Reps and Warranties . . .

refer to the statements of facts, opinions, and estimates investors ask companies and managements to put into writing as a condition of funding. These representations (reps) and warranties usually appear in the financing agreement. Some of the more common ones are

• Organization and corporate power. The company is duly organized, in good standing, and is qualified to conduct business in the manner and at the locations it is conducting business.
  

• Authorization. The company has the power and authority to enter into the financing agreements and to perform its obligations under them. The agreements have been duly authorized by the company’s board of directors and by all other necessary corporate action.
  

• Capitalization. The company’s outstanding shares of capital stock consist of only those disclosed in the representation. No person has any rights to acquire any capital stock in the company except those that management has described. If the company owns shares in any other companies, that ownership is disclosed as well.
  

• Financial statements. The financial statements delivered by the company to the investor are accurate, complete, and prepared in accordance with "generally accepted accounting principles."
  

• Undisclosed liabilities. The company is not subject to any material claims or liabilities that are not disclosed on its most recent balance sheet.
  

• Absence of changes. There have been no material adverse changes in the company or in its operations since the date of the last balance sheet delivered to the investor.
  

• An accurate business plan. To the best of management’s knowledge, neither the company’s business plan nor any other information delivered to the investor contains any untrue or misleading statements. The business plan projections were prepared based upon the assumptions disclosed therein, assumptions management believes to be reasonable.
  

• Properties. The company has good and marketable title to all of its properties.
  

• Compliance with laws. The company has complied with all laws and regulations that apply to it.
  

• Taxes. The company has filed all of its tax returns on time and has paid its taxes.
  

• Contracts and laws. All of the company’s material contracts have been disclosed to the investor. The company is not in default under any of its agreements. The financing agreements do not conflict with or cause a default under any of the company’s other agreements, its charter, or any laws.
  

• Intellectual property. The company has sufficient title to its patents, trademarks,  copyrights and other intellectual property to conduct its business. To management’s knowledge, the company’s business does not infringe upon any patents or intellectual property rights of others.
  

• Litigation. Except as has been disclosed to the investor, there is no litigation or other claim pending or threatened against the company.

Other reps regarding cost estimates, market research conclusions, and revenue projections may also be requested.

Reps and warranties should be made carefully. If they are inaccurate, they should be corrected. If they are over broad, they should be narrowed. Otherwise, they may create a default that releases the investor from his obligations and subjects management and the company to liability. See: Boilerplate, Investment Reps, Operating Covenants, Opinion Letters.