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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Crowdfunding Part 3(B): Alternatives— Accredited Crowdfunding Platform #1

Posted by on Aug 9, 2013 in Crowdfunding and Fund Raising

We’ve been talking about crowdfunding for a while now, and we’ve started discussing alternatives to the crowdfunding exemption in Title III of the JOBS Act because that exemption is technically not final yet.  Last time we talked about rewards-based crowdfunding, which is analogous to the pre-sale of goods and services and does not require any exemption from the registration requirements of the Securities Act because it does not involve the offer or sale of securities. Another alternative is an accredited crowdfunding platform, which, unlike rewards-based crowdfunding, is a crowdfunding platform that actually does facilitate offers and sales of securities and therefore does require more regulatory compliance. Accredited crowdfunding platforms, (or “Regulation D crowdfunding platforms”) are only open to investors who qualify as “accredited investors” under Rule 501 of Regulation D of the Securities Act. There are 2 main types of accredited crowdfunding platforms: (1) the investment fund model and (2) the broker-dealer model, but we’ll only talk about one of them today: Accredited Crowdfunding Platform #1: The Investment Fund Model The investment fund model is an accredited crowdfunding platform that typically targets high-growth startup companies who would otherwise try to go the traditional venture capital (“VC”) route. Companies that adopt the investment fund model usually form and advise other investment funds which make investments in different startup companies. These other investment funds will then make offerings of their own equity interests to accredited investors in unregistered offerings that fall under the Regulation D safe harbor (Rule 506). Thus, the companies who adopt the investment fund model of crowdfunding intend to act as investment advisors, meaning that they will have to register as such under applicable law (e.g. Investment Advisors Act of 1940) or otherwise qualify for an exemption (e.g. Dodd-Frank Act exemption for VC fund advisors). Being an investment advisor means that these companies have the right to receive a profit share upon the termination of the investment funds that they advise; however they are not permitted to accept “transaction-based compensation,” which would require them to register as a broker-dealer and comply with those applicable regulations. There are a couple of companies employing this investment model that are worth noting: FundersClub and AngelList are online platforms that raise funds and advise startup companies in this manner. If this sounds confusing, maybe it is. Next time we’ll talk about the broker-dealer model, but in the meantime, please talk to an attorney if you have any questions or are interested in raising funds for your...

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Crowdfunding PART 3(A)– Alternatives: Rewards-Based Crowdfunding

Posted by on Aug 5, 2013 in Crowdfunding and Fund Raising

The prior 2 crowdfunding discussions focused on what crowdfunding is under Title III of the JOBS Act and its potential disadvantages should the SEC and FINRA ever get around to promulgating the applicable final rules… Today the discussion will focus on what, if any, alternative crowdfunding opportunities are out there, given you can’t yet rely on the exemption in Title III of the JOBS Act to raise capital from the general public. Alternative Crowdfunding Opportunities– REWARDS-BASED CROWDFUNDING Rewards-based crowdfunding is perhaps the most familiar form of crowdfunding and does not require an exemption from the SEC’s registration requirements of typical offerings because there is no “offer” or “sale” of securities as those concepts are defined in applicable Securities laws. Under the rewards-based crowdfunding method, a company or an individual can raise funding for a project by promising individual donors that they will receive some specific reward from the project when the project is complete. The classic example of a rewards-based crowdfunding method is an author or a filmmaker trying to raise money for a book or a documentary by promising those who donate that they will receive a free copy.  Thus, the rewards-based crowdfunding method is analogous to the pre-sale of goods and services. There are many companies who have used rewards-based crowdfunding platforms to raise or help companies raise capital, including Kickstarter, Inc. and Indiegogo, Inc., and the popularity of this fundraising platform continues to grow.  Kickstarter, for example, has helped raised over $732 million and successfully funded more than 46,000 different creative projects since its inception in 2009 .  (Check it out: For more information on other crowdfunding alternatives to the delayed Title III exemption in the JOBS Act stay tuned for Crowdfunding PART 3(B). Also, if you’re interested in learning more about how to raise capital for your company or project, please get with an attorney who can help bring some of this to...

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Crowdfunding 101— PART 2: Potential Disadvantages

Posted by on Jul 30, 2013 in Crowdfunding and Fund Raising

Ok, so last time in Part 1 we went over what crowdfunding is as contemplated by Title III of the JOBS Act and how crowdfunding can be useful.  We also discussed how true JOBS Act crowdfunding is not really an option right now until the SEC and FINRA adopt final rules clarfying the scope of crowdfunding potential. Before getting into the potential disadvantages of crowdfunding should the final rules be adopted any time during our lifetime, we would like to emphasize how late the SEC and FINRA are in their rulemaking efforts regarding crowdfunding possibilities: Given that it is already almost August 2013, the government is woefully behind in its end-of-2012 deadline for promulgation of crowdfunding rules– and, despite the potential disadvantages of the JOBS Act crowdfunding methods, much of the startup and entrepreneurial world is frustrated with the (not-so-atypical) regulatory clog. Now that the regulatory rant is over, we can go over the potential disadvantages of crowdfunding (despite the many potential advantages, there are many concerns): Potential Disadvantages of Title III Crowdfunding We can boil the potential disadvantagse of Title III crowdfunding down to: Cost and Effort–  Many practitioners fear that offerings relying on the Title III crowdfunding exemption will be too costly and time-consuming for the very companies and investors the exemption purports to target.   EXAMPLE: 1) Disclosures:  Title III of the JOBS Act requires issuers to make an inordinate amount of disclosures.  Issuers will have to provide detailed descriptions of their officers and directors, ownership and capital structure, business and financial condition (including financial statements–some of which may need to be audited). 2) Liability:  Issuers may be held liable for material misstatements or omissions in their oral and/or written statements in a manner that is not too different from the potential liability arising out of a traditional SEC registered offering. 3) Attorneys’ and Professionals’ Fees:  In order to comply with the requisite level of disclosures, many practitioners believe that a substantial amount of legal and accounting help will be required and that a large portion of the funds raised will end up going to pay the fees associated with such services. 4) All or Nothing:  The issuer in a Title III crowdfunding offering must set a fundraising goal and, unless the company raises that specific amount (or more) from investor commitments, no securities can be sold.  This raises the potential risk that an issuing company can incur a significant amount of up front costs for absolutely no reason. Given the uncertainty surrounding the regulatory requirements of Title III crowdfunding, as well as the potential costs and burdens of compliance once applicable final rules are promulgated, alternative crowdfunding platforms have developed and will likely continue to do so in the future. For more information on alternatives to Title III crowdfunding, stay tuned for PART 3 of the Crowdfunding 101 series, and, as always, if you have any questions concerning raising capital, crowdfunding or otherwise, please seek the advice of an attorney who can take you beyond the 101 series into the practical world of...

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Crowdfunding 101: What Is It? And Should I Be Excited About it? PART 1

Posted by on Jul 26, 2013 in Crowdfunding and Fund Raising

Ever since the passage of the JOBS Act (the Jumpstart Our Business Startups Act), there’s been a lot of hype about crowdfunding. A lot of startups have built their entire business model on the assumed ability to use crowdfunding methods to raise capital. But, what is crowdfunding? And, is it really something that you should be excited about right now? When used in connection with the JOBS Act, the term “crowdfunding” refers to an exemption intended to permit US companies to raise up to $1 million per year from the general public without the same restrictions as would normally be applied in a traditional private offering (or private placement) governed by Regulation D of the Securities Act of 1933. Crowdfunding as contemplated by the JOBS Act would permit a company to sell small amounts of equity to a much larger pool of investors than is currently permitted. What’s So Great About Crowdfunding Anyway? Non-Accredited Investor Potential: While traditional private placements may only be offered to institutional investors (such as banks or pension funds) or to a limited number of individuals who are qualify as “accredited investors” (i.e. those having a net worth greater than $1 million or an annual income exceeding $200k (or $300k if combined with that of a spouse)), crowdfunding would permit the issuing company to raise money from a greater number of non-accredited investors who are typically not eligible to participate in a private placement. Accessible Funding Portals: Companies who wish to raise capital through crowdfunding methods will eventually use platforms that are publicly accessible websites.  This enables companies to issue equity shares over the Internet to registered investors who will make their investments through the online funding portal without the companies having to have engaged in the often difficult and costly process of forming a pre-existing relationship with the investors. Should You Be Excited About Crowdfunding? The answer to this is both yes and no. Yes, you should be excited about the ways your company could potentially benefit from this new(er) fundraising method. But, no, you should not be too excited about crowdfunding just yet. Here’s why: Title III of the JOBS Act, which is home to the crowdfunding exemption to the traditional Regulation D private placement rules, has not been fully implemented yet because the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) have not yet adopted the final rules which are needed to fully clarify and define the scope of the crowdfunding exemption. Until the final rules under Title III are adopted by the SEC and FINRA, private offerings and sales of equity interests which are intended to rely on the crowdfunding exemption in Title III of the JOBS Act are unlawful. Therefore, while there are some companies who are using hybrid methods or other alternative crowdfunding platforms to raise capital, it is probably not a good idea to get too excited just yet about your company’s ability to fully rely on the crowdfunding exemption to raise capital. For further discussion on crowdfunding (including its anticipated disadvantages and alternatives) stay tuned for Crowdfunding 101: PART...

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Patents: Is It Too Late To File??? PART 3

Posted by on Jul 23, 2013 in Intellectual Property

Continuing our discussion on patents and when and whether to file one…  So, is it too late to file? As we have emphasized over the last few posts, it is crucial for inventors to keep the novelty of their invention—i.e. whatever is new about your invention—a guarded secret.  If you disclose your invention without any protection, say, without a non-disclosure agreement, it can be rendered non-patentable. In the absence of the protection of a non-disclosure agreement, most public disclosures of an invention made before a filing date at the USPTO is obtained will prevent an inventor from obtaining patent protection for the invention. There is one and only ONE exception to this rule: If the disclosure is limited to a publication made by the inventor or someone on behalf of the inventor within one year before the filing date of the patent, it does not become a part of the prior art.  However, relying on this one-year period can be extremely risky. That’s the only exception. Under the old regime, other public disclosures (like offers for sale, trade show exhibitions, etc.) did not necessarily become a part of the prior art, if the patent’s filing date was within a year of the disclosure. Now, there is no 12- month grace period for these types of disclosures. Tying this Part 3 discussion in with last week’s Part 2 discussion on provisional patent applications, this disclosure rule shows how powerful provisional patent applications can be—because they may be used to obtain earlier filing dates on patents that issue.  (See Part 2 from last week on discussion of provisional patent applications.) Remember: Once you file a provisional application, you have reserved your filing date. And as long as your actual patent application is filed within a year of your provisional patent application (and everything else goes smoothly), you will be entitled to keep that earlier filing date of the provisional application. If this sounds tricky, it’s because it is tricky. Don’t risk patent forfeiture. Make sure you know what you should do, shouldn’t do, and when by contacting a registered patent...

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