at that point, his priorities changed.”It would be a stretch to say that Schaefer is trying to install himself as boxing’s drug czar. But he certainly doesn’t want drug testing to interfere with Golden Boy’s fights. That’s evident from his assault on VADA and Margaret Goodman after Lamont Peterson and Andre Berto tested positive.“Richard Schaefer saw what happened when somebody tests impartially with sophisticated testing methods,” HBO commentator Jim Lampley observes. “I haven’t spoken with him about these issues, but it would certainly appear as though he has decided to stay away from Margaret Goodman.”Stripped of its rhetoric, Schaefer’s main objection to VADA and Dr. Goodman appears to have been that they wouldn’t empower him in the testing process. He talks about VADA failing to notify him of Peterson’s positive “A” test in a timely manner. But if early notification is so important, why didn’t Golden Boy advise the New York State Athletic Commission that Erik Morales’s “A” and “B” samples had tested positive for Clenbuterol - twice?In fairness to Golden Boy, no other promoter has made a serious effort to rid boxing of PEDs, or even pretended to. And Schaefer himself acknowledged recently, “I think that ultimately it should be up to the athletic commissions to adopt a more updated drug-testing protocol and really not up to a promoter.”That latter point is particularly well-taken. The problem is that the state athletic commissions, as presently constituted, are woefully unsuited to the task. In many instances, boxing is barely governed at the state level. Everything has a loophole. Illegal PED users vs. the state athletic commissions is one of the biggest mismatches of all time.Most state athletic commissions don’t have the resources, the technical expertise, or the will to deal effectively with the PED problem. People go along to get along. No one wants to make waves.There’s no uniformity with regard to standards, degree of testing, or punishment from state to state. Testing on the day of a competition is notoriously ineffective in the face of sophisticated drug use. But that’s the only testing that most states utilize. Some states don’t drug test at all.The Nevada State Athletic Commission has long been considered to have one of the best drug-testing programs in the country. Two years ago, Travis Tygart was asked, “How easy is it to beat a testing program like Nevada’s?”“As simple as walking across the street,” Tygart answered. “It’s good for PR, to give the appearance that you’re testing, but nothing more.”After Lamont Peterson tested positive with VADA, Zach Arnold of Your Global Connection to the Fight Industry. spoke with Keith Kizer (Executive Director of the Nevada State Athletic Commission).“Kizer admits that a standard Nevada State Athletic Commission drug test would not have caught Peterson using synthetic testosterone,” Arnold reported afterward. “He admits that the reason the VADA test caught Peterson is because they use the Carbon Isotope Ratio standard for urine testing, which does in fact catch synthetic testosterone usage.”The Peterson camp, as earlier noted, says Lamont tested positive because of the surgical implantation of testosterone pellets to correct a testosterone deficiency known as hypogonadism. Jeff Fried (Peterson’s attorney) says the implantation occurred on November 12, 2011.Four weeks later, on December 10, 2011, Peterson fought Amir Khan in Washington D.C. The tests administered by the local commission failed to detect the testosterone. That’s a pretty good indication that PED testing in Washington D.C. is deficient.California hosts more fight cards than any other state in the country. On October 9, 2012, the California State Athletic Commission upheld a one-year suspension imposed on Antonio Tarver in the wake of his testing positive for Drostanolone.“The commission heard both sides of the issue and upheld Mr. Tarver’s suspension,” Kathi Burns (interim executive officer of the CSAC, told ESPN.com). “I think the commission’s actions speak for itself. It’s well-known that the commission has among the toughest anti-doping standards in the world, and that we have zero tolerance for doping.”Not true.California then turned 180 degrees and, without a full hearing, licensed Andre Berto for a November 24th fight (to be promoted by Golden Boy) against Robert Guerrero, despite the fact that Berto tested positive for Norandrosterone in May of this year. The explanation given by commission personnel was that Berto’s positive drug tests were administered by VADA and not by the commission itself.“How can they not recognize VADA?” Margaret Goodman asks. “Our program is in accord with WADA protocols. Our scientific director was recommended to us by WADA’s medical chief. We use internationally-recognized sample collectors. We even use the same laboratory [the UCLA Olympic Analytical Laboratory] that the California commission uses.”Then there’s the case of Julio Cesar Chavez Jr. Following his November 14, 2009 fight against Troy Rowland in Las Vegas, Chavez tested positive for Furosemide (a diuretic and steroid-masking agent). He was fined $10,000 by the Nevada State Athletic Commission and suspended for seven months. Four of his next six bouts were in Texas, one in California, and one in Mexico. Texas has a reputation for being lax in the area of drug-testing. Mexico is Mexico.On September 15, 2012, Chavez returned to Las Vegas to fight Sergio Martinez. After the bout, it was revealed that Julio had tested positive for marijuana.Marijuana is illegal, but it’s not a performance-enhancing drug. Chavez’s explanation for the positive test was as follows: “I have never smoked marijuana. For years, I have had insomnia, so I went to the doctor and he prescribed some drops for me that contained cannabis. I stopped taking them before the fight with Martinez, and I didn’t think I was going to test positive.”That explanation strains credibility. Chavez might have been better off claiming he ate tainted beef from a cow that ate a marijuana plant. Still, before the NSAC rules harshly on Julio, it should consider testing all commission personnel (including the five commissioners) for recreational drugs. Boxing has a drug problem, but the drug isn’t marijuana.As for Erik Morales and New York, on the day of Garcia-Morales II, the New York State Athletic Commission issued the following statement: “The New York Athletic Commission has taken into consideration the testing of Erick [sic] Morales conducted by USADA, an independent non-governmental organization contracted by Golden Boy Promotions to conduct testing on its boxers. Based upon currently available information and the representations made by Mr. Morales that he unintentionally ingested contaminated food, it is the Commission’s opinion that at this time there is inconclusive data to make a final determination regarding the suspension of Mr. Morales’s boxing license. The Commission will continue investigating the allegations and will wait until official laboratory results are available before making a final decision.”Let’s give the NYSAC the benefit of the doubt and assume that enormous political pressure from above was brought to bear on well-intentioned administrators. Garcia-Morales II was the main event on the first fight card at the new billion-dollar Barclays Center, an anchor for economic redevelopment in Brooklyn.Still, Kieran Mulvaney summed up nicely when he wrote on ESPN.com, “The way in which the situation was handled was borderline farcical. Morales failed tests twice, yet was allowed to take a third, which he passed, and faced no real consequences. Why have a drug-testing program if testing positive means nothing? If commissions are going to stand on the sideline, will failing a drug test become like missing weight: an inconvenience that can be smoothed over with some extra money changing hands?”It should also be noted that the world sanctioning organizations are part of the problem, not part of the solution.Four days after Garcia-Morales II, World Boxing Council President Jose Sulaiman declared, “The time of getting urine samples for the anti-doping tests is absolutely none other than in the dressing rooms before going into the ring or after the fights. The WBC only wants to test how a fighter is at the time of his performance and no other time unless it is a special circumstance. The tests are done by the local boxing commissions, most with which we have excellent relations and amicable agreements of mutual cooperation. We are, and have been, testing against drugs in boxing since 1975 and we have had only 15 positives in 37 years and about 1,600 fights. Boxing is a clean sport, as our data proves.”If Sulaiman weren’t so adept at gobbling up sanctioning fees and crushing reform movements within the WBC, one would be inclined to dismiss him as a buffoon.As for what comes next, the signs aren’t promising. This Saturday (November 24th), Andre Berto will fight Robert Guerrero in Ontario, California, on a card promoted by Golden Boy.Guerrero asked that the fighters be tested for PEDs by VADA. Walter Kane (Guerrero’s attorney) says that Richard Schaefer and Al Haymon (Berto’s manager) refused and would only allow testing by the California State Athletic Commission and USADA.In other words, Berto said he’d do drug testing, but not with the people who caught him earlier this year.Guerrero had two options. He could accept USADA and a career-high payday or lose the payday.“I’m not happy about it,” Kane says, “but in the end, we really didn’t have a choice. Golden Boy controls the purse strings, and they’re calling the shots.”Would the National Football League let Dallas Cowboys owner Jerry Jones dictate drug-testing terms for games the Cowboys play? Of course not. But in essence, Golden Boy (which has a vested interest in the outcome of the fights it promotes) is doing just that.Once again, the playing field has been tilted. There are times when it appears as though, not only does Golden Boy dictate which drug-testing organization is utilized, it can also influence whether or not there is random blood and urine testing for a fight.Indeed, Golden Boy might even be able to use its influence over the drug-testing process as a bargaining chip in signing fighters. Andre Berto tested positive and, soon after, was licensed to fight in California in a big-money fight. Erik Morales tested positive and New York said, “No problem. He can fight here right now.”Meanwhile, Golden Boy is refusing to use a drug-testing agency that plays by the reporting rules (VADA) and is giving its business to an agency (USADA) that appears to have ceded a certain amount of reporting authority to the promoter.The problems are overwhelming and there are no easy answers. Even state-of-the-art tests often fail to uncover PED use.Olympic gold medalist Marion Jones was tested more than 160 times during her track-and-field career and none of the tests came back as a confirmed positive. As the BALCO investigation widened, she admitted she’d used steroids prior to the 2000 Olympics and lied to federal investigations about it. She pled guilty to federal charges and spent six months in prison. The tests have gotten more sophisticated since then, but so have the cheaters.Should boxing even try to curtail PED use?“Yes,” says Victor Conte. “There will always be athletes who escape detection, but when there’s a desperate need, half a loaf of bread is better than none.”One might look to Major League Baseball for parallels. No sport wants to tarnish its image, let alone its major stars. But as baseball discovered, if a sport looks the other way, the use of PEDs can come back to haunt it.Baseball got a huge bounce when Barry Bonds, Mark McGwire, and Sammy Sosa rewrote its record book. Now an entire era has been disgraced, and baseball’s most hallowed records (which link fans from one generation to the next) are in limbo.Baseball made significant strides when it decided, finally, to crack down on PED use. Home run statistics are evidence of that. For eight consecutive seasons (between 1995 and 2002), the MLB home run leader hit at least 50 home runs. In the past five years, that mark has been reached only once. In the past two seasons, the four league leaders hit 44, 41, 43, and 39 home runs. Compare that with 1998, when Mark McGwire hit 70, Sammy Sosa hit 66, and Ken Griffey Jr. hit 56.In boxing at present, the users are way ahead of the testers and the distance between them is growing. The only thing that can possibly close the gap is a national approach with uniform national standards and a uniform national enforcement mechanism. If additional federal legislation is necessary to achieve that end, so be it. The notion that boxing can clean itself up one state athletic commission at a time is frivolous.To make real headway, it should be a condition for granting a license in any state that a fighter can be tested for PEDs at any time. Logistics and cost would make mandatory testing on a broad scale impractical, but unannounced spot testing could be implemented.All contracts for drug testing (such as Golden Boy’s contracts with USADA) should be filed immediately with the Association of Boxing Commissions and the supervising state athletic commission for the fight at issue. The ABC and supervising commission should be notified when each test is performed and also of each test result.For a state athletic commission to say (as is the case in some jurisdictions) that it won’t recognize any tests but its own is ridiculous. It shouldn’t matter who does the testing as long as the tests are reliable. Whether it’s a police officer or a private security guard who sees a bank being robbed, the offense is prosecuted.The implementation of sophisticated, unannounced, impartially-administered, random drug testing is the only way to turn the tide.That said, one has to acknowledge that we live in the real world. If a mega-fight is canceled two days before its scheduled date because one of the combatants has tested positive for PEDs, it isn’t like saying, “Number 94 won’t be playing defensive tackle on Sunday.” In boxing, if a fighter is suspended, the fight doesn’t go on.Big events are the economic engine that drives boxing. Canceling a mega-fight, particularly at the last minute, will result in tens of millions of dollars in lost income.For that reason, it’s not unreasonable to suggest that, in certain instances, if a fighter tests positive for PEDs before a fight: (1) his opponent should have the choice of proceeding with the fight or not; (2) if the fight takes place, the fighter who has tested positive should forfeit 50 percent of his purse; and (3) the fighter who has tested positive should be suspended for a minimum of one year after the fight with the suspension being recognized by every jurisdiction in the United States.Meanwhile, one has to ask: How many positive test results similar to those for Erik Morales (and possibly Floyd Mayweather) are there that we don’t know about? How many other samples have been destroyed in the manner of the samples taken from Peter Quillin and Winky Wright? What would happen if federal investigators put key players in boxing’s ongoing PED drama under oath?Victor Conte says flatly, “I think the relationship between USADA and Golden Boy needs to be investigated.”An Internet website isn’t the place to make judgments as to whether or not USADA has acted properly. Congress is. There’s an open issue as to whether USADA has become an instrument of accommodation. For an agency that tests United States Olympic athletes and receives in excess of $10,000,000 a year from the federal government, that’s a significant issue.If USADA has violated appropriate protocols, the consequences could be enormous. If, in fact, USADA has made special accommodations for Golden Boy, one has to wonder how many times it has made similar accommodations for other athletes in the past.This isn’t about a handful of athletes. It’s about the integrity of boxing and the well-being of all fighters.Someday, if it hasn’t happened already, a fighter who has been using PEDs will kill his opponent in the ring. Thus, in closing, it’s worth remembering the thoughts of Emanuel Steward.“Boxing isn’t like other sports,” Steward said several months before his death. “In boxing, a human being is getting hit in the head. None of us like to talk about it, but there’s a very real risk of brain damage. So to my way of thinking, anyone in boxing who’s part of using performance-enhancing drugs – I don’t care if it’s the fighter, the trainer, the strength coach, the conditioner, the manager, the promoter – that person is ruining the sport and doing something criminal.”Source: Max Boxing - Home

Term sheets are a way to make sure that everyone who is party to an agreement is on the same page before lawyers spend a lot of time and money writing the actual paperwork for a transaction.To give you an example, check out the Model Legal Documents from the National Venture Capital Association (NVCA). Their sample Term Sheet is 16 pages, and covers all of the important issues that an investor and an early stage company need to agree on before they consummate an investment transaction.However, at that same link you will see nine other documents that will ultimately be drafted and agreed on by the parties and their attorneys, covering all the tiny details of the transaction. Taken together, they amount to 120 pages of paperwork. As you can imagine, negotiating 16 pages is much easier, cheaper and faster than negotiating 120 pages.For a perfect example of why we use term sheets, take a look at the following provision from the NVCA term sheet:Representations and WarrantiesStandard representations and warranties by the Company. [Representations and warranties by Founders regarding technology ownership, etc.]Now take a look at the expanded, detailed language that is actually contained in the Stock Purchase Agreement that all parties will ultimately sign:1. Representations and Warranties of the CompanyThe Company hereby represents and warrants to each Purchaser that, except as set forth on the Disclosure Schedule attached as Exhibit C to this Agreement, which exceptions shall be deemed to be part of the representations and warranties made hereunder, the following representations are true and complete as of the date of the Initial Closing, except as otherwise indicated. The Disclosure Schedule shall be arranged in sections corresponding to the numbered and lettered sections and subsections contained in this Section 2, and the disclosures in any section or subsection of the Disclosure Schedule shall qualify other sections and subsections in this Section 2 only to the extent it is readily apparent from a reading of the disclosure that such disclosure is applicable to such other sections and subsections.[1] For purposes of these representations and warranties (other than those in Subsections 2.2, 2.3, 2.4, 2.5, and 2.6), the term the “Company” shall include any subsidiaries of the Company, unless otherwise noted herein.2.1 Organization, Good Standing, Corporate Power and Qualification[2] The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as presently conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.2.2 Capitalization.[3] (a) The authorized capital of the Company consists, immediately prior to the Initial Closing, of:(i) [__________] shares of common stock, $[____] par value per share (the “Common Stock”), [_________] shares of which are issued and outstanding immediately prior to the Initial Closing. All of the outstanding shares of Common Stock have been duly authorized, are fully paid and nonassessable and were issued in compliance with all applicable federal and state securities laws.[4] [The Company holds no Common Stock in its treasury.](ii) [__________] shares of Preferred Stock, of which [__________] shares have been designated Series A Preferred Stock, none of which are issued and outstanding immediately prior to the Initial Closing. The rights, privileges and preferences of the Preferred Stock are as stated in the Restated Certificate and as provided by the Delaware General Corporation Law. [The Company holds no Preferred Stock in its treasury.](b) The Company has reserved [__________] shares of Common Stock for issuance to officers, directors, employees and consultants of the Company pursuant to its [Plan Year] Stock [Option] Plan duly adopted by the Board of Directors and approved by the Company stockholders (the “Stock Plan”). Of such reserved shares of Common Stock, [__________] shares have been issued pursuant to restricted stock purchase agreements, options to purchase [__________] shares have been granted and are currently outstanding, and [__________] shares of Common Stock remain available for issuance to officers, directors, employees and consultants pursuant to the Stock Plan. The Company has furnished to the Purchasers complete and accurate copies of the Stock Plan and forms of agreements used thereunder.(c) Subsection 2.2(b) of the Disclosure Schedule sets forth the capitalization of the Company immediately following the Initial Closing including the number of shares of the following: (i) issued and outstanding Common Stock, including, with respect to restricted Common Stock, vesting schedule and repurchase price; (ii) granted stock options, including vesting schedule and exercise price; (iii) shares of Common Stock reserved for future award grants under the Stock Plan; (iv) each series of Preferred Stock; and (v) warrants or stock purchase rights, if any.[5] Except for (A) the conversion privileges of the Shares to be issued under this Agreement, (B) the rights provided in Section 4 of the Investors’ Rights Agreement, and (C) the securities and rights described in Subsection 2.2(a)(ii) of this Agreement and Subsection 2.2(b) of the Disclosure Schedule, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal or similar rights) or agreements, orally or in writing, to purchase or acquire from the Company any shares of Common Stock or Series A Preferred Stock, or any securities convertible into or exchangeable for shares of Common Stock or Series A Preferred Stock. All outstanding shares of the Company’s Common Stock and all shares of the Company’s Common Stock underlying outstanding options are subject to (i) a right of first refusal in favor of the Company upon any proposed transfer (other than transfers for estate planning purposes); and (ii) a lock-up or market standoff agreement of not less than one hundred eighty (180) days following the Company’s initial public offering pursuant to a registration statement filed with the Securities and Exchange Commission under the Securities Act.(d) None of the Company’s stock purchase agreements or stock option documents contains a provision for acceleration of vesting (or lapse of a repurchase right) or other changes in the vesting provisions or other terms of such agreement or understanding upon the occurrence of any event or combination of events, including without limitation in the case where the Company’s Stock Plan is not assumed in an acquisition. The Company has never adjusted or amended the exercise price of any stock options previously awarded, whether through amendment, cancellation, replacement grant, repricing, or any other means. Except as set forth in the Restated Certificate, the Company has no obligation (contingent or otherwise) to purchase or redeem any of its capital stock.(e) [409A. The Company believes in good faith that any “nonqualified deferred compensation plan” (as such term is defined under Section 409A(d)(1) of the Code and the guidance thereunder) under which the Company makes, is obligated to make or promises to make, payments (each, a “409A Plan”) complies in all material respects, in both form and operation, with the requirements of Section 409A of the Code and the guidance thereunder. To the knowledge of the Company, no payment to be made under any 409A Plan is, or will be, subject to the penalties of Section 409A(a)(1) of the Code.][6] (f) The Company has obtained valid waivers of any rights by other parties to purchase any of the Shares covered by this Agreement.2.3 Subsidiaries[7] The Company does not currently own or control, directly or indirectly, any interest in any other corporation, partnership, trust, joint venture, limited liability company, association, or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement.2.4 Authorization[8] All corporate action required to be taken by the Company’s Board of Directors and stockholders in order to authorize the Company to enter into the Transaction Agreements, and to issue the Shares at the Closing and the Common Stock issuable upon conversion of the Shares, has been taken or will be taken prior to the Closing. All action on the part of the officers of the Company necessary for the execution and delivery of the Transaction Agreements, the performance of all obligations of the Company under the Transaction Agreements to be performed as of the Closing, and the issuance and delivery of the Shares has been taken or will be taken prior to the Closing. The Transaction Agreements, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their respective terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or other laws of general application relating to or affecting the enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, or (iii) to the extent the indemnification provisions contained in the Investors’ Rights Agreement and the Indemnification Agreement may be limited by applicable federal or state securities laws.2.5 Valid Issuance of Shares[9] (a) The Shares, when issued, sold and delivered in accordance with the terms and for the consideration set forth in this Agreement, will be validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under the Transaction Agreements, applicable state and federal securities laws and liens or encumbrances created by or imposed by a Purchaser. Assuming the accuracy of the representations of the Purchasers in Section 0 of this Agreement and subject to the filings described in Subsection2.5(b) (ii) below, the Shares will be issued in compliance with all applicable federal and state securities laws. The Common Stock issuable upon conversion of the Shares has been duly reserved for issuance, and upon issuance in accordance with the terms of the Restated Certificate, will be validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under the Transaction Agreements, applicable federal and state securities laws and liens or encumbrances created by or imposed by a Purchaser. Based in part upon the representations of the Purchasers in Section 0 of this Agreement, and subject to Subsection 2.5(b) below, the Common Stock issuable upon conversion of the Shares will be issued in compliance with all applicable federal and state securities laws.(b) No “bad actor” disqualifying event described in Rule 506(d)(1)(i)-(viii) of the Securities Act (a “Disqualification Event”) is applicable to the Company or, to the Company’s knowledge, any Company Covered Person, except for a Disqualification Event as to which Rule 506(d)(2)(ii–iv) or (d)(3), is applicable.,[10]2.6 Governmental Consents and FilingsAssuming the accuracy of the representations made by the Purchasers in Section 0 of this Agreement, no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority is required on the part of the Company in connection with the consummation of the transactions contemplated by this Agreement, except for (i) the filing of the Restated Certificate, which will have been filed as of the Initial Closing, and (ii) filings pursuant to Regulation D of the Securities Act, and applicable state securities laws, which have been made or will be made in a timely manner.2.7 Litigation.[11] There is no claim, action, suit, proceeding, arbitration, complaint, charge or investigation[12] pending or to the Company’s knowledge, currently threatened [in writing] (i) against the Company or any officer, director or Key Employee of the Company [arising out of their employment or board relationship with the Company][; or] (ii) [to the Company’s knowledge,] that questions the validity of the Transaction Agreements or the right of the Company to enter into them, or to consummate the transactions contemplated by the Transaction Agreements[; or (iii) to the Company’s knowledge, that would reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect]. Neither the Company nor, to the Company’s knowledge, any of its officers, directors or Key Employees is a party or is named as subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality (in the case of officers, directors or Key Employees, such as would affect the Company). There is no action, suit, proceeding or investigation by the Company pending or which the Company intends to initiate. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or threatened in writing (or any basis therefor known to the Company) involving the prior employment of any of the Company’s employees, their services provided in connection with the Company’s business, any information or techniques allegedly proprietary to any of their former employers or their obligations under any agreements with prior employers.2.8 Intellectual Property[13] [The Company owns or possesses or [believes it] can acquire on commercially reasonable terms sufficient legal rights to all Company Intellectual Property without any known conflict with, or infringement of, the rights of others.] To the Company’s knowledge, no product or service marketed or sold (or proposed to be marketed or sold) by the Company violates or will violate any license or infringes or will infringe any intellectual property rights of any other party. Other than with respect to commercially available software products under standard end-user object code license agreements, there are no outstanding options, licenses, agreements, claims, encumbrances or shared ownership interests of any kind relating to the Company Intellectual Property, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other Person. The Company has not received any communications alleging that the Company has violated, or by conducting its business, would violate any of the patents, trademarks, service marks, tradenames, copyrights, trade secrets, mask works or other proprietary rights or processes of any other Person. The Company has obtained and possesses valid licenses to use all of the software programs present on the computers and other software-enabled electronic devices that it owns or leases or that it has otherwise provided to its employees for their use in connection with the Company’s business. To the Company’s knowledge, it will not be necessary to use any inventions of any of its employees or consultants (or Persons it currently intends to hire) made prior to their employment by the Company. Each employee and consultant has assigned to the Company all intellectual property rights he or she owns that are related to the Company’s business as now conducted and as presently proposed to be conducted. Subsection 0of the Disclosure Schedule lists all Company Intellectual Property.[14] The Company has not embedded any open source, copyleft or community source code in any of its products generally available or in development, including but not limited to any libraries or code licensed under any General Public License, Lesser General Public License or similar license arrangement.[15] For purposes of this Subsection 0, the Company shall be deemed to have knowledge of a patent right if the Company has actual knowledge of the patent right or would be found to be on notice of such patent right as determined by reference to United States patent laws.2.9 Compliance with Other Instruments2.6.. The Company is not in violation or default (i) of any provisions of its Restated Certificate or Bylaws, (ii) of any instrument, judgment, order, writ or decree, (iii) under any note, indenture or mortgage, or (iv) under any lease, agreement, contract or purchase order to which it is a party or by which it is bound that is required to be listed on the Disclosure Schedule, or (v) [to its knowledge,] of any provision of federal or state statute, rule or regulation applicable to the Company, the violation of which would have a Material Adverse Effect. The execution, delivery and performance of the Transaction Agreements and the consummation of the transactions contemplated by the Transaction Agreements will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either (i) a default under any such provision, instrument, judgment, order, writ, decree, contract or agreement; or (ii) an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, forfeiture, or nonrenewal of any material permit or license applicable to the Company.2.10 Agreements; Actions2.7..[16](a) Except for the Transaction Agreements, there are no agreements, understandings, instruments, contracts or proposed transactions to which the Company is a party or by which it is bound that involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of [_________], (ii) the license of any patent, copyright, trademark, trade secret or other proprietary right to or from the Company, (iii) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other Person that limit the Company’s exclusive right to develop, manufacture, assemble, distribute, market or sell its products, or (iv) indemnification by the Company with respect to infringements of proprietary rights.(b) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of [___________] or in excess of [__________] in the aggregate, (iii) made any loans or advances to any Person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. For the purposes of(a)and(b)of this Subsection2.6, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same Person (including Persons the Company has reason to believe are affiliated with each other) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsection.(c) The Company is not a guarantor or indemnitor of any indebtedness of any other Person.(d) [The Company has not engaged in the past [three (3) months] in any discussion with any representative of any Person regarding (i) a sale or exclusive license of all or substantially all of the Company’s assets, or (ii) any merger, consolidation or other business combination transaction of the Company with or into another Person.][17]2.11 Certain Transactions2.8..[18](a) Other than (i) standard employee benefits generally made available to all employees, (ii) standard director and officer indemnification agreements approved by the Board of Directors, and (iii) the purchase of shares of the Company’s capital stock and the issuance of options to purchase shares of the Company’s Common Stock, in each instance, approved in the written minutes of the Board of Directors (previously provided to the Purchasers or their counsel), there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, consultants or Key Employees, or any Affiliate thereof.(b) The Company is not indebted, directly or indirectly, to any of its directors, officers or employees or to their respective spouses or children or to any Affiliate of any of the foregoing, other than in connection with expenses or advances of expenses incurred in the ordinary course of business or employee relocation expenses and for other customary employee benefits made generally available to all employees. None of the Company’s directors, officers or employees, or any members of their immediate families, or any Affiliate of the foregoing are, directly or indirectly, indebted to the Company[ or, [to the Company’s knowledge], have any (i) material commercial, industrial, banking, consulting, legal, accounting, charitable or familial relationship with any of the Company’s customers, suppliers, service providers, joint venture partners, licensees and competitors, (ii) direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company except that directors, officers, employees or stockholders of the Company may own stock in (but not exceeding two percent (2%) of the outstanding capital stock of) publicly traded companies that may compete with the Company; or (iii) financial interest in any [material] contract with the Company].[19]2.12 Rights of Registration and Voting Rights2.9..[20] Except as provided in the Investors’ Rights Agreement, the Company is not under any obligation to register under the Securities Act any of its currently outstanding securities or any securities issuable upon exercise or conversion of its currently outstanding securities. To the Company’s knowledge, except as contemplated in the Voting Agreement, no stockholder of the Company has entered into any agreements with respect to the voting of capital shares of the Company.2.13 Property2.10.. The property and assets that the Company owns are free and clear of all mortgages, deeds of trust, liens, loans and encumbrances, except for statutory liens for the payment of current taxes that are not yet delinquent and encumbrances and liens that arise in the ordinary course of business and do not materially impair the Company’s ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances other than those of the lessors of such property or assets. The Company does not own any real property.2.14 Financial Statements2.11..[21] The Company has delivered to each Purchaser its [unaudited] [audited] financial statements as of [_______ __, 20_] and for the fiscal year ended [_______ __, 20_] [and its unaudited financial statements (including balance sheet, income statement and statement of cash flows) as of [_______ __, 20_] and for the [_____]-month period ended [_______ __, 20_] (collectively, the “Financial Statements”). The Financial Statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods indicated[, except that the unaudited Financial Statements may not contain all footnotes required by GAAP]. The Financial Statements fairly present in all material respects the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein, subject in the case of the unaudited Financial Statements to normal year-end audit adjustments. Except as set forth in the Financial Statements, the Company has no material liabilities or obligations, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to [___________]; (ii) obligations under contracts and commitments incurred in the ordinary course of business; and (iii) liabilities and obligations of a type or nature not required under GAAP to be reflected in the Financial Statements, which, in all such cases, individually and in the aggregate would not have a Material Adverse Effect. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with GAAP.2.15 Changes2.12..[22] Since [date of most recent financial statements/date of incorporation if no financial statements] there has not been:(a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not caused, in the aggregate, a Material Adverse Effect;(b) any damage, destruction or loss, whether or not covered by insurance, that would have a Material Adverse Effect;(c) any waiver or compromise by the Company of a valuable right or of a material debt owed to it;(d) any satisfaction or discharge of any lien, claim, or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and the satisfaction or discharge of which would not have a Material Adverse Effect;(e) any material change to a material contract or agreement by which the Company or any of its assets is bound or subject;(f) any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder;(g) any resignation or termination of employment of any officer or Key Employee of the Company;(h) any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable and liens that arise in the ordinary course of business and do not materially impair the Company’s ownership or use of such property or assets;(i) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business;(j) any declaration, setting aside or payment or other distribution in respect of any of the Company’s capital stock, or any direct or indirect redemption, purchase, or other acquisition of any of such stock by the Company;(k) any sale, assignment or transfer of any Company Intellectual Property that could reasonably be expected to result in a Material Adverse Effect;(l) receipt of notice that there has been a loss of, or material order cancellation by, any major customer of the Company;(m) to the Company’s knowledge, any other event or condition of any character, other than events affecting the economy or the Company’s industry generally, that could reasonably be expected to result in a Material Adverse Effect; or(n) any arrangement or commitment by the Company to do any of the things described in this Subsection2.11.2.16 Employee Matters2.13..(a) As of the date hereof, the Company employs [________] full-time employees and [________] part-time employees and engages [________] consultants or independent contractors. [Subsection2.12(n)of] the Disclosure Schedule sets forth a detailed description of all compensation, including salary, bonus, severance obligations and deferred compensation paid or payable for each officer, employee, consultant and independent contractor of the Company who received compensation in excess of $[________] for the fiscal year ended [____ __, 20_] or is anticipated to receive compensation in excess of $[________] for the fiscal year ending [____ __, 20_].[23](b) To the Company’s knowledge, none of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would materially interfere with such employee’s ability to promote the interest of the Company or that would conflict with the Company’s business. Neither the execution or delivery of the Transaction Agreements, nor the carrying on of the Company’s business by the employees of the Company, nor the conduct of the Company’s business as now conducted and as presently proposed to be conducted, will, to the Company’s knowledge, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated.(c) The Company is not delinquent in payments to any of its employees, consultants, or independent contractors for any wages, salaries, commissions, bonuses, or other direct compensation for any service performed for it to the date hereof or amounts required to be reimbursed to such employees, consultants or independent contractors. The Company has complied in all material respects with all applicable state and federal equal employment opportunity laws and with other laws related to employment, including those related to wages, hours, worker classification and collective bargaining. The Company has withheld and paid to the appropriate governmental entity or is holding for payment not yet due to such governmental entity all amounts required to be withheld from employees of the Company and is not liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing.(d) To the Company’s knowledge, no Key Employee intends to terminate employment with the Company or is otherwise likely to become unavailable to continue as a Key Employee, nor does the Company have a present intention to terminate the employment of any of the foregoing. The employment of each employee of the Company is terminable at the will of the Company. Except as set forth in Subsection2.12(n)of the Disclosure Schedule or as required by law, upon termination of the employment of any such employees, no severance or other payments will become due. Except as set forth in Subsection2.12(n)of the Disclosure Schedule, the Company has no policy, practice, plan or program of paying severance pay or any form of severance compensation in connection with the termination of employment services.(e) The Company has not made any representations regarding equity incentives to any officer, employee, director or consultant that are inconsistent with the share amounts and terms set forth in the minutes of meetings of the Company’s board of directors.(f) Each former Key Employee whose employment was terminated by the Company has entered into an agreement with the Company providing for the full release of any claims against the Company or any related party arising out of such employment.(g) Subsection2.12(n)of the Disclosure Schedule sets forth each employee benefit plan maintained, established or sponsored by the Company, or which the Company participates in or contributes to, which is subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Company has made all required contributions and has no liability to any such employee benefit plan, other than liability for health plan continuation coverage described in Part 6 of Title I(B) of ERISA, and has complied in all material respects with all applicable laws for any such employee benefit plan.(h) [The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the Company’s knowledge, threatened, which could have a Material Adverse Effect, nor is the Company aware of any labor organization activity involving its employees.](i) [To the Company’s knowledge, none of the Key Employees or directors[24] of the Company has been (a) subject to voluntary or involuntary petition under the federal bankruptcy laws or any state insolvency law or the appointment of a receiver, fiscal agent or similar officer by a court for his business or property; (b) convicted in a criminal proceeding or named as a subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (c) subject to any order, judgment or decree (not subsequently reversed, suspended, or vacated) of any court of competent jurisdiction permanently or temporarily enjoining him from engaging, or otherwise imposing limits or conditions on his engagement in any securities, investment advisory, banking, insurance, or other type of business or acting as an officer or director of a public company; or (d) found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated any federal or state securities, commodities, or unfair trade practices law, which such judgment or finding has not been subsequently reversed, suspended, or vacated.]2.17 Tax Returns and Payments2.14.. There are no federal, state, county, local or foreign taxes due and payable by the Company which have not been timely paid. There are no accrued and unpaid federal, state, country, local or foreign taxes of the Company which are due, whether or not assessed or disputed. There have been no examinations or audits of any tax returns or reports by any applicable federal, state, local or foreign governmental agency. The Company has duly and timely filed all federal, state, county, local and foreign tax returns required to have been filed by it and there are in effect no waivers of applicable statutes of limitations with respect to taxes for any year.2.18 Insurance2.15..[25] The Company has in full force and effect fire and casualty insurance policies with extended coverage, sufficient in amount (subject to reasonable deductions) to allow it to replace any of its properties that might be damaged or destroyed.2.19 Employee Agreements2.16.. Each current and former employee, consultant and officer of the Company has executed an agreement with the Company regarding confidentiality and proprietary information substantially in the form or forms delivered to the counsel for the Purchasers (the “Confidential Information Agreements”). No current or former Key Employee has excluded works or inventions from his or her assignment of inventions pursuant to such Key Employee’s Confidential Information Agreement. Each current and former Key Employee has executed a [non-competition and] non-solicitation agreement substantially in the form or forms delivered to counsel for the Purchasers. The Company is not aware that any of its Key Employees is in violation of any agreement covered by this Subsection2.15.2.20 Permits2.17.. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business, the lack of which could reasonably be expected to have a Material Adverse Effect. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority.2.21 Corporate Documents2.18.. The Restated Certificate and Bylaws of the Company are in the form provided to the Purchasers. The copy of the minute books of the Company provided to the Purchasers contains minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation and accurately reflects in all material respects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes.2.22 [83(b) Elections2.19.. To the Company’s knowledge, all elections and notices under Section 83(b) of the Code have been or will be timely filed by all individuals who have acquired unvested shares of the Company’s Common Stock.][26]2.23 [Real Property Holding Corporation2.20..[27] The Company is not now and has never been a “United States real property holding corporation” as defined in the Code and any applicable regulations promulgated thereunder. The Company has filed with the Internal Revenue Service all statements, if any, with its United States income tax returns which are required under such regulations.]2.24 Environmental and Safety Laws2.21.. Except as could not reasonably be expected to have a Material Adverse Effect [to the best of its knowledge] (a) the Company is and has been in compliance with all Environmental Laws; (b) there has been no release or [to the Company’s knowledge] threatened release of any pollutant, contaminant or toxic or hazardous material, substance or waste or petroleum or any fraction thereof (each a “Hazardous Substance”), on, upon, into or from any site currently or heretofore owned, leased or otherwise used by the Company; (c) there have been no Hazardous Substances generated by the Company that have been disposed of or come to rest at any site that has been included in any published U.S. federal, state or local “superfund” site list or any other similar list of hazardous or toxic waste sites published by any governmental authority in the United States; and (d) there are no underground storage tanks located on, no polychlorinated biphenyls (“PCBs”) or PCB-containing equipment used or stored on, and no hazardous waste as defined by the Resource Conservation and Recovery Act, as amended, stored on, any site owned or operated by the Company, except for the storage of hazardous waste in compliance with Environmental Laws. The Company has made available to the Purchasers true and complete copies of all material environmental records, reports, notifications, certificates of need, permits, pending permit applications, correspondence, engineering studies and environmental studies or assessments.For purposes of this Subsection 2.24, “Environmental Laws” means any law, regulation, or other applicable requirement relating to (a) releases or threatened release of Hazardous Substance; (b) pollution or protection of employee health or safety, public health or the environment; or (c) the manufacture, handling, transport, use, treatment, storage, or disposal of Hazardous Substances.2.25 [Qualified Small Business Stock2.22..[28] As of and immediately following the Closing: (i) the Company will be an eligible corporation as defined in Section 1202(e)(4) of the Code, (ii) the Company will not have made purchases of its own stock described in Code Section 1202(c)(3)(B) during the one (1) year period preceding the Initial Closing, except for purchases that are disregarded for such purposes under Treasury Regulation Section 1.1202-2, and (iii) the Company’s aggregate gross assets, as defined by Code Section 1202(d)(2), at no time between its incorporation and through the Initial Closing have exceeded $50 million, taking into account the assets of any corporations required to be aggregated with the Company in accordance with Code Section 1202(d)(3); provided, however, that in no event shall the Company be liable to the Purchasers or any other party for any damages arising from any subsequently proven or identified error in the Company’s determination with respect to the applicability or interpretation of Code Section 1202, unless such determination shall have been given by the Company in a manner either grossly negligent or fraudulent.]2.26 Disclosure2.23..[29] The Company has made available to the Purchasers all the information reasonably available to the Company that the Purchasers have requested for deciding whether to acquire the Shares, including certain of the Company’s projections describing its proposed business plan (the “Business Plan”). No representation or warranty of the Company contained in this Agreement, as qualified by the Disclosure Schedule, and no certificate furnished or to be furnished to Purchasers at the Closing contains any untrue statement of a material fact or[, to the Company’s knowledge,] omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. The Business Plan was prepared in good faith; however, the Company does not warrant that it will achieve any results projected in the Business Plan. It is understood that this representation is qualified by the fact that the Company has not delivered to the Purchasers, and has not been requested to deliver, a private placement or similar memorandum or any written disclosure of the types of information customarily furnished to purchasers of securities.2.27 [Small Business Concern2.24..[30] The Company together with its “affiliates” (as that term is defined in Section 121.103 of Title 13 of the Code of Federal Regulations (“CFR”), is a [“small business concern”][“smaller business”] within the meaning of the Small Business Investment Act of 1958, as amended (the “Small Business Act”), and the regulations promulgated thereunder, including [Section 121.301 of Title 13 of the CFR][Section 107.710 of Title 13 of the CFR]. The information delivered to each Purchaser that is a licensed Small Business Investment Company (an “SBIC Purchaser”) on SBA Forms 480, 652 and 1031 delivered in connection herewith is true and complete. The Company is not ineligible for financing by any SBIC Purchaser pursuant to Section 107.720 of the CFR. The Company acknowledges that each SBIC Purchaser is a Federal licensee under the Small Business Act.]2.28 [Foreign Corrupt Practices Act2.25.. Neither the Company nor any of the Company’s directors, officers, employees or agents have, directly or indirectly, made, offered, promised or authorized any payment or gift of any money or anything of value to or for the benefit of any “foreign official” (as such term is defined in the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”)), foreign political party or official thereof or candidate for foreign political office for the purpose of (i) influencing any official act or decision of such official, party or candidate, (ii) inducing such official, party or candidate to use his, her or its influence to affect any act or decision of a foreign governmental authority, or (iii) securing any improper advantage, in the case of (i), (ii) and (iii) above in order to assist the Company or any of its affiliates in obtaining or retaining business for or with, or directing business to, any person. Neither the Company nor any of its directors, officers, employees or agents have made or authorized any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of funds or received or retained any funds in violation of any law, rule or regulation. The Company further represents that it has maintained, and has caused each of its subsidiaries and affiliates to maintain, systems of internal controls (including, but not limited to, accounting systems, purchasing systems and billing systems) to ensure compliance with the FCPA or any other applicable anti-bribery or anti-corruption law. Neither the Company, or, to the Company’s knowledge, any of its officers, directors or employees are the subject of any allegation, voluntary disclosure, investigation, prosecution or other enforcement action related to the FCPA or any other anti-corruption law (collectively, “Enforcement Action”).]2.29 [Data Privacy2.26.. In connection with its collection, storage, transfer (including, without limitation, any transfer across national borders) and/or use of any personally identifiable information from any individuals, including, without limitation, any customers, prospective customers, employees and/or other third parties (collectively “Personal Information”), the Company is and has been[, to the Company’s knowledge,] in compliance with all applicable laws in all relevant jurisdictions, the Company’s privacy policies and the requirements of any contract or codes of conduct to which the Company is a party. The Company has commercially reasonable physical, technical, organizational and administrative security measures and policies in place to protect all Personal Information collected by it or on its behalf from and against unauthorized access, use and/or disclosure. The Company is and has been[, to the Company’s knowledge,] in compliance in all material respects with all laws relating to data loss, theft and breach of security notification obligations.][See ADDENDUM at end of this document with sample Founders Representations and Warranties.][31]3. Representations and Warranties of the Purchasers.[32]Each Purchaser hereby represents and warrants to the Company, severally and not jointly, that:3.1 Authorization. The Purchaser has full power and authority to enter into the Transaction Agreements. The Transaction Agreements to which the Purchaser is a party, when executed and delivered by the Purchaser, will constitute valid and legally binding obligations of the Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and any other laws of general application affecting enforcement of creditors’ rights generally, and as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, or (b) to the extent the indemnification provisions contained in the Investors’ Rights Agreement may be limited by applicable federal or state securities laws.3.2 Purchase Entirely for Own Account.[33] This Agreement is made with the Purchaser in reliance upon the Purchaser’s representation to the Company, which by the Purchaser’s execution of this Agreement, the Purchaser hereby confirms, that the Shares to be acquired by the Purchaser will be acquired for investment for the Purchaser’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any Person to sell, transfer or grant participations to such Person or to any third Person, with respect to any of the Shares. The Purchaser has not been formed for the specific purpose of acquiring the Shares.3.3 Disclosure of Information. The Purchaser has had an opportunity to discuss the Company’s business, management, financial affairs and the terms and conditions of the offering of the Shares with the Company’s management and has had an opportunity to review the Company’s facilities. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section2of this Agreement or the right of the Purchasers to rely thereon.3.4 Restricted Securities. The Purchaser understands that the Shares have not been, and will not be, registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Purchaser’s representations as expressed herein. The Purchaser understands that the Shares are “restricted securities” under applicable U.S. federal and state securities laws and that, pursuant to these laws, the Purchaser must hold the Shares indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. The Purchaser acknowledges that the Company has no obligation to register or qualify the Shares, or the Common Stock into which it may be converted, for resale except as set forth in the Investors’ Rights Agreement. The Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Shares, and on requirements relating to the Company which are outside of the Purchaser’s control, and which the Company is under no obligation and may not be able to satisfy. [The Purchaser acknowledges that the Company filed a registration statement for a public offering of its Common Stock, which was withdrawn effective [_____ __, 20_]. The Purchaser understands that this offering is not intended to be part of the public offering, and that the Purchaser will not be able to rely on the protection of Section 11 of the Securities Act.[34]]3.5 No Public Market. The Purchaser understands that no public market now exists for the Shares, and that the Company has made no assurances that a public market will ever exist for the Shares.3.6 Legends. The Purchaser understands that the Shares and any securities issued in respect of or exchange for the Shares, may be notated with one or all of the following legends:“THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH TRANSFER MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.”(a) Any legend set forth in, or required by, the other Transaction Agreements.(b) Any legend required by the securities laws of any state to the extent such laws are applicable to the Shares represented by the certificate, instrument, or book entry so legended.3.7 Accredited Investor. The Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act.3.8 Foreign Investors. If the Purchaser is not a United States person (as defined by Section 7701(a)(30) of the Code), the Purchaser hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Shares or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Shares, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale, or transfer of the Shares. The Purchaser’s subscription and payment for and continued beneficial ownership of the Shares will not violate any applicable securities or other laws of the Purchaser’s jurisdiction.3.9 No General Solicitation. Neither the Purchaser, nor any of its officers, directors, employees, agents, stockholders or partners has either directly or indirectly, including, through a broker or finder (a) engaged in any general solicitation, or (b) published any advertisement in connection with the offer and sale of the Shares.[35]3.10 Exculpation Among Purchasers. The Purchaser acknowledges that it is not relying upon any Person, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. [The Purchaser agrees that neither any Purchaser nor the respective controlling Persons, officers, directors, partners, agents, or employees of any Purchaser shall be liable to any other Purchaser for any action heretofore taken or omitted to be taken by any of them in connection with the purchase of the Shares.][36]3.11 Residence. If the Purchaser is an individual, then the Purchaser resides in the state or province identified in the address of the Purchaser set forth onExhibit A; if the Purchaser is a partnership, corporation, limited liability company or other entity, then the office or offices of the Purchaser in which its principal place of business is identified in the address or addresses of the Purchaser set forth onExhibit A.3.12 [Consent to Promissory Note Conversion and Termination. Each Purchaser, to the extent that such Purchaser, as set forth on the Schedule of Purchasers, is a holder of any promissory note of the Company being converted and/or cancelled in consideration of the issuance hereunder of Shares to such Purchaser, hereby agrees that the entire amount owed to such Purchaser under such note is being tendered to the Company in exchange for the applicable Shares set forth on the Schedule of Purchasers, and effective upon the Company’s and such Purchaser’s execution and delivery of this Agreement, without any further action required by the Company or such Purchaser, such note and all obligations set forth therein shall be immediately deemed repaid in full and terminated in their entirety, including, but not limited to, any security interest effected therein.[37]][1] The purpose of the Company’s representations is primarily to create a mechanism to ensure full disclosure about the Company’s organization, financial condition and business to the investors. The Company is required to list any deviations from the representations on a Disclosure Schedule, the preparation and review of which drives the due diligence process on both sides of the deal. For subsequent closings, changes to the Disclosure Schedule are sometimes simply referenced on the Compliance Certificate. The introductory paragraph to this Section2may be modified to permit an update to the Disclosure Schedule that would be reasonably acceptable to each of the Purchasers. If this modification is made, a closing condition should be added to indicate that the updated Disclosure Schedule will be delivered and that each of the Purchasers may refuse to close if the updated Disclosure Schedule is reasonably unacceptable to that Purchaser. If there is to be a Milestone Closing, specific representations and warranties to be true as of the Milestone Closing date may need to be negotiated. Some practitioners prefer to deliver the Disclosure Schedule separately, instead of as an exhibit to the Stock Purchase Agreement, so that the Disclosure Schedule will not have to be publicly filed in the event the Stock Purchase Agreement is filed as an exhibit to a public offering registration statement.[2] The purpose of this representation is to ensure that basic corporate maintenance has been properly carried out by the Company. Note that the Company is required to disclose failure to qualify in other jurisdictions where it does business only if failure to do so could have a “Material Adverse Effect”; the purpose of this language is to eliminate the time and expense of doing a state-by-state analysis to determine whether the Company should technically be qualified. If the Company has material connections to states in which it is not qualified, these states must be investigated by counsel to determine whether qualification is necessary and whether there are potential adverse effects of having failed to qualify.[3] Subsection2describes the Company’s capital structure and can be stated either immediately prior to or upon the Initial Closing of the financing. This description details any outstanding rights or privileges with respect to the Company’s securities. In later round financings, this description would also list any co-sale rights and rights of first refusal granted to investors in prior rounds. In later round financings, consider adding representations that there have been no conversions of previously-issued preferred stock to common stock, the number of shares that would be outstanding on an as-converted-to-common stock basis and the current conversion ratios of each series of preferred stock.[4] Note that the amendments to Rule 506 effective September 23, 2013 added additional requirements for offerings relying on the Rule 506 safe harbor, namely, the absence of “bad actors” affiliated with the issuer and, for offerings involving general solicitation under Rule 506(c), accredited investor certification. Accordingly, investors may wish to conduct additional due diligence on these matters with respect to offerings consummated after September 23, 2013[5] Some practitioners prefer to delete this representation, provided the capitalization table is a separate document.[6] It should be noted that the consensus among the NVCA drafting group was that the 409A issues are better dealt with as a diligence item, rather than a company rep. Nevertheless, this rep is included here because it is in any case important that the issue be surfaced as part of the financing, to ensure that the company is mindful of the obligations and potential penalties imposed by 409A as it makes future equity grants. Inserting the rep in the first draft, as a discussion item, is one way to ensure that the issue is not neglected.[7] The purpose of this representation is to require the Company to fully disclose its structure, including other corporations, if any, that it controls. If the Company does have subsidiaries, you should (i) add to Subsection2.2(f)a representation with respect to the subsidiaries of the Company modeled after Subsection0regarding the organization, good standing and qualification of each such subsidiary, and (ii) add a reference to subsidiaries where appropriate in Section2. Some formulations include subsidiaries in the definition of the Company, this approach works if careful attention is given to representations where the effect of such inclusion requires additional language (for example, the representation in Subsection2would require either the exclusion of subsidiaries or a separate paragraph regarding the capitalization of subsidiaries).[8] In certain jurisdictions, ancillary agreements executed in connection with the financing, such as noncompetition provisions or voting agreements, may be subject to some question regarding their enforceability, and the representation should be modified accordingly.[9] The representations in Subsections2.3and2.4are intended to ensure that the Company has taken all steps necessary to issue the preferred stock in accordance with applicable corporate law. This means that, before the closing, the Company must (A) obtain the requisite stockholder and board approvals to amend the Certificate of Incorporation and issue the stock; (B) file the Restated Certificate; and (C) obtain any other stockholder consents or waivers required pursuant to the Restated Certificate, Bylaws, and existing agreements with securityholders (most importantly, waivers to any existing rights of first offer or refusal). Subsection2.4also requires the Company to disclose any restrictions on transfer other than those contained in the Transaction Agreements (such as any contained in the Restated Certificate and Bylaws, or any preemptive rights contained in agreements with other securityholders).[10] Even if the Company is not relying on Rule 506 for the offering under this Agreement, this representation is included so that investors can determine whether the Company will be entitled to rely on Rule 506 in future offerings by the Company.[11] The litigation representation will often be unqualified in Series A financings. The bracketed materiality qualifiers are more common in later rounds of financings. In subsequent rounds it is no longer appropriate to have the Company make representations regarding directors (as opposed to employees), since directors will include investor representatives.[12] It may be appropriate to include a knowledge qualifier as to investigations since it would be difficult for the Company to know of an investigation unless it had been notified. Some investors nevertheless feel the risk is appropriately borne by the Company.[13] Subsection 2.8 gives the Purchasers assurances that the Company has the intellectual property rights necessary to conduct its business, or has disclosed its need to acquire further rights. Although Purchasers prefer an unqualified representation, this provision is often heavily negotiated, and may be impossible for the Company to make with certainty for a product in a very early stage of development. Under a common compromise, the Company provides an unqualified representation with respect to everything but patents, on the theory that potential patent conflicts cannot always be uncovered even after reasonable investigation, and that patent conflicts therefore represent an unknown risk that is fairly borne by both parties.[14] If you represent the Company, you may seek to use a more specific list of items (a subset of the broader definition of Company Intellectual Property) to be set forth on the Disclosure Schedule: “patents, patent applications, trademarks, trademark applications, service marks, service mark applications, tradenames, copyrights, and licenses to and under any of the foregoing.”[15] This representation regarding non-use of open source software is intended to elicit disclosure of publicly available, third-party source code that the Company has incorporated, or intends to incorporate, into its products. In most cases, the Purchasers should be concerned primarily about use of third-party source code distributed under a license that requires the Company to disclose and distribute its own source code, that grants licensees rights under the Company’s patents, or that contains other provisions that relinquish or may compromise the Company’s intellectual property rights or commercial prospects. Much publicly available source code is distributed under licenses that permit it to be freely used and redistributed without imposing onerous obligations upon those that use it to develop their own software. Note also that the General Public License (“GPL”) and other so-called “viral” open source licenses impose potentially onerous obligations upon licensees only if code distributed under them is incorporated into a product that is actually released to the general public. Some proprietary software companies experiment with code distributed under the GPL during the development process with no intention of retaining GPL code in the products ultimately released to their customers. (This experimentation typically is done in a separate “branch” of the source code of a product in development.) The Company may wish to consider narrowing this representation to include use of third-party source code distributed under any license that imposes specified obligations upon the Company, and perhaps then only if the third party source code has been included in a product that the Company has released. An example of a reduced-disclosure open source representation is as follows: “The Company has not embedded, used or distributed any open source, copyleft or community source code (including but not limited to any libraries or code, software, technologies or other materials that are licensed or distributed under any General Public License, Lesser General Public License or similar license arrangement or other distribution model described by the Open Source Initiative at News | Open Source Initiative, collectively “Open Source Software”) in connection with any of its products or services that are generally available or in development in any manner that would materially restrict the ability of the Company to protect its proprietary interests in any such product or service or in any manner that requires, or purports to require (i) any Company IP (other than the Open Source Software itself) be disclosed or distributed in source code form or be licensed for the purpose of making derivative works; (ii) any restriction on the consideration to be charged for the distribution of any Company IP; (iii) the creation of any obligation for the Company with respect to Company IP owned by the Company, or the grant to any third party of any rights or immunities under Company IP owned by the Company; or (iv) any other limitation, restriction or condition on the right of the Company with respect to its use or distribution of any Company IP.”[16] Subsections2.7and 2.102.7require the Company to disclose material contracts as well as other agreements or arrangements that might be important from a due diligence standpoint regardless of dollar amount (such as intellectual property licenses or a proposed acquisition of the Company). The disclosure thresholds are negotiable.[17] This representation is not standard, but is sometimes requested by investors concerned that the Company might be considering a business combination transaction.[18] This representation requires disclosure of situations which could create a conflict of interest. This is an item of particular concern in the first round of venture capital financing, since loans among the Company and its founders and their families (which may not be well documented) are especially common prior to the first infusion of outside capital.[19] The bracketed portion of this sentence may be a broader representation than the Company is comfortable giving. In addition, it is appropriate to include directors throughout this section only at the first financing round. In subsequent rounds the directors will include investor representatives, and it should not be incumbent on the Company to make disclosures as to them.[20] Prior registration rights may conflict with those currently being negotiated among the investors and the Company. Therefore, any such rights must be carefully reviewed and any conflicts resolved. It is common to have any previous registration rights agreement amended to include the new investors, or replaced by a new agreement including the old and new investors and clarifying their rights relative to each other as well as the Company. It is preferable to have all registration rights relating to the Company’s securities set forth in one document. Having several different sets of rights outstanding can be a significant (and confusing) complication when the Company goes public.[21] For early stage companies without financial statements, it may be appropriate to have an alternative provision, such as the following:Material Liabilities. The Company has no liability or obligation, absolute or contingent (individually or in the aggregate), except (i) obligations and liabilities incurred after the date of incorporation in the ordinary course of business that are not material, individually or in the aggregate, and (ii) obligations under contracts made in the ordinary course of business that would not be required to be reflected in financial statements prepared in accordance with GAAP.[22] The purpose of this representation is to “bring down” the financial statements from the period covered thereby. Therefore, the blank in Subsection2.11should be filled with the last date covered by the financial statements provided to the investors, and any of the changes listed in this section must be disclosed on the Disclosure Schedule. While the itemization in this section serves as a useful due diligence checklist, this section can be replaced by a much shorter section reading simply, “[To the Company’s knowledge], since [______,] there have been no events or circumstances of any kind that have had or could reasonably be expected to result in a Material Adverse Effect.”[23] Many practitioners prefer not to list employee compensation in the Disclosure Schedule, particularly if employees are participating in the round. Even if there is no employee participation, however, employee compensation is a sensitive matter for many companies, and there is always a risk of the Disclosure Schedule inadvertently winding up in the wrong hands.[24] See footnote31– same point as to investor directors.[25] The investors may negotiate life insurance coverage in favor of the Company for certain founders or other key employees. If such coverage is in effect prior to the closing, it may be appropriate to add to this representation a statement of the covered individuals and amount of coverage for each.[26] This representation is fairly standard in West Coast venture financing transactions; it is much less common in financings originating on the East Coast.[27] This representation is appropriate if there are foreign investors (i.e., nonresident aliens) involved in the financing, since they are subject to the Foreign Investment Real Property Tax Act of 1980 (“FIRPTA”). Under FIRPTA, a transfer of an interest in a U.S. Real Property Holding Corporation (a “USRPHC”) by a foreign investor is subject to tax withholding, notwithstanding the general rule that sales of stock by foreigners are not subject to U.S. taxation. A corporation is USRPHC if more than fifty percent (50%) of its assets consist of U.S. real property. While very few, if any, venture capital investors are USRPHCs, it is customary to provide this representation in order to ensure that any foreign investors will not be subject to tax withholding. Regardless of FIRPTA, if a foreign person or entity is, directly or indirectly, acquiring a ten percent (10%) or greater voting interest in the Company, it must file Form BE-13 with the U.S. Department of Commerce unless an exemption applies.[28] Section 1202 of the Internal Revenue Code provides for a fifty percent (50%) exclusion (subject to certain limitations) from taxable income of gains recognized on the disposition of certain stock in qualifying corporations that has been held for at least five years. Although investors may ask for such a representation, companies may resist on the theory that the analysis regarding current compliance is complex, and that many elements of the test are outside the Company’s control. In any event, compliance with numerous other requirements during the time the investor holds the stock is needed for the investor to qualify for the benefits of Section 1202.[29] There is no consensus position on what should be included in the “Disclosure” representation. Purchasers will generally try to obtain an unqualified representation that none of the written information and business plan information provided to them by the Company contains a material misstatement or a materially misleading omission. The Company will generally try to resist such a broad representation, on the basis that a 10b-5 type representation, commonly found in an IPO prospectus, is inappropriate for a private financing in which a prospectus-type due diligence process has not occurred. The language shown represents a compromise position. It is important to note that the investors’ right of recovery for a breach of this rep may be broader than under Rule SEC 10b-5, because in order to prevail in a Rule 10b-5 securities fraud action, the purchaser must establish that the seller acted with scienter. That is, a purely innocent misrepresentation normally does not give rise to civil liability under 10b-5. Another issue for a Series A investor to consider is the relative utility of this rep to the Series A investor at this stage, versus the risk of giving such a broad rep to investors in later rounds (who, in a worst case, may be looking for a rep on which to “hang their hat” if they decide they want out of the investment).[30] The Small Business Concern representation is only necessary if one or more Purchasers is a SBIC.[31] Founders’ representations are controversial and may elicit significant resistance as they are found in a minority of venture deals. They are more likely to appear if Founders are receiving liquidity from the transaction, or if there is heightened concern over intellectual property (e.g., the Company is a spin-out from an academic institution or the Founder was formerly with another company whose business could be deemed competitive with the Company), or in international deals. Founders’ representations are even less common in subsequent rounds, where risk is viewed as significantly diminished and fairly shared by the investors, rather than being disproportionately borne by the Founders. A sample set of Founders Representations is attached as an Addendum at the end of this Model Stock Purchase Agreement.[32] The main purpose of the Purchasers’ representations and warranties in Section0are to ensure that the investors meet the criteria for private placement exceptions under applicable state and federal securities laws.[33] Occasionally, a venture capital fund will allow its employees and principals to co-invest through a special entity as a nominee. Assuming these employees and principals meet the accreditation or sophistication standards necessary for the private placement exemption being relied on, and assuming the special purpose entity is not formed solely for the purpose of this investment, the language of this provision can be tailored to carve out that special entity.[34] Include the bracketed language if the private placement exemption is based on the safe harbor in Rule 155(c) under the Securities Act for private offerings following an abandoned public offering.[35] In September 2012 and pursuant to the Jumpstart Our Business Startups Act (the “JOBS Act”), the SEC proposed new rules amending Rule 506 of Regulation D and Rule 144A which would provide that the Rule 502(c) prohibition against general solicitation and general advertising would not apply to offers and sales of securities made pursuant to Rule 506 where all purchasers of the securities are accredited investors. Until these rules are finalized, any disclosures made under Section 3.9 in reliance on the JOBS Act should be carefully scrutinized by counsel.[36] This provision is intended to protect the lead investor from claims of reliance by other investors.[37] This eliminates any issues resulting from possible miscalculation of the amount owed to investor noteholders (miscalculations that can result from, for example, application of conversion discounts).