Posts made in August, 2013

Update! New JOBS Act Regulations

Posted by on Aug 28, 2013 in Update!

Several of our discussions have mentioned the SEC’s delay in adopting final implementing regulations under the JOBS Act of 2012, however, on September 23, 2013 a few new JOBS Act regulations will become effective to implement a lift on the ban on general solicitations or general advertising for certain private offerings. 1) The final rules adopt amendment to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 and implement Section 201(a) of the JOBS Act, which permits an issuer to engage in general solicitation or general advertising in offering and selling securities under Rules 506–as long all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors. 2) The amendment to Rule 506 also includes a non-exclusive list of the measures which issuers may take to verify the accredited investor status of purchasers who are natural persons. 3) The amendment to Rule 144A provides that securities may be offered under Rule 144A to persons other than qualified institutional buyers as long as the securities are sold only to persons that the seller (and any person acting on behalf of the seller) reasonably believes are qualified institutional buyers. 4) In addition to these amendments, the SEC revised Form D to require issuers to indicate whether they are relying on the provisions permitting general solicitations or general advertising in a Rule 506 offering. 5) The SEC also adopted rules under the Dodd-Frank Act to disqualify felons and other “bad actors” from participating in certain securities offerings. If you have any questions concerning the JOBS Act or are considering a private offering, please contact an...

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Your Liability Can Have Limits #3

Posted by on Aug 22, 2013 in Draft Your Contract, Limiting Liability, Practice Pointers

We’ve talked about 2 ways people limit liability in a contract (waiver of consequential damages and limitation of liability provisions). Another way you or someone you’re negotiating against can limit contractual liability is by including a provision that limits the time in which a party can bring a claim under the contract—i.e. shortening the statute of limitations that otherwise would apply. I know that sounds great, but: “what’s a statute of limitations”? A statute of limitations is essentially a law which establishes the maximum time after an event has occurred within which a party may commence legal proceedings. That is to say, a statute of limitations is a law that basically tells people how long they have to file suit. Statutes of limitations can vary depending on the type of claim or issue at hand. For example, in the State of Tennessee, the default statute of limitations for breach of contract claims is 6 years, meaning if 6 years has passed since the other party breached your contract, you probably can’t sue him or her for breach of contract (unless your contract says otherwise). The Tennessee Code sets forth statutes of limitations for many types of actions, including defamation, injury to personal property, products liability, medical malpractice, and the list goes on. Not only is it important to know the statute of limitation which may apply to your potential legal claims in any given situation, you should remember that you can often limit these statutory limitations contractually. It is common for contracts to include a provision that shortens the default statute of limitations to 3 years, 2 years or even 1 year. I’ve even seen a contract that attempted to limit the period to 3 months (!). Statute of limitation provisions are often placed at the back of the contract in a “governing law,” “dispute resolution” or “miscellaneous” section. A shorter statute of limitations can really take you for surprise if you dilly-dally or delay your decision concerning whether to file a claim. Obviously, if you are providing the good or service, you’d probably want the period to be shorter, and if you’re the one buying the good or service, you’d probably want the period to be longer. If your contract doesn’t say anything about it, don’t worry: the statutory default of 6 years would kick in. Don’t be afraid of these limitations, though, because, if used correctly, they can really help both parties understand and manage their respective risks under the contract. While there may be a way to argue around the statute of limitations provision in your contract, this is one reason why you should always read the fine print carefully (*or have an attorney review your contract and advise you concerning liability matters). If possible, you want to avoid having to hire an attorney to argue why your contract provisions should be...

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Your Liability Can Have Limits #2

Posted by on Aug 20, 2013 in Draft Your Contract, Limiting Liability, Practice Pointers

Last time we discussed limitation of liability provisions and how they can be used by you or your vendors, suppliers and other independent contractors to limit, reduce or otherwise control liability under a contract. Another way contracting parties can limit liability is by including a Waiver Of Consequential Damages provision. While this provision can be part of an overall limitation of liability provision, it is often set apart as its own provision. Without getting into a detailed discussion on what types of damages constitute consequential damages (this is an entirely separate blog discussion that will come later), we can use the most classic example of consequential damages: lost profits as the focus of our discussion. When you are providing goods or services to a client, you may want to consider including a waiver of consequential damages provision in order to better protect yourself in the event your client later claims that you breached the contract (or a warranty) and that caused them to lose profits or incur other consequential damages. Conversely, if you are buying goods or services, you will want to look very closely at any waiver language to see if your suppliers, vendors or independent contractors are attempting to waive responsibility for any consequential damages, including lost profits, that you may suffer as a result of their breach. Depending on the distribution of bargaining power between you and the other contracting party, you may not be able to negotiate this issue, but here are 2 things to consider about waivers of consequential damages: (1) If you are faced with a supplier, vendor or independent contractor who wants you to agree to a waiver of consequential damages, you will at least want to try to make sure the waiver is MUTUAL (i.e. applies equally to both parties). (2) Although we will have to discuss the scope of consequential and other damages at a later date, it is important for you to understand your level of exposure to damages in general, including consequential damages like lost profits, should your suppliers, vendors or independent contractors breach. It could be that whatever you’re buying from them wouldn’t really impact your business in a way that concerns you enough to put up a big fight about including this waiver language. So, know and understand the types of damages you may suffer from a supplier’s breach. (e.g. There is a huge difference between suffering from some losses resulting from additional rental fees should your supplier be late in a delivery of purchased goods vs. losses resulting from a complete shutdown of operations). Please contact an attorney if you’re ever faced with the decision of whether and how to waive or limit consequential damages in your contracts–there are many more considerations and this discussion only skims the...

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Your Liability Can Have Limits

Posted by on Aug 16, 2013 in Draft Your Contract, Limiting Liability

Everyone enters into agreements– not just entrepreneurs and people who own businesses. Therefore, everyone has contractual (and non-contractual) liability of some sort. But when you’re at the point of drafting or signing a contract, it is your chance to double-check exactly what you’re getting into and ask yourself what kind of exposure or other liability you may be subjecting yourself to after you sign. If you’re like most small businesses or entrepreneurs, you don’t have the time or resources to call an attorney every time you’re executing a contract to provide or buy your goods or services. While we would recommend that you always seek legal advice on the practical and legal effects of the terms of your contracts, there are things you can do on your own to help you limit your contractual liability and we’ll talk about one of those ways today: 1) Limitation of Liability Provision: A limitation of liability provision often includes language that states the maximum amount of damages a party may be liable for under certain circumstances. For example, a limitation of liability provision may state that under no circumstances shall a party’s liability exceed the value of the contract (or the amount of compensation paid under the agreement). While there are many ways to tweak this concept (including addressing different types of damages, like direct and indirect damages), this type of limitation of liability provision is very common and often very heavily negotiated. Liability can be limited to 100% of the contract value, 200% of the contract value or some pre-set amount of money (like $1 million). There are many ways to craft a limitation of liability scenario. So, pay attention when you’re buying something from someone who wants to limit his or her liability to the amount of money you’re paying, especially if you think your damages may exceed what you’ve paid them. If you sign off on this, you may make it harder on yourself later to claim (or completely prevent yourself from claiming altogether) damages in excess of that amount. Likewise, you may want to include limitation of liability language if you’re selling goods or services and you want to be able to limit your exposure to a pre-determined amount that you can predict. While there may be ways to argue around limitation of liability provisions, it can’t hurt to include one if your bargaining position allows you to limit your liability. Again, if you’re dealing with a sophisticated buyer or seller, they are going to zero-in on any limitation of liability provision, so be prepared to negotiate your position. Also– it never hurts to send an attorney a contract and just ask them to at least review the damages and liability provisions and explain the scope to you. At least that way you won’t be...

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Crowdfunding Alternatives–Part 3(C): Broker-Dealer Model

Posted by on Aug 13, 2013 in Crowdfunding and Fund Raising

We’re wrapping up the series discussion on crowdfunding because I’d like to move on to other business issues that I’ve been encountering lately (stay tuned later this week for how to limit liability in a contract), but before we move on, there’s another accredited crowdfunding platform that we should discuss briefly because it is a counterpart to the investment fund model that we discussed last week: The Broker-Dealer Model: The broker-dealer model is another type of accredited crowdfunding platform in which a company partners with a registered broker-dealer who can accept transaction-based compensation (*i.e. the broker-dealer partner can receive a percentage of funds raised in each offering). The typical transaction involves the sale of securities in the startup company itself, rather than an investment fund which serves as a middleman (as in the investment fund model). The securities in the startup company are sold directly to accredited investors under Rule 506 of Regulation D. One of the obvious downsides of the broker-dealer model is the need to find the right broker-dealer who can serve as a partner because the profitability of the platform depends to a large degree on making sure the broker-dealer’s transaction costs and experience level are enough to originate and close on the right amount of offerings to be profitable. Another downside of accredited crowdfunding platforms, whether using the investment fund model that we discussed last time or the broker-dealer model, is that the offerings are limited to accredited investors which significantly reduces the number of eligible investors. This is one reason why the startup world is anxiously awaiting the final rules concerning the exemption in Title III of the JOBS Act. As we wrap up our crowdfunding discussion, please note that there are many other methods for startup companies to raise funds, and they all have advantages and disadvantages. If you’d like to know more about crowdfunding or any other funding platform, please contact an attorney who can help answer your...

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