This is not your father’s venture capital fund.

Thanks to an atypical legal structure, the GRA Venture Fund—which recently raised $18.75 million in its first round of fundraising—can operate with a lower cost structure, offer investors state tax credits and offer more hands-on management by board members.

The GRA Venture Fund is part of the Georgia Research Alliance and its program designed to let the state partner with private investors to provide early-stage financing to start-up companies that grow out of the research and inventions created by the state’s universities. Its focus is on technology projects, with a likely emphasis on vaccines, according to David S. Phillips [photo, below right], a partner at Jones Day who, along with colleagues Milford B. Hatcher Jr. and John E. Zamer, advised both GRA and the fund.

But while funds such as this are not unique—other states, including Florida, have them, too—from a legal standpoint, said Phillips, “It’s really a different sort of animal.”

Unlike a typical venture capital fund, according to Phillips, the GRA Venture Fund has no general partner and no carried interest. In a typical fund setup, the general partner manages the fund and raises money for it in exchange for a 20 percent cut of the profits, referred to as carried interest.

To avoid those costs, Phillips said his team structured the fund as a limited liability company, or LLC, rather than as the more typical limited partnership.

The fund doesn’t need a general partner, he said, because the GRA will provide needed administrative, accounting and back-office support at no cost. Also, because the GRA already has a program, called VentureLab, designed to commercialize university research and inventions, the new fund’s goal is to provide a financial bridge for new companies coming out of VentureLab before they’d be mature enough to attract traditional venture capital. The GRA Fund money means there’s no need to hire a general partner to go out and chase more funds, Phillips said.

Also, the LLC structure means that management decisions typically made by the general partner will instead be made by a board comprised primarily of representatives of the investors, he said. The LLC allows board members to actively manage the fund without jeopardizing their limited liability—something that would be at risk if they participated in active management under a limited partnership structure.

“The fund is also a little unique in that the state Legislature passed state income tax credits for investors investing in the fund,” Phillips said. He explains that the providers of the first $30 million to the fund will get a 25 percent, or $7.5 million, state tax credit. There’s also a smaller credit for those who invest in any of the portfolio companies created through VentureLab and the fund.

The tax credits presented yet another legal twist, Phillips said, because many of the fund’s investors—which include Georgia Tech, the Medical College of Georgia and Georgia State University—already are tax exempt.

To avoid using up the available $7.5 million in tax credits with funds from investors who can’t benefit from the credits, Phillips said his team created a parallel fund for tax-exempt investors, allowing only those who can use the exemption to invest in the main fund.

Some of those main fund investors, who also serve on the board or as trustees, include: David Ratcliffe, an attorney who is chairman and CEO of Southern Co.; F. Duane Ackerman, a former BellSouth Corp. chairman and CEO; and Frederick E. Cooper, a former Jones Day lawyer and executive at Flowers Industries who is a longtime leader in the business and Republican communities in Georgia.

Phillips said the fund’s legal structure also was crafted to meet the requirements of the state’s seed capital statute. So far, Phillips said, the state’s seed capital fund has invested $7.5 million, assisted by a team of Bryan Cave-Powell Goldstein lawyers led by Frank A. Crisafi and Riccarda N. Heising.

The goal, Phillips said, is to attract three times the state’s investment from the private sector. Coupled with the tax credits, the fund has the potential to provide more than $100 million in venture financing and to invest in a wide variety of technologies and inventions.

“This was not a plain vanilla deal,” Phillips said.

Yes, Virginia, there is a living, breathing private equity and venture capital law practice—even in these miserly economic times.

So says the Dow Jones Private Equity Analyst’s latest ranking of law firms based on the number of deals closed in 2008. Six of the players on that 72-firm list have Atlanta offices: DLA Piper is the most highly ranked local, taking second place on the nationwide list, just behind Wilson Sonsini Goodrich & Rosati.

The other Atlanta-connected firms and rankings are Jones Day (16); Paul Hastings Janofsky & Walker (18); Duane Morris (44); Morris, Manning & Martin (tied with Ice Miller at 49) and Greenberg Traurig (51).

According to information from DLA Piper, Atlanta attorneys worked on venture capital deals valued at $290.2 million in 2008.

“Atlanta’s got a lot of … emerging growth companies, but not a lot of private equity in the city,” said Jeffrey M. Leavitt, a partner in DLA Piper’s office here. “I think one of the reasons we ranked so high is we can leverage the contacts of our other offices around the country.”

DLA Piper did not disclose its largest deal because, according to Leavitt, the client occupies a competitive technology space and wanted to keep the transaction quiet. He said that one of the marquee deals for the Atlanta office involved $55 million in Series B financing for Suniva, a solar-power chip company.

Leavitt said the Atlanta office’s client base in the venture capital/private equity arena is about 85 percent technology and 15 percent life sciences companies. He said he anticipates a jump in life sciences work, given the state’s active outreach to that sector via organizations such as the new Global Center for Medical Innovation and the Georgia Research Alliance.

According to the Dow Jones ranking, DLA Piper negotiated and closed a total of 894 private equity and venture capital deals in 2008.

Jones Day, which closed 174 private equity and venture capital deals last year, listed its largest deal as advising Ospraie Management LLC in its $2.8 billion acquisition of ConAgra Trade Group, a subsidiary of ConAgra Foods.

The largest deal of the 153 that Paul Hastings handled involved its representation of Madison Dearborn Partners in a now-terminated $42 billion acquisition of BCE Inc. with Providence Equity and the Ontario Teachers’ Pension Plan. A firm spokeswoman said that 66 Atlanta lawyers worked on those deals.

Duane Morris, with a total of 53 deals, represented Atlantic Industrial Inc. and private equity firm Sterling Capital Partners when Atlantic was acquired for more than $250 million.

Morris Manning, with 47 deals, represented a transportation-focused business services company in a $27 million expansion round with multiple investors. Greenberg Traurig, with 46 deals, did not disclose its largest deal.

An Atlanta company that makes software used to provide security to data networks obtained a venture-capital investment this month. 

Reflex Systems Inc. said that RFA Management Co. led a group of firms that invested a total of $8.5 million in the company. Morris, Manning & Martin partner Terresa R. Tarpley was counsel to Reflex Systems and Arnall Golden Gregory partner James E. Dorsey advised RFA Management, according to Reflex Systems. Dorsey could not be reached for comment.

Privately held Reflex Systems, based in Atlanta, was founded in 2000 and was formerly known as Reflex Security. RFA Management is also based in Atlanta.

Morris, Manning & Martin partner Grant Collingsworth and DLA Piper partner Jeff Leavitt were counsel on both sides of a recent venture capital investment in an Atlanta technology company.

FTRANS Corp. last month obtained a $3 million venture-capital investment from three groups - Total Technology Ventures LLC, Greenhill SAVP and New Atlantic Ventures. All three groups had previously made investments in FTRANS, which stands for Financial Transaction Systems. FTRANS makes software for the financial-services industry.

Collingsworth was counsel to FTRANS on the deal, and Leavitt to the investor group, according to Collingsworth. Total Technology Ventures is an Atlanta outfit, Greenhill is based in New York and New Atlantic in Reston, Va. and Cambridge, Mass.

Work in most areas of corporate law may be moribund, but not every segment is kaput. One active segment is venture capital investments in high-tech startups.

Consider the deal 2080 Media Inc. of Atlanta just made for a digital media company developed at Turner Broadcasting. 2080 Media of acquired PlayON! Sports from Turner last month for undisclosed terms. PlayON produces and distributes Internet broadcasts of untelevised college and high-school sports events. PlayON’s clients have included the Atlantic Coast Conference and Raycom Media.

Because of a variety of factors, tech startups actually thrive during economic downturns, said DLA Piper partner Jeffrey M. Leavitt, who was involved in the 2080 Media-PlayON Sports deal.

“Resources, like office space and salaries, are cheaper now,” Leavitt said. “Big companies are not really focused on research and development in this period. So, if you’re a startup developing some technologies, when the economy recovers, big companies will be looking to acquire the technologies they didn’t develop themselves.”

Amgen, Apple Computer and Microsoft all went through their incubation phases during economic recessions, Leavitt said.

2080 Media financed its deal for PlayON Sports partly through a $3 million fund it raised from local investors, Leavitt said. Leavitt and colleagues at DLA Piper, including associates Brian M. Gordon and S. Kiran Lingam, advised the fund’s lead investor, Imlay Investments Inc. and a second investor group, Noro-Moseley Partners. 

Another investor group, Buckhead Investment Partners, took legal advice from McKenna Long & Aldridge partner Michael J. Cochran and associate Bill C. Wainwright III.

Nelson Mullins Riley & Scarborough partners Donna K. Lewis and Brian S. Galison and associate Hemant D. Dutta represented 2080 on the acquisition of PlayON.

Latex products developer Vystar Corp. of Gwinnett County tapped longtime counsel Greenberg Traurig partner Gerald Baxter for work on its plans to issue stock to a venture capital company.

Universal Capital Management Inc., a publicly traded venture capital company based in Wilmington, Del., is an investor in Vystar, according to regulatory documents. UCM also provides management services, strategic planning, investment banking consultation and other services to Vystar. As payment for those services, Vystar intends to issue 600,000 shares of common stock to UCM.

The transaction is described in Vystar’s prospectus as an initial public offering. Baxter declined to comment, citing the Securities and Exchange Commission’s “quiet period” rules for companies in the midst of preparing for an IPO.

Vystar, based in Duluth, owns the rights to a technology used to make natural rubber latex products. The technology, which is branded under the name Vytex, reduces “antigenic protein in natural rubber latex products made with Vytex to virtually undetectable levels,” according to the company’s prospectus. “Allergic reactions to untreated latex are a significant detriment affecting numerous individuals globally,” the company said.

In April, Vystar signed a contract with a Malaysian company to commercially manufacture its products.

Ballard Spahr Andrews & Ingersoll partner Kean DeCarlo in Atlanta and Dergosits & Noah partner Michael Dergosits in San Francisco are listed in U.S. Patent & Trademark Office records as intellectual property counsel to Vystar.

Morris, Manning & Martin partner Ed Hirsch advised Chain Reaction Ecommerce Inc. on a $5 million venture capital investment, according to the law firm.  MMM associates Lou Barbieri and Scott Allen also worked on the deal. Total Technology Ventures LLC invested $2.5 million in the Atlanta company. Other unnamed investors put in the additional $2.5 million. Chain Reaction’s open-source software product, called CRE Loaded, allows companies to create and manage Web sites for selling products.

Troughs in the economy are often often the best time for angels to make investments, said DLA Piper partner Jeff Leavitt. That’s apparently the thinking used by angels who have invested in Purewire Inc.

Leavitt represented software maker Purewire this month in negotiating the terms of a $2 million investment from a group of angel investors. The angel group was led by Imlay Investments of Atlanta.

Angel investors, also known as seed investors, typically make investments of $2 million or less. Angels put their own personal money into companies; in comparison, venture capital firms invest money raised from outside sources.

In exchange for the investment, angels typically get a seat on the company’s board and preferred company stock along with voting rights. Lately, however, Leavitt said the angel investors with whom he’s negotiated have received convertible debt in the company, instead of preferred stock. That’s what happened in the Purewire transaction – the investors received a convertible note instead of stock.

“The benefit with convertible debt is that you don’t have to price the deal,” Leavitt said. “Usually for an angel, the company is too new for the angel to put a valuation on the company.”

With a convertible note, you can defer the valuation negotiation” until a later round of financing when the company raises equity, Leavitt said. Convertible debt also provides a benefit to the target company, because they don’t have to put a value on their assets too soon, he said.

Leavitt said he’s closed several angel-investment deals lately because of the downturn in the economy, rather than in spite of it. That’s because angel investors know they could reap a larger return when the market rebounds.

“A lot of the best returns on angel investments historically have been made in downturns,” Leavitt said.

Purewire makes software used to provide Internet security for businesses. Along with its $2 million investment, Atlanta-based Purewire said that it also named former Internet Security Systems CEO Thomas Noonan to its board.

Two Morris, Manning & Martin attorneys were counsel to a Florida maker of lithium polymer batteries on a round of financing.

BlueCrest Capital Finance LP served up $5 million in senior debt for Solicore Inc., and a group of existing investors ponied up an additional $2 million in convertible subordinated debt for Solicore. MMM partner David Calhoun and associate Christopher Maxwell, both in Atlanta, advised Solicore. BlueCrest, a Chicago-based investment firm, relied on in-house counsel, Calhoun said.

The group of existing investors in Solicore who participated in the new financing round included Draper Fisher Jurvetson of Menlo Park, Calif.; the venture-capital arm of Ontario Power Generation of Toronto; and Firelake Capital Management of Palo Alto, Calif.

Solicore, of Lakeland, Fla., makes ultra-thin, flexible solid-state electrolyte batteries, under the Flexion brand name, used in computerized credit cards, medical devices and radio-frequency identification tags.

Atlanta attorney Mike Siavage advised Brightree LLC on obtaining a venture capital investment from Battery Ventures of Massachusetts. Brightree and Battery Ventures did not disclose the size of the investment.

Siavage, whose three-man firm is called Siavage Law Group, said he’s been outside counsel to Brightree since the company was formed in 2001. Siavage advised Brightree on corporate and intellectual property aspects of the transaction with Battery Ventures.

Siavage said he hasn’t seen a slowdown in venture-capital transactions, in spite of general economic weakness.

“We’re kind of recession-proof,” Siavage said.

Brightree, headquartered in Duluth, makes software used by companies in several healthcare-related industries, including home medical equipment, and orthotics and prosthetics. Its software is used in inventory management and claims processing. Brightree said in a press release that it’s the second-largest filer of Medicare claims in the U.S. Some of Brightree’s customers include of Extrakare LLC of Norcross and MaxCare Bionics of Indianapolis.

Battery Ventures, of Waltham, Mass., specializes in making investments in upstart technology companies. Its investment portfolio has included Akamai Technologies, Cbeyond, Focal Communications and others. Cooley Godward Kronish advised Battery Ventures on its investment in Brightree.