Exhibit 15(a)
July 27, 2018
Office of Electronics and Machinery
Division of Corporation Finance
Securities and Exchange Commission
100 F. Street, NE
Washington, DC 20549
| Re: | LunaTrust LLC Draft Offering Statement on Form1-A Submitted June 11, 2018 CIK No. 0001741687 |
Ladies and Gentlemen:
This letter sets forth the responses of LunaTrust LLC, a Delaware limited liability company (the “Company,” “LunaTrust” or “we”), to the comments received from the Staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) by letter dated July 11, 2018 (the “Comment Letter”) concerning the Company’s draft offering statement on Form1-A. In conjunction with this letter, the Company is submitting an amended draft offering statement on Form1-A (the “Offering Statement”) to the Commission. For convenient reference, we have set forth below in bold each of the Staff’s comments set forth in the Comment Letter and have set forth our responses to the numbering of the comments and the headings used in the Comment Letter.
Part I
Item 3. Application of Rule 262, page v
1. We note you checked the box that “bad actor” disclosure under Rule 262(d) is provided in Part II of the offering statement; however, no such disclosure has been provided. Please provide such disclosure or advise.
Response:The box indicating that “bad actor” disclosure under Rule 262(d) is provided in Part II of the Offering Statement should not have been checked. Such box is not checked in the amended Offering Statement.
Item 4. Summary Information Regarding the Offering and Other Current or Proposed Offerings page v.
2. We note that your aggregate offering price appears to be $50,050,000 based on the number of common limited liability company interests offered and the price per unit. Revise the number of securities offered or the price per security such that the disclosure regarding the portion of the aggregate offering price attributable to securities being offered is correct.
Response:We have revised and reduced the number of securities offered. The aggregate offering price attributable to securities being offered does not exceed $50,000,000.
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3. We note your securities will not be offered for cash. Revise your offering circular to disclose how the aggregate offering price will be based on the value of the member data provided as consideration as established by bona fide sales of that consideration made within a reasonable time, or, in the absence of sales, on the fair value as determined by an accepted standard. Also disclose how your valuations of the member data provided asnon-cash consideration will be reasonable at the time made. In addition, refer to the Note to Paragraph (A) of Rule 251 of Regulation A and provide us with your analysis as to how your offering falls within the scope of the exemption provided by that rule. Also provide us with your analysis as to how you intend to comply with Rule 251(d)(2)(i)(C) and include disclosure as appropriate. In each analysis you provide in response to this comment, cite any authority on which you rely.
Response:We are not aware of any bona fide sales of the limited and revocable rights we will acquire for any of the Member Data types indicated on the cover page. We have added disclosure to the cover page and beginning at page 41 to the Offering Statement describing the accepted standards we used to value each data type.
We intend to comply with Rule 251(d)(2)(i)(C) by verifying that, for prospective investors who are not accredited investors, the aggregate purchase price to be paid by him or her for the shares is no more than ten percent (10%) of the greater of his or her annual income or net worth (determined as provided in Rule 501 (§ 230.501)), using the purchase price determined based on the value of the member data he or she is contributing. As authorized by Rule 251(d)(2)(i)(D), we intend to rely on the representations of the prospective investor regarding when determining his or her annual income or net worth, unless we know at the time of the transaction that the representation is untrue. The Offering Statement includes this disclosure on the cover page.
Part II
Preliminary Offering Circular, page 1
4. Throughout your offering circular where you discuss the declaration of distributions, such as on page 12, revise to make clear that distributions may never be declared and that such distributions are in the sole discretion of your manager. Furthermore, in an appropriate section of your offering circular, disclose the methodology by which the funds available for distributions will be determined.
Response:We have revised the Offering Statement at pages 2, 13, 37, 42, and 43 to clarify that distributions may never be declared and that any distributions are effectively in the sole discretion of the Manager, as the Manager may unilaterally amend the terms of our operating agreement and the management agreement. We have also included disclosure discussing the methodology by which the funds available for distributions will be determined under the heading “Our Limited Liability Company Operating Agreement— Distributions and Dividends” beginning on page 43.
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5. In each instance where you discuss the terms of your operating agreement, management agreement or license agreement, please include disclosure that such terms may be changed unilaterally by your manager. Moreover, where you discuss your manager’s discretion not to effectuate a distribution in the event the distribution is less than a certain amount, please clarify whether the manager has the discretion to not effectuate a distribution at all under your current operating agreement or by unilateral amendment to your operating agreement. Also, tell us whether your manager can unilaterally waive or change the provisions in section 6.8 of your operating agreement.
Response:In each portion of the Offering Statement in which we discuss the terms of our operating agreement, management agreement or license agreement, we have included disclosure that such terms may effectively be changed unilaterally by the Manager. We have also specifically disclosed that the Manager has the discretion to reduce or eliminate some or all distributions by unilaterally amending our operating agreement. We have amended and restated our operating agreement to provide that the Manager may not amend the provisions of section 6.8 without the affirmative consent of each member adversely affected by the amendment, and we have filed the amended and restated operating agreement with the Offering Statement.
6. We note your disclosure, such as on page 12, that the manager is “generally, but not always” required to provide advance notice to members of unilateral modification to the operating agreement or management agreement (including the Database IP license terms contained therein). In an appropriate location, disclose the circumstances under which your manager is not required to provide advance notice of such modifications.
Response: We have added disclosure regarding the circumstances under which the Manager is not required to provide advance notice of unilateral modification to the Operating Agreement or Management Agreement (including the Database IP license terms contained therein) in “Our Limited Liability Company Operating Agreement—Unilateral Modification” beginning on page 46 and “Our Management Agreement— Amendment, Modification, or Waiver” beginning on page 49 of the Offering Statement.
7. In an appropriate section of your offering circular, discuss the material terms of any required compliance with the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended, and any other material federal, state or local regulations, including how your business and database will comply with those rules and regulations, how the blockchain aspects of your database will comply with those rules and regulations, the anticipated costs associated with such compliance, and the risks and consequences ofnon-compliance.
Response:We have added disclosure concerning HIPAA under the heading “Privacy Policy—Health Insurance Portability and Accountability Act of 1996 (HIPAA)” on page 28 of the Offering Statement and concerning other health care data regulatory compliance and the risks and consequences ofnon-compliance at “Risk Factors—Risks Related to the Company—Failure to comply with federal, state and local laws and regulations or our contractual obligations relating to data privacy, protection and security of Member Data, and civil liabilities relating to breaches of privacy and security of Member Data, could, damage our reputation and harm our business” on page 11 of the Offering Statement. Supplementally, we note that we will store the Member Data in a conventional SQL database rather than in a distributed ledger, and hence the blockchain component of our business plan will not affect our compliance with any health or medical privacy laws. Please also see our response to Comment 18.
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Preliminary Offering Circular Cover Page, page 1
8. Disclose on your cover page that the securities you are offering will not have any voting, consent or management rights relating to the management and operation of the company, except to appoint a liquidator upon the dissolution of the company if you do not have a manager at that time, that the holders of your securities will not be entitled to the profits that you or your manager derive from the database or your respective businesses and will only be entitled to receive dividends or distributions, if any, as and when determined by the manager, will be transferable only under limited circumstances and will have extremely limited rights and remedies due to your governance provisions, including the elimination of your manager’s fiduciary duties to your security holders. Given these limited rights and remedies, avoid referring throughout your filing to the securities you are offering as “shares” or “common shares.”
Response:We have added disclosure responsive to this comment on the cover page of the Offering Statement. We have also removed all usages of the term “common shares” from the Offering Statement.
Per comment 24, we have added disclosure regarding the material differences between the shares we are offering and typical common stock. We believe that the term “shares” appropriately describes the securities we are offering, as each of these securities entitles the holder to an equal share of our profits. (E.g., Investopedia states “Shares are units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends. . . .”,available athttps://www.investopedia.com/terms/s/shares.asp (last accessed July 26, 2018).)
9. In an appropriate location in your offering circular, disclose how you determined the number of securities to be issued for each type of member data provided and how you determined the estimated fair market value of such data.
Response:We have added disclosure regarding how we determined the number of securities to be issued for each type of member data provided and how we determined the estimated fair market value for the divers categories of Member Data under the heading “Securities Being Offered—Value of Consideration” beginning on page 41 of the Offering Statement.
10. It does not appear your disclosed website is operable. Please advise or revise.
Response:We advise the Staff that at the current time the LunaTrust website is not operable to the public as we are in confidential registration with the Commission. We intend to launch public access to the LunaTrust website in connection with the qualification of the Offering Statement, as the website will offer and sell the shares. We will provide the current development version of the website to the SEC staff supplementally upon request.
Summary of Information in Offering Circular, page 4
11. Provide a summary of the material risks to members who provide their data to you. We note some examples in various locations in your filing such as revelation of surname,non-paternity and of various hereditary diseases and traits, and that such data could be released into the public domain unintentionally.
Response:We have provided a summary of the material risks to members who provide their data to us in the “Summary of Information in Offering Circular” under the heading “Risk Factors” at page 5 of the Offering Statement.
12. Disclose what consideration would be paid to members if their interests were redeemed.
Response:A member is allowed to redeem his or her shares at any time, at which point he or she may elect to revoke his or her purchaser consent provided in connection with purchase of those shares. We have disclosed at page 6 of the Offering Statement that no consideration will be paid to a member if his or her shares are redeemed.
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Risk Factors, page 7
13. We note your disclosure on page 44 regarding mandatory arbitration, class action waiver, exclusive forum, and fee shifting provisions in your operating agreement. We also note the waiver of liability provision in section 4.4(a) of your operating agreement. Please add risk factor disclosure to address the specific material risks to your members from each of these provisions and the similar provisions contained in your management agreement.
Response:We have added risk factor disclosure at page 14 of the Offering Statement to address the specific material risks to our members from the provisions noted in this comment and the similar provisions contained in our management agreement.
Our business is subject to complex and evolving U.S. and foreign laws..., page 8
14. If you will be subject to the European General Data Protection Regulation (GDPR) that took effect in May 2018, expand your risk factor disclosure as appropriate. If you will not market to European-based customers, disclose how this will limit your ability to market to global pharmaceutical and life sciences companies.
Response:At this time, the Company can accept only members who are residents of the United States. We plan to accept European Union members in the future, subject to compliance with appropriate European laws and regulations. We have added risk factor disclosure at page 8 of the Offering Statement to the effect that GDPR may apply to us in the future and at page 28 of the Offering Statement concerning our readiness for GDPR.
Our Manager may have conflicts of interest..., page 13
15. We note public announcements regarding your manager’s Luna Coin project. If that project is still active, update your disclosure as appropriate. If that project would compete with your planned business operations, expand your risk factor disclosure to discuss the potential conflicts of interest, including the risk of competing with your manager.
Response:While the Manager in the past anticipated and continues to consider issuing a “Luna Coin,” the Manager has no current plans to do so. Among other things, the Manager does not know (a) if or when it may create a “Luna Coin”, (b) what the material terms of a “Luna Coin” may be, including whether or not the “Luna Coin” would be a security under the SEC’s evolving views and guidance on crypto-currencies, crypto-tokens and related products, or (c) whether a “Luna Coin” would be in any way related or supplemental to, or competitive with, our business or, if so, the materiality thereof. Given these unknowns, combined with the ability of members to redeem their shares and withdraw our continuing right to use their data any time should the Manager issue a Luna Coin (or at any other time or for any other reason), we believe a potential issuance of a “Luna Coin” is not material to our potential investors and any reference in the Offering Statement to a potential digital asset could cause investor confusion.
Our Operating Agreement eliminates our Manager’s fiduciary duties to our members, page 13
16. Expand your risk factor disclosure to address the lack of securityholders’ ability to seek accountability for wrongdoing given the elimination of fiduciary duties, governance provisions, and the unilateral discretion of your manager.
Response:We have added additional risk factors at page 15 of the Offering Statement to address the lack of securityholders’ ability to seek redress for wrongdoing given the elimination of fiduciary duties, governance provisions, and the unilateral discretion of the Manager.
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Description of Business, page 16
17. Clarify how you will create a longitudinal database if members do not continue to contribute personal data. Include appropriate risk factor disclosure.
Response:We have added a risk factor at page 9 of the Offering Statement concerning the need for members to recurrently provides us with data in order to create a longitudinal database as we intend.
18. We note that paragraph 2 of your management agreement indicates the database managed by your manager will be “designed to have key functions powered by the blockchain.” Please explain how you intend to incorporate blockchain technology into your database and how the technology will work. Include an outline of the stages of development for the blockchain technology solution for your database and where your manager is in each stage, including associated milestones, timeframes, and costs. Also, provide balanced disclosure regarding the potential risks and benefits of the technology.
Response:We do not intend to use any blockchain technology in connection with any Member Data or our Member Data database. We do, however, intend to use blockchain technology as a distributed and tamper-evident ledger to the extent disclosed in the Offering Statement under the heading “Description of Business—Our Solution—Blockchain Technology” beginning on page 27. We intend to deploy the blockchain technology for our intended application usingoff-the-shelf third party tools from reputable vendors. Given the limited scope of our intended usage of blockchain technology, the modest efforts we anticipate to be necessary to implement the technology, the early stage of our development plans and our current ability to collect and manage the same information solely using conventional database technology (albeit with less transparency to our members), we do not believe that an outline of the stages of its development or the Manager’s progress is in each stage is material to potential investors in our shares. Accordingly, we have not included disclosure regarding these items. As noted in our blockchain disclosure, we intend to use a blockchain to provide additional transparency to our members. Given that we plan for our blockchain not to contain any sensitive data, we believe the risks associated with this aspect of our business plan are relatively modest; nonetheless, we have added a risk factor at page 11 of the Offering Statement to disclose potential risks of this technology, including the risk that we may not implement this technology.
19. Please discuss government regulations of your blockchain technology solution for your database, if material. Provide appropriate risk factor disclosure, if applicable. Also, please tell us whether your blockchain technology solution will involve holding or trading digital assets or cryptocurrencies.
Response:As noted in our response to Comment 18 above, we do not intend to use any blockchain technology for our Member Data. We do not believe our the limited categories of information that would be stored in a blockchain would entail any additional material risks to our potential investors because the associated user identities will be masked and only accessible if our primary, conventional user database is compromised, for which we have already included a risk factor.
Additionally, as noted in our response to Comment 15, neither we nor the Manager has any current plans to issue crypto-currencies nor do we or the Manager know what the terms would be if we or the Manager elected to issue crypto-currencies in the future (including whether or not such crypto-currencies would utilize a blockchain or, if so, how they would do so).
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20. We note you have organized your business as a limited liability company with a public benefit corporation as your manager that will own the intellectual property to your database with your members holding limited liability company interests. Please revise to disclose why you have chosen this structure and the material advantages and disadvantages of this structure as compared to structuring your company as a typical corporation that offers common stock to its investors.
Response:We added disclosure at page 18 of the Offering Statement discussing the reasons for choosing our organizational structure. Per comment 24, we have added disclosure regarding the material differences between the shares we are offering and typical common stock which describes the advantages and disadvantages to investors of our governance structure.
21. To the extent you, or your manager, are affiliated with digital asset-related businesses, please disclose such affiliations. Also, tell us how Luna Coin relates to your business and how your manager plans to use Luna Coin for its business operations. Include in your response the costs to your manager of creating Luna Coin, the material risks your manager faces in implementing it, and how you expect your manager’s token generation to impact your planned operations. Also, explain how your manager intends to comply with the registration and other requirements of the federal securities laws.
Response:We advise you that neither our company nor the Manager has any affiliation with any digital asset related business that is material to potential investors.
Please see our response to Comment 15, which is incorporated into this response by reference. Due to the Manager’s significant uncertainly whether or not a “Luna Coin” would ever be issued, what its material terms would be if issued, or how it would relate, if at all, to our business or operations, we cannot provide good faith estimates as to costs to the Manager of creating a “Luna Coin,” the material risks our Manager would face in implementing it, or how we expect the Manager’s potential issuance of a “Luna Coin” to impact our planned operations. We further believe, as noted in our response to Comment 15, that given this fundamental uncertainty, these matters are not material to potential investors and any disclosure relating to a potential digital asset could cause investor confusion.
Supplementally, we advise you that if the Manager elects to issue a “Luna Coin” or other digital asset or token, and if such digital asset or token would be a security at the time of issuance as defined under the Securities Act of 1933, as amended, the SEC’s rules and regulations promulgated thereunder or applicable judicial interpretations thereof, our Manager intends either to register the offering or to offer the “Luna Coin” under an available exemption from registration.
22. We note your disclosure that large amounts of genomic and other data are already freely available from public databases which you disclose have been of little interest to the pharmaceutical industry due in part to the “high variation in data quality.” We also note your disclosure on page 24 that your database inputs will include self-reported genomic and phenotypic data, and medical data and DTC testing product data files which will be self-reported and originally sourced from third parties. Clarify how you will validate these inputs into your database and how you will control the variation in your data quality given that it is self-reported or made available from third parties. Also, disclose the risks to your business and the value proposition of your database if your inputs do not prove reliable.
Response:We have provided additional disclosure at page 25 of the Offering Statement concerning how we will validate inputs into our database and at page 25 of the Offering Statement how we will control the variation in our data quality. We have also added appropriate risk factor disclosure at page 10 of the Offering Statement to discuss the risks if our inputs do not prove to be reliable.
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Compensation of Our Manager, page 31
23. We note your disclosure on page 24 that you, your manager, and your members may receive compensation from research sponsors for identifying potential members for targeted research. Clarify in this section how that compensation will be determined and divided among the various parties.
Response:We have clarified on page 26 of the Offering Statement and on page 33 in the “Compensation of Our Manager” section how compensation from research sponsors will be determined and divided among the various parties.
Securities Being Offered, page 35
24. Disclose the material differences between the securities being offered and typical common stock.
Response:We have added disclosure at pages 37 of the Offering Statement the material differences between the securities being offered and typical common stock.
Arbitration; Governing Law; Class Actions, page 44
25. Disclose in this section the waiver of liability provision in section 4.4(a) of your operating agreement and then disclose how each provision described in this section may materially impact the rights of holders. To the extent that any of these provisions would apply to any claims under the federal securities laws or the rules and regulations thereunder, revise your disclosure to affirmatively state (in both the disclosure and in the related exhibit) that by agreeing to these provisions, investors will not be deemed to have waived the manager’s or the company’s compliance with any federal securities laws or the rules and regulations thereunder. In addition, address any question under applicable state law as to the enforceability of any of the provisions described in this section and, to the extent the transfer of any security is required by law, address whether these provisions would apply to transferees.
Response:We have disclosed at page 47 of the Offering Statement the waiver of liability provision in section 4.4(a) of our operating agreement and we have revised our disclose and added risk factors at page 15 of the Offering Statement explaining how these provisions may materially impact the rights of holders. We have revised Section 4.4(a) of our operating agreement to state that the waiver of liability does not apply to claims our apply to any claims members may have under United States securities laws or the rules and regulations thereunder with respect to the Manager’s or our compliance with any such United States securities laws or the rules and regulations thereunder. The disclosures in the Offering Statement concerning the waiver in section 4.4(a) indicate that exception. We have filed the amended and restated operating agreement with the Offering Statement.
We also added disclosure at page 49 of the Offering Statement concerning the limitation of liability provisions in our management agreement to state that by our company agreeing to these provisions, investors will not be deemed to have waived the Manager’s or our company’s compliance with any federal securities laws or the rules and regulations thereunder. We note that while section 4.4(a) of our operating agreement applies to the maximum extent permitted by the Delaware Limited Liability Company Act, we do not believe there to be any material question under such act as to the enforceability of this section as written and we therefore have not qualified the disclosure to suggest that investors may not be bound to these limitations as written. We have noted at page 48 of the Offering Statement that to the extent that the transfer of any security is required by law, these provisions would apply to transferees.
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Our Management Agreement, page 45
26. Disclose the waiver of liability provision in section 9, the mandatory arbitration provision in section 16.2, the exclusive forum provision in section 16.7, and the fee shifting provision in section 16.8. Also, disclose how you would initiate claims against the manager to enforce any terms of the agreement given that the manager controls you and you have no officers or directors.
Response:We have added disclosure at pages 49 of the Offering Statement to disclose the provisions referenced in this comment. We have also disclosed at page 49 of the Offering Statement to the effect that it is unlikely that the Manager would cause our company to initiate claims against the Manager to enforce the terms of the Management Agreement and that members’ recourse is generally limited to exercising the right to redeem their shares and withdraw their consent for us to use their Member Data.
Index to Financial Statements of LunaTrust, LLC, pageF-1
27. Please tell us why you only presented an opening audited balance sheet and how this presentation complies with Part F/S(b)(4) of Form1-A as specified by Part F/S(c)(1).
Response:We believe our presentation of an inception audited balance and notes thereto complies with the financial statement requirements of Part F/S(b)(4) of Form1-A as specified by Part F/S(c)(1). The inclusion of a balance sheet dated as of the inception date is consistent with Part F/S(b)(3)(D) in that the filing is made during the period between inception (April 23, 2018) and three months after reaching the annual balance sheet date for the first time (which will be March 31, 2019). The date of the balance sheet (April 23, 2018) is within nine months of filing. The date of the balance sheet then determines which periods the statements of comprehensive income, cash flows and changes in stockholders’ equity must cover. Part F/S(b)(4) defines the periods for statements of comprehensive income, cash flows and changes in stockholders’ equity as “each of the two fiscal years preceding the date of the most recent balance sheet being filed or such shorter period as the issuer has been in existence.” For an entity that was not in existence prior to the balance sheet date, the shorter period is zero time and statements of comprehensive income, cash flows and changes in stockholders’ equity are therefore not required or possible to prepare.
28. We note that the manager is not entitled to reimbursement for operational expenses paid by the manager if such expenses would have been accrued by you under generally accepted accounting principles on or before March 31, 2020. Please tell us how you intend to account and reflect within your financial statements the expenses paid on your behalf by the manager. Refer to the guidance in SAB Topic 5T.
Response:Currently, the Manager is the sole member of LunaTrust. In accordance with our operating agreement, the Manager will automatically resign as, and cease to be, a member upon any other person being admitted as a member of the Company. Accordingly, we intend to account for the operational expenses paid on our behalf by the Manager while the Manager is the sole member as expenses of LunaTrust with a corresponding credit to paid in capital, in accordance with the guidance in SAB Topic 5T. Once an investor becomes a member, the sole relationship between our company and the Manager will be the contractual services relationship that exists pursuant to the operating agreement and the management agreement and the manager provisions of the Delaware Limited Liability Company Act (Chapter 18 of Title 6 of the Delaware Code), and we do not believe that the guidance in SAB Topic 5T would continue to apply. Accordingly, the Company plans not to record as expenses of the Company those expenses that the Manager bears after the Manager is no longer a member and for which the Manager does not have a contractual right of reimbursement. Our management agreement has been amended and restated to revise the description of expenses for which the Manager is not entitled to be reimbursed to those that are, or would be but for the applicable provisions of the management agreement, accrued by the Company under generally accepted accounting principles on or before March 31, 2020. We have filed the amended and restated operating agreement with the Offering Statement.
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If you have any further comments and/or questions, please contact me or John Tishler, Esq. at Sheppard, Mullin, Richter & Hampton LLP at (858)720-8943.
| Very truly yours, |
| /s/ Robert Kain |
Robert Kain Chief Executive Officer |
cc: John Tishler, Esq., Sheppard, Mullin, Richter & Hampton LLP
August 23, 2018
Office of Electronics and Machinery
Division of Corporation Finance
Securities and Exchange Commission
100 F. Street, NE
Washington, DC 20549
| Re: | LunaTrust LLC | |
| Amendment No. 1 to Draft Offering Statement on Form1-A | ||
| Submitted July 30, 2018 | ||
| CIK No. 0001741687 |
Ladies and Gentlemen:
This letter sets forth the responses of LunaTrust LLC, a Delaware limited liability company (the “Company,” “LunaTrust” or “we”), to certain of the comments received from the Staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) by letter dated August 16, 2018 (the “Comment Letter”) concerning the Company’s draft offering statement, as amended, onForm 1-A (the “Offering Statement”). As discussed with the Staff via telephone on August 20, 2018, we are providing written responses to comments 2, 3 and 4 of the Comment Letter. We will amend andre-submit the Offering Statement, and provide a full response to the Comment Letter, at a later date.
Draft Form1-A submitted July 30, 2018
2. We note your added disclosure in the last paragraph on page 41 that you intend to revise the number of shares to be issued for types of Member Data from time to time based on bona fide sales or your updated determination of the fair value of such types of Member Data. Please revise your disclosure to be consistent with Rule 251(d)(3)(ii) of Regulation A which provides that you must offer the securities at a fixed price for the duration of the offering.
Response:Rule 251(d)(3)(ii) prohibits “at the market offerings” under Regulation A and defines the term “at the market offering” to mean an offering of equity securities into an existing trading market for outstanding shares of the same class at other than a fixed price. The offer described in the Offering Statement does not satisfy this definition of an at the market offering because it is not made into an existing trading market. The shares arenon-transferable, except as required by law, and there will not be any public trading market for the shares. This is disclosed on pages 5, 13 and 16 in the Offering Statement.
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3. It appears from your disclosure on page 41 that you established the value for some of the Member Data categories by reference to sales of genomic information. Please identify which Member Data items you are valuing on the basis of an “accepted standard” and which you are valuing by reference to “bona fide sales within a reasonable time.” For valuations based on bona fide sales, provide us with your analysis of why those sales are comparable to the acquisitions of Member Data contemplated by your disclosure. Include in your analysis how the price consumers pay to acquire their own ancestry data, as described in your first analysis on page 41, related to your valuation methodology. Please also provide us with your analysis of how you considered other acquisitions of genomic or related personal data in determining bona fide sales for purposes of your valuations.
Response:We have not valued any Member Data based on bona fide sales within a reasonable time as we are unaware of any bona fide sales of the limited and revocable rights for any of the Member Data types indicated on the cover page of our Offering Statement that we will acquire from an undifferentiated (i.e., self-selected) population. We will revise the first sentence on page 41 of the Offering Statement to clarify that the fair value has been determined by an accepted standard due to the absence of bona fide sales of Member Data within a reasonable time.
The price that consumers pay to acquire their own ancestry data and/or health information from a direct to consumer genomics provider does not reflect a bona fide transaction in the limited and revocable rights that we will acquire for the DNA Genome-Wide Microarray or any other Member Data type. Today, consumers pay direct to consumer genomics providers a fee primarily for trait, genealogy and health analyses performed by such providers and only secondarily for their permanent access to the underlying genotype file, which many consumers do not access at all. Consumers also provide data rights to the direct to consumer genomics provider as part of the provider’s terms of service. If a consumer elects to download his or her genotype file, he or she may share that file with an unlimited number of other data repositories in addition to having shared it with the initial provider. The difference between the information and rights consumers receive from a direct to consumer genomics provider and the limited and revocable rights to the genotype file they will provide to us in exchange for shares is estimated in the analysis described in the second paragraph on page 41. See also our response to the Staff’s comment 4, below.
4. You indicate that you are not aware of any bona fide sales for the types of Member Data you intend to acquire. In the absence of such bona fide sales, please clarify how you determined that the valuation methodology you intend to use is an “accepted standard” for purposes of Note to Paragraph (A) of Rule 251. As part of your analysis, please specifically address whether the disclosed methodology has been recognized as an accepted standard or used by third parties to value genomic or similar data.
Response:None of Paragraph (A) of Rule 251, the proposing release for Regulation A amendments (ReleaseNo. 33-9497) or the adopting release for these amendments (ReleaseNo. 33-9741) define or clarify the meaning of an “accepted standard” for purposes of valuingnon-cash consideration. We note that very similar language is used in Rule 419(g) (discussed further below), Rule 501(c) of Regulation D and Rule 701(c)(3)(i), the latter two of which contemplatenon-cash consideration for offering limits in the exemption. The term “accepted standard” is not further defined in these exemptions or in their respective proposing or adopting releases.1
| 1 | SeeRelease Nos.33-6389 (1982) (adopting Regulation D with the “accepted standard” language),33-6339 (1981) (proposing Regulation D with the “accepted standard” language),33-6768 (1988) (adopting Rule 701 with the “accepted standard” language and no explanation) and33-6683 (1987) (proposing Rule 701 but not including the “accepted standard” language). ReleaseNo. 33-6339, which proposed Regulation D, based the definition of “aggregate offering price” on Rule 242(c).See id., § V. B.3. Rule 242(c) was modeled on similar language in then Rule 254(c) of Regulation A.See ReleaseNo. 33-6180 (1980).Rule 254(c) was adopted in SEC ReleaseNo. 33-3663. |
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Rule 419 concerning blank check companies states in Note 2: “If all or part of the consideration paid consists of securities or othernon-cash consideration, the fair value shall be determined by an accepted standard, such as bona fide sales of the assets or similar assets made within a reasonable time, forecasts of expected cash flows, independent appraisals, etc. Such valuation must be reasonable at the time made.” Accordingly, we believe the term “accepted standard” should be understood to include, but not be limited to, reasonable forecasts of expected cash flows or reasonable independent appraisals.
We further note the Staff’sno-action letter to Clark Tank Lines (Sept. 22, 1984). The requesting issuer proposed to issue stock to an Employee Stock Ownership Plan (ESOP) in reliance on Rule 504 of Regulation D in exchange for wage concessions from its employees. The issuer represented that the wage concessions were being made for the stock but also (and primarily) for job security, and that both the amount of wage concessions (i.e., the aggregate number of hours employees receiving stock through the ESOP would work during the5-year term of the plan) and the associated job security (i.e., how much of the wage concession was simply due to employees’ desire for the issuer to survive a major downturn) were impossible to value. The issuer proposed to value the consideration received by the value of the shares to be issued to the ESOP, with the shares valued through an independent appraisal performed in accordance with Revenue Ruling59-60. The Chief Counsel of the Division of Corporation Finance concurred that the issuer could rely on Rule 504 using that calculation methodology in that case subject to various stated conditions.
We believe the additional language in Rule 419, the Clark Tank Lines letter and other Staff analyses2demonstrate that an accepted standard for valuingnon-cash consideration is one supported by rational analysis of the attributes of the particularnon-cash consideration and based on standards that are recognized for more general situations. This definition would preclude unilateral and unsupported declarations of value, such as a nominal price stated in transaction documents.3
We believe this authority further stands for the proposition that the requirement for an accepted standard does not preclude reliance on a dollar limited offering exemption simply because the fair value of thenon-cash consideration is difficult to ascertain.
| 2 | See,e.g., No Action Letter issued to Northwest Medical Resources, Inc. (May 10, 1976) (issuer allowed to use book value of shares as an “accepted standard” in Regulation A context where no trading history existed and the shares were being issued in a “pooling of interests” merger); Comment letter issued to RX Healthcare Systems Ltd. (Feb. 27, 2015) (issuer’s responsive disclosure to the Staff’s comment 62 was: “The aggregate value ofnon-cash consideration will be established by bona fide sales of that consideration made within a reasonable time, or, without sales, on the fair valueor reasonable value as determined by the board of directors as a prudent purchaser.” (emphasis supplied)). |
| 3 | SeeAccounting & Valuation Guide for the Valuation of Privately-Held-Company Equity Securities Issued as Compensation prepared by the Equity Securities Task Force of the AICPA 8.03(d) (“It is important to carefully consider the rights and preferences of each class of equity when estimating the aggregate fair value implied by the transaction. In these cases, one approach would be to perform a specific valuation of the securities issued or the noncash consideration received. It would not be reasonable to rely solely on the nominal price specified in the documents.”) |
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Turning to our calculation of the value of the specified types of genomic Member Data, we relied upon the following authoritative guidance related to business and equity security valuation as our accepted standard:
1. Accounting & Valuation Guide for the Valuation of Privately-Held-Company Equity Securities Issued as Compensation prepared by the Equity Securities Task Force of the AICPA (AICPA Accounting & Valuation Guide);
2. Statements on Standards for Valuation Services No. 1, issued June 2007 by the American Institute of Certified Public Accountants (SSVS No. 1); and
3. 2018-2019 Uniform Standards of Professional Appraisal Practice (USPAP) issued by the Appraisal Foundation.
Each of these publications is consistent in the recognition of three primary methods to determine fair value, namely, market approach, income approach, and the asset (or cost) approach, and apply consistent (although not identical) definitions to each method. The AICPA Accounting & Valuation Guide and SSVS No. 1 apply specifically to the valuation standards and methodologies used within the context of financial reporting activities. We relied primarily on the AICPA Accounting & Valuation Guide in developing our analysis and in referencing the definitions of each valuation method.
According to the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) glossary, themarket approach is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business. The market approach bases the value measurement on what other similar enterprises or comparable transactions indicate the value to be. Under this approach, the valuation specialist examines investments by unrelated parties in comparable equity securities (or assets) of the subject enterprise or examines transactions in comparable equity securities (or assets) of comparable enterprises. Financial and nonfinancial metrics may be used in conjunction with the market approach to estimate the fair value of the privately issued securities of the subject enterprise.
According to the FASB ASC glossary, theincome approach is defined as “valuation techniques that convert future amounts (for example, cash flows or income and expenses) to a single current (that is, discounted) amount.” The fair value measurement is estimated on the basis of the value indicated by current market expectations about those future amounts. The income approach obtains its conceptual support from its basic assumption that value emanates from expectations of future income and cash flows.
The FASB ASC glossary defines theasset (or cost) approach as a general way of determining a value indication of an individual asset by quantifying the amount of money required to replace the future service capability of that asset. An asset’s value today is what it would cost today to acquire a substitute asset of equivalent utility. In applying the cost approach, replacement cost often serves as a starting point, and then, adjustments are made for depreciation and other factors.
We performed an analysis using three independent valuation methodologies under the market approach and income approach to determine the fair value of the Member Data types to be received in exchange for our shares. We deemed the asset approach not applicable to our analysis because it is not practical to replace or recreate the limited, revocable license to the diverse Member Data types. Our analysis was performed in a manner consistent with the literature referenced above, and, as such, we believe our analysis and value conclusions reflect the application of an accepted standard for purposes of Rule 251.
More specifically, the valuation methods first estimate the fair value of a single Genotype file, also known as a DNA Genome-Wide Microarray (GT file), based on observable, third-party market transaction data for the most directly comparable assets we could identify. Other genomic contributions were then valued in relation to the fair value of a GT file.
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Our first analysis consisted of a genotype contribution valuation. This analysis is a market approach based on market participant data, specifically the price that individuals pay to established genotype testing services for both trait, genealogy and health analyses and the right to access the underlying GT file (which right, as we noted in our response to the Staff’s comment 3, is often not exercised). We observed a typical market-based price for obtaining this suite of services and then subtracted the estimated value of the trait, genealogy and health report to obtain a residual value calculation for the right to access the GT file. We then divided the value of this right by the mean number of entities with which we project an individual would share (license) his or her GT file to determine the fair value of the GT file per licensee.
Our second analysis consisted of an electronic health record (EHR) valuation that was used to impute the value of a GT file. This analysis is also a market approach based on market participant data – specifically, the observable price of ade-identified EHR, which we observed in publicly available listings to be a range between $7 and $50. We note that in some cases, the observed prices were for data that appeared to have been unlawfully obtained. We were not able to obtain information on the content or comprehensiveness of the EHRs that were indicated to be for sale. In our analysis, we assumed amid-price of $20 per EHR, and we then estimated that amid-priced EHR record would contain 30% of the total information we would be able to obtain from a highly engaged member of our community. That is, we assumed that an individual who elects to provide an EHR to us will be more engaged with our community and likely also to provide multiple other data contributions in exchange for shares, such as various types of genomic data, wearable data and surveys. This analysis implies a value of $67 ($20/30%) forall data we would obtain from a single more engaged individual providing an EHR to us, including other data provided by the same individual. We estimate that the GT file for such an individual would represent 5% of the total value of all contributions by such individual, thereby implying a value of the GT file of $3.33 as indicated in the Offering Statement.
Our third analysis consisted of a terminal value analysis based on the value per record observed from two significant market transactions involving the acquisition of large volumes of patient medical data (described below under the heading “Transactional analyses”). These transactions are summarized below. We prepared a discounted cash flow (net present value or NPV) analysis under the income approach using reasonable estimates of the number of data files we anticipate collecting and the average acquisition cost observed via those two market transactions to arrive at an NPV per patient record. We then adjusted the NPV per patient record by the estimated percentage of the contribution of the GT file to the total value of the member record to determine the fair value of the GT information. The terminal value analysis also provides a reasonableness test with respect to the other two valuation methods in that it relates the fair value per GT file to the anticipated future value of the Company via anticipated cash flows.
After using the market approach and income approach to determine the fair value of the GT file, we determined the fair value of other data types by analyzing the respective values of contributions of those data types compared to a GT file or other closely related data type. We believe this approach is consistent with the accepted standard we used to value the GT file. The valuation standards and methodologies we reference above mandate that in the absence of a bona fide transaction involving the subject asset or security, the fundamental valuation approaches – market, income and asset – should be used to develop estimates of value predicated on adjustments to observable third-party datapoints and relative value concepts. Examples of this application of the accepted standard to other situations include, but are not limited to, intercompany transfer pricing analyses where the value of goods and services exchanged between related parties is determined based on qualitative and quantitative adjustments to market-based datapoints (e.g., a cost-plus or comparable profits analysis);stock-for-stock transactions involving privately held companies (e.g., a 3:2 exchange ratio where the relative value of each firm is determined); and using quantitative and qualitative adjustments to determine the value of a security relative to one that has been priced in the market (e.g., determining the fair value of common stock at a percentage of the value of recently transacted preferred stock after applying appropriate adjustments).
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Transactional analyses
The two significant market transactions that were analyzed in the third analysis above were Genentech Inc.’s (Genentech) partnership with 23andMe, Inc. (23andMe) announced in January 2015 (Genentech/23andMe transaction) and Roche’s acquisition of EHR software firm Flatiron Health announced in February 2018 (Roche/Flatiron transaction). Publicly announced details of these two transactions, plus two others that were not included in our terminal value analysis, are summarized below.
In reviewing these analyses, it is critical to understand that the value ofde-identified medical data, including all of the Member Data types indicated on the cover page of our Offering Statement, is heavily dependent on what is known about the patient that provided that data. We are offering the same number of shares per Member Data type to any person who voluntarily chooses to submit that data type, regardless of what we already know about that person. We therefore refer to our population as “self-selected,” which in the marketplace is the equivalent of a random population. As noted in the summaries below, the transaction precedents we have identified involve data from persons withpre-identified traits, which, because of the nature of thosepre-identified traits, make the data substantially more valuable. As a general rule, the value of data with a preidentified, sought after trait compared to data from a random population is:
| Value (preidentified trait) = | value (random sample) | |
| ||
| percent of preidentified trait in random population |
The application of this formula is illustrated below in the first summary below.
Genentech/23andMe transaction
Genentech and 23andMe announced a partnership in January 2015 to recruit 3,000 individuals who suffered from Parkinson’s disease (or their first-relative) for clinical trials. The incidence of Parkinson’s disease in the general population is approximately 0.013%, or 13 individuals for every random sample of 100,000 individuals. 23andMe publicly reported having approximately 800,000 unique genotypes in 2015. Through 23andMe’s involvement with the Michael J Fox Foundation, 23andMe had over 12,000 diagnosed Parkinson’s disease patients and 1,300 family members in its database, including detailed medical histories. Because of this relationship, the number of diagnosed Parkinson’s patients in 23andMe’s database was substantially higher than would have occurred in a self-selected population of 800,000 unique individuals, which would be predicted at approximately 100 individuals. Genentech paid 23andMe $10,000,000 at announcement and agreed to pay up to an additional $50,000,000 subject to milestones. The milestones were not disclosed. The collaboration is apparently ongoing. For purposes of the third analysis described above, we imputed a cost per million random individual records that would equate to the $5,000 cost per identified Parkinson’s record implied by the maximum $60,000,000 price over 12,000 available patient records, resulting in an imputed maximum transaction price over the available data of $0.65 per available individual data set.
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Although we used this transaction and the implied price per data set in our third analysis involving terminal value of a business model that uses health data, we do not believe it is useful as an indicator of the value of an average (i.e., self-selected) member’s GT file. First, the disclosed transaction price was between $10,000,000 and $60,000,000 depending on milestones that were not publicly available, and the imputed transaction price per available record could therefore range from $0.11 to $0.65. Second, the population waspre-identified as having Parkinson’s disease (or a close relative of a person with Parkinson’s disease). We or anyone else with only self-selected participants would need a database of over 92 million unique individuals to obtain a sample size of 12,000 individuals with Parkinson’s disease.4 Third, even if we somehow had a sufficient population of Parkinson’s disease members, we would have only the data those members voluntarily contributed. By contrast, 23andMe stores biobank samples their customers submitted for testing, and those samples are available to 23andMe for further sequencing and analysis at any time. Accordingly, the implied range of imputed transaction price per available record does not tie to the more limited genomic information in a GT file. The cost of fully sequencing the biobank samples for the 12,000 individuals (or 15,000, including family members) would be substantial (perhaps $20,000,000 or more), and may have been taken into account in either or both the consideration to be paid or the milestones. Finally, and most importantly, the disclosed purpose of the partnership was to identify participants for clinical trials. Our members will not be consenting to participate in clinical trials as part of their consideration for the shares, and accordingly, the milestone-based pricing of a transaction with the stated purpose of producing participants for clinical trials has limited relevance to the value of our members’ GT files.5 Put another way, we are not receiving from our members the primary value that Genentech appears to have been seeking in the Genentech/23andMe transaction, and which value was presumably incorporated into both the initial price, the maximum price and the milestones.
Roche/Flatiron transaction
The Roche Group (Roche) and Flatiron Health, Inc. (Flatiron Health) announced in February 2018 that Roche would acquire all shares of Flatiron Health for $1.9 billion. The transaction completed in April 2018. Flatiron Health is a healthcare technology and services company focused on accelerating cancer research and improving patient care. As of the announcement date, Flatiron Health disclosed partnerships with over 265 community cancer clinics, six major academic research centers and 14 out of the top 15 therapeutic oncology companies. Flatiron Health’s website claims 2,000,000 active patient records. We presumed these records to be of cancer patients given Flatiron Health’s mission and business.
Cancer has a 4.4% incidence in a general population. For purposes of the third analysis described above, we imputed a cost per million random individual records that would equate to the $950 cost per identified cancer patient record implied by the $1.9 billion purchase price over 2,000,000 available patient records, resulting in an imputed maximum transaction price over the available data of $42.25 per available individual data set. Although we used this transaction and the implied price per data set in third analysis involving discounted cash flow for a business model that uses health data, we do not believe it is useful as an indicator of the value of our member’s GT file.
Flatiron Health was purchased as an operating business and post-transaction is maintained as a separate legal entity. Roche’s disclosed rationale for the purchase was to “provide the technology and data analytics infrastructure needed not only for Roche, but for oncology research and development efforts across the entire industry.” In other words, this a purchase of a business and not a purchase of data, and the ongoing business purchased will provide Roche a flow of additional phenotypic data contributions for the existing patient base and continual access to new patient data. We found no indication that the purchase price related to the value of an individual GT file, or even that individual GT files are normally included in the available patient data. Accordingly, we do not believe that the implied price per available data record bears any relationship to the market value of an individual GT file, except to the extent used in the company terminal value analysis for our third methodology described above.
Pfizer/23andMe
Pfizer, Inc. (Pfizer) and 23andMe announced a collaboration in 2014 to recruit up to 10,000 individuals suffering from Inflammatory Bowel Disease (IBD) in a research initiative designed to explore the genetic factors associated with the onset, progression, severity and response to treatments for BID. Pfizer and 23andMe announced a further collaboration in 2015 for a longitudinal study involving lupus, which entailed enrolling and genotyping 5,000 people suffering from lupus. The announcement indicated that the collaboration would include the integration of medical records, targetedbio-sampling along with genetic information for all participants. Financial terms were not disclosed for either collaboration. Accordingly, we were unable to consider this transaction in our valuation analysis. We note that if we had available financial terms, similar factors that limit the comparability of the Genentech/23andMe transaction to our offer of shares would apply to these collaborations.
deCode/Amgen
deCode Genetics, Inc. (deCode) has a complicated history. deCode was founded in 1996, raised $199 million in its initial public offering in 2000, and filed for bankruptcy in 2009. Arch Venture Partners acquired deCode out of bankruptcy for $14,000,000 and further invested an undisclosed sum into the purchased assets. Amgen, Inc. (Amgen) acquired deCode for $415,000,000 in 2012, and thenspun-out NextCode Health which was acquired by WuXi PharmaTech, Inc. for $65,000,000 in 2015. The acquisition of deCode gave Amgen genomic information, biobank specimens and medical histories of 160,000 individuals, representing over half of the adult population of Iceland. The population of Iceland is known as a “founder population,” meaning the genetic diversity is limited compared to a randomly sampled human population. The combination of genomic and family medical history from a founder population is significantly more valuable than genomic information from the self-selected population from which we will solicit our members because far fewer persons are needed from a founder population to identify statistically significant correlations between genomic information and observed medical traits (such as the occurrence of a particular disease). Moreover, the subject data derived from an Icelandic governmental study that was unique and is likely impossible to replicate. Finally, the data obtained was exclusive to Amgen and could be used by Amgen in perpetuity. Because of the unique nature of the population and data acquired, and the substantial difference in rights acquired, including the exclusivity and scarcity of the data, we did not consider this transaction in our analyses.
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| 4 | We estimate the maximum number of individuals we could add as members through this offering would be 1.4 to 1.6 million members. |
| 5 | We note also that the Company will not earn any revenue should one of our members agree both to be identified to a customer that purchases a query of our Database and to participate in a clinical trial. Pursuant to our purchaser consent, our members will agree that we may contact them from time to time regarding opportunities for them to participate in targeted research. We will notify our members of the terms of participation, including any compensation offered by the sponsor of the study. Participation in targeted research will be completely voluntary. |
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If you have any further comments and/or questions, please contact me or John Tishler, Esq. at Sheppard, Mullin, Richter & Hampton LLP at (858)720-8943.
| Very truly yours, |
| /s/ Robert Kain |
| Robert Kain |
| Chief Executive Officer |
| cc: | John Tishler, Esq., Sheppard, Mullin, Richter & Hampton LLP |
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