Small Business Crowdfunding

A new trend for raising capital is a talking point for small business owners. Small business owners express tremendous interest in using crowdfunding platforms to raise capital by selling shares in the business or by selling debt securities like a note or bond.

What is driving all of this interest? The 2013 JOBS Act and the regulations that the Securities and Exchange Commission has issued about that act.

Selling securities is heavily-regulated. Current laws are designed to protect investors by requiring companies that want to sell securities to disclose all of the information a prudent investor would need to know in order to make an informed decision to buy. The most important law, the big Kahuna, is the Securities Act of 1933 (The 33 Act). The 33 Act requires a company issuing the securities to put together a detailed offering document containing extensive, specific information about the company, including financial information (which must be audited by independent accountants); this document must be filed or “registered” with the SEC and reviewed by its staff before any securities can be sold. The staff of the SEC insists that all of the information in the document is clear and complete. Usually, the securities are sold with the assistance of an underwriter. This process is very expensive and is out of reach for most small businesses.

Most small business owners look at the other options available. There are exemptions from the registration requirements of the 33 Act for sales of securities to folks who don’t need the protection created by preparing a big, reviewed and audited disclosure document. That is where the JOBS Act has created some buzz.

One of the most interesting exemptions available is set out in Rule 506(c) of the 33 Act. This rule (part of which was created by the JOBS Act) permits companies to sell securities using the internet to wealthy, sophisticated investors (accredited investors). In this case, there is no need to register the offering under the 33 Act and that makes it much less costly to raise the money. Investment crowdfunding! What a concept! Hence the tremendous interest.

BUT!!

(You knew it was coming, didn’t you?)

The exemptions that permit investment crowdfunding only exempt the company issuing the securities from the registration requirements of the 33 Act. They do NOT exempt the company from another, really big part of the 33 Act: what we securities lawyers call “the anti-fraud” provisions.

“Now, hold on a minute,” you say. “I’m not going to commit fraud while my company sells securities!” And, I know what you mean. Of course, you don’t intend to defraud and, lacking the requisite intent, cannot commit fraud.

But hold on: “Fraud” under the 33 Act does not involve intent to defraud at all. Nope! The 33 Act’s antifraud provisions require that the company selling the securities tells a prospective buyer everything the buyer needs to know in order to make an intelligent decision to invest. So, the company cannot say anything that is not true about the company or not say (omit to say) anything that is important to a prospective investor.

To learn more about the limitations and benefits of selling securities as a small business owner, connect with us here.

 

 

Time To Consult A Lawyer – Part 2

Last week, I wrote about an old Fram® Oil Filter television commercial—the one where the auto mechanic says at the end that he doesn’t care; you can pay him now (for a new oil filter) or pay him later (to replace the car’s engine). I promised to provide you with some examples of how this tagline plays out between small business owners and their business lawyers.

FYI: “Pay me later” is always lots more expensive than “pay me now.”

In the past, I represented the owner of a personal training business. She was successful and had a good clientele of steady, consistent training clients. She had other trainers working out of her rented facility who paid her a modest percentage of their training fee income. She sold supplements to her clients and the others who visited the gym. At the time, business was good.

After five years, she grew tired of the business and wanted out. She didn’t realize how draining it would be to have to work the three, simultaneous jobs of all entrepreneurs. She sought business, trained the clients and ran the business. It was more work than she ever anticipated.

She met with one of the other trainers whom she trusted and shared the idea of selling the business to him. He was interested and the two began to discuss the general terms upon which a deal could be made.

Neither consulted a lawyer at this stage of the process (Author’s note: This would be the “PAY ME NOW” moment), although both confessed thinking about and deciding against it. Instead, they discussed the price for the business. Although they had differing views of what the sale price should be, the owner assumed the pricing was close enough and trusted the buyer.

Unfortunately, the buyer didn’t have the funds on hand to purchase the business at the price she intended. This was not a problem to our two transaction partners. They agreed that he would begin to operate the business as if he owned it and then he would begin paying her the purchase price (still not agreed to) out of the operating profits of the business and give her the money to pay the rent during this “interim” arrangement. She would assist him in the transition of the business and its relationships with its customers, other trainers, suppliers, bank, credit card processor and landlord. He would take over her training clients and she would begin to enjoy life after owning a personal training business.

They decided to worry about all of the “details” later when they both had time and money to spend on lawyers. (The business lawyers in the audience are all shaking their heads about now.)

Fast forward:

During the first few months, it never generated the money that both parties expected.

The buyer woke up to the realities of marketing and administrative demands that business ownership entails and he began to have second thoughts about buying the business. He also missed a rent payment and my client had to pay the landlord out of savings rather than operating profits since those were now for the account of the buyer. She is still obligated on the lease since the “details” weren’t addressed. Also, the buyer was not very good with the training clients and several of them left the facility altogether amid complaints about missed and tardy training appointments. He alienated the training supplement vendors, all of which had been great sellers for the business, and several pulled their products.

Finally, the buyer made a decision. He walked away from the deal, leaving my client in the lurch, and took his training clients along with invaluable knowledge of various financial matters about my client’s business to another gym. My client rushed back into the business to discover the mess and that there was a discrepancy in the supplement inventory. The buyer was selling inventory and “forgot” to pay for it when the invoices came due. On top of what already seems like a terrible situation, several items of exercise equipment were missing.

Finally, she came to see me and dumped this messy story on my conference room table (Author’s note: This is the “PAY ME LATER” part), asking for my help to pick up the pieces and put things back together again.

Have you ever wondered when to consult a lawyer? Pay attention to that thought and trust it. Don’t push it away. Pay a lawyer now, save a bundle later.

Time To Consult A Lawyer

In 1972, Fram® Oil Filters began to air a TV commercial that featured an automobile mechanic in greasy overalls, wiping his hands on an oily rag while standing in front of an older car with the hood open. The mechanic, pointing to the engine compartment of the car says, “You see this? This guy needs a new engine. That’s about $1,400 dollars .” Untitled

The mechanic picks up a new Fram® Oil Filter and says, “This is a Fram® Oil Filter. It’s about $4.00. If this guy [pointing again at the car] had gotten regular oil changes and used Fram® Oil Filters [lifting the oil filter], he wouldn’t need a new engine.”

The mechanic shrugs and says, “Me? I don’t care. You can pay me now [holding up the oil filter again] or you can pay me later [once again pointing at the car’s engine].”

Pay me now or pay me later. This is a common story in the world of a business attorney. Clients routinely consult a lawyer when they have a legal mess that could have been avoided if only the client sought legal advice earlier.

I know. Trust me, I get it. Growing small business owners are focused almost exclusively on sales and getting cash in the door. The very survival of their business depends on this. They postpone addressing anything else until the business is up and running and has the cash and breathing room to hire the professionals who can address these matters.

In short, business owners elect to, “pay me later.” They choose to consult a lawyer at a time when they feel more ready, more able. The mindset that often accompanies this election can be summarized with saying, “It’s better to ask for forgiveness than permission.” While there are situations where opting for “pay me later” or planning to ask for forgiveness rather than permission make sense, in my experience these situations are the exception rather than the rule.

In the posts that follow, I will share some of the messes that I have helped clean up, along with some of the solutions that could have been implemented had the client opted to, “pay me now” and consult a lawyer earlier. I will demonstrate that business owners need to establish a relationship with a business lawyer sooner rather than later.

If you have any questions about when to consult a lawyer or the pay me now or pay me later method you can contact me, Mark Sullivan.

Understanding Agreements

By Paul Brytus, Esquire

handsWritten contracts are a good idea.  A well-crafted, written document can memorialize the terms of the agreement and serve as a good reference to determine what your rights and obligations are.  In some cases, a written contract is required.  But the lead up to a contract often involves a negotiation process, for example if a car salesman would tell you that the car you are buying comes with certain features, like heated seats to help combat these polar vortexes.  These exchanges are often verbal and occur before you sign the contract.  Sometimes, people will sign a contract based on what they think the contract contains, on these verbal exchanges during the negotiation process (I’ve even done this before).  Herein lies a problem. 

Many contracts contain what is known as an integration clause or a merger clause.  These are often titled as “Entire Agreement,” “Merger,” “Integration,” or something similar.  Sometimes they are not labeled at all, but the substance of the clause is simply written in with other provisions of the agreement.  These clauses essentially state “the terms contained herein constitute the entire agreement and no other representations or promises have been made or relied upon” or substantially similar legalese.

So what does this mean to you?  It appears to be some kind of boilerplate language (a term that you heard about somewhere) and you assume that it only applies to some abstract context that won’t affect you.  WRONG!  Remember those heated seats the salesman promised you?  Your contract for the car contains an integration clause and there is no mention of heated seats in the written contract.  The integration clause will prohibit any evidence (even if it’s written) occurring prior to the written contract.  (That is generally speaking; of course there are exceptions, like any other area of law).  If you sue to get your heated seats, the court will look at the contract and say “there’s no mention of heated seats.”  You will not be getting it no matter how many times you say “but he promised me heated seats.”  (You actually would probably be precluded from even saying this if the right objection is made).

But what if the entire reason that you bought this car in the first place was for the heated seats?  You only signed the contract because of what the salesman told you, namely, that there would be heated seats?  You are SOL (in most cases when I refer to SOL, it means statute of limitations, but here I’m using it in the traditional sense; that you have the same old luck – read “none”).  So the bottom line is, if something is important to you, if it’s something that you absolutely need, make sure it is written into your contract. 

If you have any questions at all, feel free to contact me at:

412.434.4911 Extension 12, or 

EMAIL ME

 

 

So You Think You Want to Disinherit a Child? Be Careful!

There is no one size fits all estate planning solution. Some people opt to devise property to their children in their will, but for others it may make sense to exclude one or more of their children or relatives. As people attempt to address the unique demands of their situation, they may have questions about disinheriting a child. Sometimes people ask about either (1) their legal ability to disinherit a child; or (2) whether they must specifically disinherit a child in their will. Although an individual in Pennsylvania can never completely disinherit a spouse, the same is not true for children.

The Pennsylvania Supreme Court has explained that “a parent does not have to leave any of his property to any of his children, irrespective of whether he likes them or dislikes them, or hates them, and he does not have to disclose his reasons for disinheriting them.” In re Sommerville’s Estate, 177 A.2d 496, 499 (Pa. 1962). However, in the absence of clear and plain language in a will indicating otherwise, it is presumed that a parent does not intend to disinherit their children. In re Newlin’s Estate, 80 A.2d 819, 823 (Pa. 1951). Because of this presumption, it is always better for a will to include plain language which expresses a desire to disinherit a child by name rather than simply leaving them out of the will.

If you would like to learn more about estate planning devices, please contact Adam G. Anderson at 412-434-4911 x14 for a free consultation.

COMPREHENSIVE IMMIGRATION REFORM

The whole world is watching the United States Congress to see what type of new comprehensive immigration law emerges.

In the interim, let’s take a look at recent change to the law, which may not amount to comprehensive reform, but it is worth noting.

 

Rule Changes – Federal Register Notification

Immigrants with spouses, children and parents in the U.S. may not have to wait much longer to get their much sought-after green cards, thanks to a new change in immigration policy.

On January 2, 2013, Secretary of Homeland Security Janet Napolitano described the posting of a final rule in the Federal Register. This will reduce the time U.S. citizens are separated from their spouses, children and parents on waiting lists for permanent citizenship in certain cases.

This took effect in March. Pursuant to this final rule change, those family members of U.S. citizens looking to live in the United States may apply for provisional waivers prior to heading into the country to attend immigrant visa interviews that would help legalize their status. The way this works is, the waiver helps applying immigrants dodge serious penalties for being in the U.S. without documentation during her application process, according to Secretary Napolitano. However, rationale beneath the new rule is to reduce the pain of long separations that face U.S. citizens waiting for loved ones on the other side to be allowed into the country and be reunified.

“The law is designed to avoid extreme hardship to U.S. citizens, which is precisely what this rule achieves,” U.S. Citizenship and Immigration Services Director Mayorkas indicated in a declaration. “The change will have a significant impact on American families by greatly reducing the time family members are separated from those they rely upon.”

Pursuant to the rule pre-March of 2013, undocumented immediate relatives of U.S. citizens to leave the country and get an immigrant visa abroad as part of the green card process. Under that same rule, those who have been in the country unauthorized for more than six months must obtain a waiver before leaving the country in order to obtain an immigrant visa.

Moreover, an immigrant who returned to the USA illegally could be barred from re-entering for several years.

Even with an adjustment to the current regulations, immediate relatives must still leave the as part of the application process; however, they can apply for a provisional waiver before they depart for their immigrant visa interview abroad.

U.S. Department of Homeland Security Statistics provide that approximately 25,000 immigrants seek family unity waivers annually in the USA; eighty-eight percent of those were approved in 2012; 84 percent in the year 2011.

Immigration reform has been talked about for decades. Former President George Bush proposed immigration reform, unsuccessfully. Then, immigration reform was promised during President Obama’s election as President of the United States in 2008. Since then, President has blamed changes in the economy and disagreements with Congress for not proposing comprehensive immigration reform during his first term. This issue re-emerged to the forefront of the national debate during President’s bid for reelection in November of 2012. President Obama has promised to make good on his early pledge to make changes to the process surrounding immigration and Republicans indicating a more willing stance to work for such changes.

Some immigration reform advocates support the March 2013 rule change.

“(We) are pleased that the Obama administration is using its authority to keep families together and we look forward to more leadership as we embark on the long term solution of immigration reform,” Kica Matos, Director of Immigrant Rights and Racial Justice for the Center for Community Change, indicated to Fox News.

Our Pittsburgh lawyers practice immigration nationwide and offer a free consultation over the phone or in person.

Stay tuned to Elliott & Davis, PC for updates on the changes in immigration law as described by our attorneys

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