Attachment: memo-disclosure-obligations-safe.docx
**PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION**
Dear Priya,
I am writing following today's board meeting at which the board discussed the Prism Core v2.0 validation failure and the question of whether and how to disclose these results to the company's SAFE holders. I want to provide you with Calderwood & Harkness's recommendation on how to proceed. I recognize this is a difficult situation, but I believe the path forward is clear, and I want to lay it out for you as directly as I can.
**Background**
As you know, Peralta IP Consulting LLC completed its third-party functionality and accuracy validation of the Prism Core v2.0 machine-learning compliance scoring module on October 8, 2023, and issued its formal report the following day. The module achieved only 61% accuracy against the benchmark — well below the 92% target threshold. CTO Elliot Marsh disclosed these results to the board on October 10, 2023, and estimates that a 4–6 month additional development timeline will be required to remediate the identified deficiencies.
This is significant in the context of the company's recent fundraising. The pitch materials circulated to investors in August 2023 represented Prism Core v2.0 as "beta-ready by Q4 2023." That representation was a material factor in the investment decisions of the company's SAFE holders.
At today's meeting, the board considered whether and how to disclose this development to the following investors:
- **Vantage Peak Ventures Fund II, L.P.** — lead investor; $3,500,000 SAFE executed September 12, 2023 - **Ridgeline Angel Fund, L.P.** — $1,200,000 SAFE executed September 22, 2023 - **Canopy Growth Capital LLC** — $1,100,000 SAFE executed September 29, 2023 - **Atlas Fintech Syndicate, L.P.** — term sheet signed October 4, 2023; SAFE not yet executed
**Legal Analysis — Summary**
I have attached a memorandum prepared by Omar Siddiqui that provides a detailed analysis of the company's disclosure obligations. I will summarize the key conclusions here.
The executed SAFEs contain information rights provisions that, while not as extensive as typical Series A preferred stock information rights, do establish an ongoing relationship between the company and its investors and create expectations of good-faith dealing. Under Delaware law, even where a SAFE does not impose an express ongoing disclosure obligation for product development milestones, the company faces meaningful risk if it fails to disclose a material adverse change that directly contradicts representations made during the fundraising process.
The pitch materials described Prism Core v2.0 as "beta-ready by Q4 2023." This was a forward-looking representation that investors relied upon in making their investment decisions. The validation failure and the resulting 4–6 month delay render that representation materially inaccurate.
Silence in the face of a known material change can give rise to claims of fraud by omission or negligent misrepresentation under Delaware common law, particularly where there is a relationship of trust between the parties or where prior affirmative representations created a duty to update. The MFN provision in each SAFE, while principally economic in nature, further underscores the investors' expectation of fair and transparent treatment.
The attached memo addresses these points in substantially greater detail.
**Our Recommendation**
Calderwood & Harkness strongly recommends prompt and transparent disclosure to all three SAFE holders, as well as to Atlas Fintech Syndicate notwithstanding that its SAFE has not yet been executed.
We recommend that you make the disclosure directly, as CEO, by phone call to each investor's deal lead:
- **Samantha Reyes** at Vantage Peak Ventures - **David Choi** at Ridgeline Angel Fund - **Lena Petrova** at Canopy Growth Capital - **Marcus Greenfield** at Atlas Fintech Syndicate
Each call should be followed by a written summary. In both the calls and the written follow-up, the disclosure should:
1. Acknowledge the Prism Core v2.0 validation results candidly and without equivocation. 2. Provide Elliot's estimated remediation timeline of 4–6 months. 3. Emphasize the company's commitment to resolving the technical issues and the strength of the underlying platform and team. 4. Avoid making new forward-looking commitments about revised timelines that may themselves prove inaccurate. It is important that we not compound the current problem by creating new representations that the company may be unable to meet.
Prompt disclosure serves multiple purposes. First, it mitigates the risk of fraud or misrepresentation claims. Second, it preserves the company's credibility and its relationships with its investor base — relationships that Lumos will need going forward regardless of how the near-term situation unfolds. Third, and most simply, it is the right thing to do from a governance perspective.
I want to be equally direct about the alternative. Delaying disclosure increases legal exposure materially. If investors learn of the validation failure independently or at a later date, the delay itself becomes evidence of intent to conceal, which significantly strengthens any misrepresentation claim they might bring. The calculus here is straightforward: the risks of disclosure are manageable; the risks of delay are not.
**Practical Considerations**
I want to flag several practical realities so that you and the board are prepared.
Once disclosure is made, there is a real possibility that one or more investors may seek to unwind their SAFEs and request a return of funds. As of today, Lumos holds approximately $5,800,000 in SAFE proceeds in its operating account at Silicon Valley Commerce Bank, plus roughly $420,000 in pre-existing operating cash. The company is therefore in a position to make refunds if that becomes necessary, though doing so — depending on the number and size of any unwind requests — could return the company to its pre-round cash position, representing approximately 4 months of runway at the current burn rate of roughly $95,000 per month. This is a serious but manageable contingency, and one that the board should discuss.
Calderwood & Harkness can advise on the termination mechanics under each SAFE instrument and on structuring any mutual termination agreements if the need arises.
With respect to Atlas Fintech specifically, we recommend that disclosure occur before any further steps are taken toward executing their SAFE. Proceeding to execution with knowledge of this material development would present additional and unnecessary legal risk to the company and to you personally.
**Timing**
We recommend making the disclosure calls no later than tomorrow, Friday, October 13, 2023.
Calderwood & Harkness is available to help you prepare talking points for each call. We are also available to participate in any follow-up communications with investor counsel. We note that Vantage Peak is represented by Whitfield Harte & Associates LLP, and we would expect them to be actively engaged once disclosure is made.
**Next Steps**
Attached is the full memorandum analyzing the company's disclosure obligations in detail. I would encourage you to review it this evening if possible.
I am available to discuss by phone tonight or first thing tomorrow morning — please do not hesitate to reach out at whatever hour works for you. Omar Siddiqui is also available and can take the lead on drafting the written follow-up communication to investors once the initial calls have been made.
Priya, I understand this is not the advice anyone wants to receive, but I am confident it is the right course. The company's integrity is its most important asset, and protecting it now will serve Lumos well in the long run.
Best regards,
**Patricia Dunmore** Partner Calderwood & Harkness LLP 555 California Street, 30th Floor San Francisco, CA 94104 Direct: (415) 555-0178 Email: pdunmore@calderwoodharkness.com
Matter Ref: Lumos Analytics Inc. — SAFE Financing Round (Matter No. 1008-00003)
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