Wednesday, September 30, 2015
I recently learned, via e-mail, that Albany Law School has a number of open positions that may interest our readers. The positions, and links to the postings, are provided below:
- Associate Dean for Strategic Initiatives and Information Systems
- Tenure-Track Position in Commercial Law
- Tenure-Track Position in Tax and Transactions Clinic
- Visiting or Contract Faculty Position-Business Transactions and Entrepreneurship
- Visiting or Contract Faculty Position-Patents/Technology Transfer, Innovation and Entrepreneurship
Wednesday, September 23, 2015
As I earlier noted, I participated in a continuing legal education program at The University of Tennessee College of Law last Friday on the basics of crowdfunding. My partners in crime for the last hour of the event were two folks from Chattanooga, Tennessee (yes, home of the famous choo choo) who have been involved in crowdfunding efforts for local businesses. One used crowdfunding to finance a change in the location of a business; the other used crowdfunding to gauge interest in his business concept and raise seed capital. They described their businesses and financing efforts in the second segment of the program (after a foundational hour on crowdfunding from me).
The business location change was for The Camp House, a coffeehouse owned and operated as part of The Mission Chattanooga, a local church. Private events, including music performances, also take place at the venue. The Camp House raised over $32,000 through a crowdfunding campaign on Causeway. Matt Busby, Director of The Camp House, educated us on donation crowdfunding through a non-profit platform.
The new business concept and capital raise was for Treetop Hideaways (a/k/a, The Treehouse Project), a business that designed, built, and rents time in a luxury treehouse. The principals raised over $34,000 on Kickstarter. One of the two men behind this project, Enoch Elwell, offered us practical information about reward crowdfunding. Enoch also told attendees about his work with local entrepreneurs through CO.LAB and CO.STARTERS.
In the last hour of the program, the three of us reflected on crowdfunding successes and failures and speculated about the future of crowdfunding (using their experiences and my research as touchstones). It was a wide-ranging discussion, filled with disparate tidbits of information on business formation, finance, and governance, as well as professional responsibility and the provision of practical, cost-sensitive legal advice. Both Matt and Enoch turned out to be great folks to talk to about business finance, choice of entity, and the role of lawyers in small business formation and operation. Their observations were thoughtful and sensible. I learned a lot from them, and participants (practitioners and students) also indicated that they learned a lot. Everyone had fun. It was pure business lawyer/law student joy on a Friday afternoon! :>)
For those who were not at the program on Friday and would have liked to have been there, all is not lost. We plan to post a recorded version of all three program segments here in a few weeks. Continuing legal education credit will be available in Tennessee for viewing the online recording, upon completion of the test provided and payment of the applicable fee.
Friday, September 18, 2015
For many businesses a good online reputation can significantly increase revenue.
Kashmir Hill, who I know from my time in NYC, has done some interesting reporting on businesses buying a good online reputation.
Earlier this week Kashmir posted the results of her undercover investigation into the problem of fake reviews, followers, and friends. When asking questions as a journalist, those selling online reviews insisted they only did real reviews on products they actually tested.
Kashmir then created a make-believe mobile karaoke business, Freakin’ Awesome Karaoke Express (a/k/a F.A.K.E), and found how easy it was to artificially inflate one's online reputation. She writes:
For $5, I could get 200 Facebook fans, or 6,000 Twitter followers, or I could get @SMExpertsBiz to tweet about the truck to the account’s 26,000 Twitter fans. A Lincoln could get me a Facebook review, a Google review, an Amazon review, or, less easily, a Yelp review.
All of this for a fake business that the reviewers had, obviously, never frequented. Some of the purchased fake reviews were surprisingly specific. In a time when many of us rely on online reviews, at least in part, this was a sobering story. It was somewhat encouraging, however, to see Yelp's recent efforts to combat fake reviews, albeit after a 2015 article by professors from Harvard Business School and Boston University showed roughly 16% of the Yelp reviews to be suspicious or fake.
Go read Kashmir's entire article, it will make you even more skeptical of reviews you read online and small businesses with tens of thousands of friends/followers.
Thursday, September 10, 2015
Transactions: The Tennessee Journal of Business Law is sponsoring a continuing legal education program on the afternoon of Friday, September 18 entitled "Crowdfunding: The Basics." If you will be in or near Knoxville at the end of next week (maybe because you're arriving early for a certain football game on Saturday night versus Western Carolina . . . ), come on over and check it out. I am presenting for the introductory session. The second session will feature entrepreneurs from two local (Chattanooga-based) crowdfunded social enterprises, and the third session will be a discussion among the three of us about successful and unsuccessful crowdfunding efforts.
I am excited to be able to participate in this program with local entrepreneurs and have the opportunity to talk to them about the future of crowdfunding. I will post important out-takes from the program in the future. I assume there will be a number of them . . . .
Friday, September 4, 2015
Babson College has posted their Global Entrepreneurship Monitor ("GEM") Reports for 2014 (one global, one for the U.S.), available here.
The reports are valuable resources and should be read in full, but below are a few, selected quotes from the executive summary of the US GEM Report.
- "The United States consistently exhibits among the highest entrepreneurship rates in the developed world. At 14% of the U.S. working age population, entrepreneurship levels edged upward in 2014 to reach the highest level in the 16 years GEM has assessed this activity. This represents approximately 24 million Americans starting or running new businesses. An additional 14 million people were estimated to be running established businesses."
- "36% of U.S. entrepreneurs operate in the business service sector, which is generally associated with knowledge and service-based businesses."
- "15% of entrepreneurs state that 25% or more of their customers come from outside the United States. This shows an increase over 11% reported in 2013, but it is still lower than 21% reported, on average, in the other innovation-driven economies."
- "29% of Americans personally know an entrepreneur; this measure has generally followed a downward path since 2001, when 43% indicated this affiliation."
- "Women’s entrepreneurship in the United States exhibits among the highest rates (11%) in the developed world."
- "The United States shows the highest rate of entrepreneurship among 55-64 year olds (11%) across the 29 developed economies surveyed by GEM in 2014."
- "20% of entrepreneurs aged 18-34 currently employ six or more people. 58% of 18-24 year olds and 46% of 25-34 year olds project six or more employees in five years. Among both younger age groups, 75% use the internet in their businesses."
At Belmont University, we have quite a number of entrepreneurial students, and I think the statistics show that entrepreneurship is a critical piece of our economy.
On the legal scholarship side, Gordon Smith (BYU Law) and others have been building the Law & Entrepreneurship field. The field continues to grow, and I hope to make it to the annual meeting of the Law and Entrepreneurship Association at some point soon.
On the legal education side, there is now a Law & Entrepreneurship LLM at Duke, and the number of related programs is growing. My colleague Mark Phillips is one of the academics advocating for the teaching of entrepreneurial skills to law students, and he shows that those entrepreneurial skills are useful to lawyers at law firms of all sizes.
Thursday, August 6, 2015
We here in Tennessee took a strong interest in the decision in Obergefell v. Hodges, since one of the cases being decided was from Tennessee (Tanco v. Haslam). We at The University of Tennessee were especially interested. The plaintiffs in the Tanco case are University of Tennessee faculty members at the College of Veterinary Medicine, located on our adjacent sister campus (for The University of Tennessee Institute of Agriculture) here in Knoxville. As East Tennessee awaited the Supreme Court's decision--and in the aftermath of the opinion's release, the press sought for and found many angles on the case.
Of interest to me, as a business lawyer, was the interaction of the case with local business--existing and potential. As with most things, there were (and are) two sides to this coin. Locally, and nationally, both have gotten some play. For opportunistic business lawyers, both sides present advisory possibilities.
Some press time was spent on what I call the "Sweet Cakes" issue (covered by blogs as well as the traditional press, with my favorite law coverage coming from Eugene Volokh over at The Volokh Conspiracy, including this post). Sweet Cakes is, of course, the now-famous family-owned-and-run Oregon wedding cake purveyor that expressly refused to sell wedding cakes to same-sex couples. Eugene outlines a number of interesting legal issues in his posts, and regardless of whether you agree with his conclusions, you can see there is much lawyering involved in the business decisions of those who are intent on being conscientious objectors to same-sex marriage through their business activities. In Tennessee, the Obergefell decision has been famously followed with reports of anti-same-sex marriage signage, like this press item on a sign posted by the owner/proprietor of a hardware store.
The other side of the coin is, of course, the new opportunities that same-sex marriage creates for existing businesses and entrepreneurs. In the run-up to the Supreme Court's ruling, The Tennessean reported that "[o]pening marriage to same-sex couples would yield an additional $36.7 million in spending in Tennessee in three years as more than 5,400 same-sex weddings are expected to be held in the state during that period, according to estimates from the Williams Institute, a think tank at UCLA Law dedicated to sexual orientation and gender identity research." And after the decision, the Nashville Business Journal reiterated the message. New businesses formed to take advantage of this new market for marriages in the state will need--you guessed it--lawyers! Since Gatlinburg--in the Smoky Mountains just a stone's throw from Knoxville--is a wedding destination, our end of the state should see its fair share of that "action," assuming the business environment is welcoming . . . . This article indicates there may be some businesses in that part of the state that are willing to participate in same-sex weddings.
So, as with other legal changes of any magnitude, we may conceptualize Obergefell as a full-opportunity-for-lawyers act, and those opportunities will likely enure to business lawyers as well as others.
Thursday, July 30, 2015
Last week I attended a panel discussion with angel investors and venture capitalists hosted by Refresh Miami. Almost two hundred entrepreneurs and tech professionals attended the summer startup series to learn the inside scoop on fundraising from panelists Ed Boland, Principal Scout Ventures; Stony Baptiste, Co-Founder & Principal, Urban.Us, Venture Fund; Brad Liff, Founder & CEO, Fitting Room Social, Private Equity Expert; and (the smartest person under 30 I have ever met) Herwig Konings, Co-Founder & CEO of Accredify, Crowd Funding Expert. Because I was typing so fast on my iPhone, I didn’t have time to attribute my notes to the speakers. Therefore, in no particular order, here are the nuggets I managed to glean from the panel.
1) In the seed stage, it’s more than an idea but less than a business. If it’s before true market validation you are in the seed round. At the early stage, there has been some form of validation, but the business is not yet sustainable. Everything else beyond that is the growth stage.
2) The friend and family round is typically the first $50-75,000. Angels come in the early stage and typically invest up to $500,000.
3) The seed rounds often overlap with angels and businesses can raise from $500,000 to $1,000,000. If you have a validated part of a business model but are not self funding then you are at Series A investment stage. You still need outside capital despite validation. The Series A round often nets between $3-5 million and then there are subsequent rounds for growth until the liquidity event which is either the IPO or acquisition.
4) Venture capitalists are investing their LPs' money and often the LP will co-invest with the VC. Their ultimate goal is for the company to get acquired or go public.
5) At the early stages some VCs will show a deal to other investors if it looks good. Later stage VCs will become more competitive and will keep the information and good deals to themselves.
6) It’s important to find a lead investor or lead angel to champion your idea.
7) Not all funding is helpful. Some panelists discussed the concepts of “fallen angels” or “devils,” which were once helpful but now are not providing value but still take up time and energy that could be better spent focusing on building the business. “False angels” are those who could never have been helpful in the first place.
8) You don’t want to be the first or the last check the angel is writing. You want to get references on the angel investor and see where they have invested and what their plan is for you.
9) There is smart money and dumb money. Smart money gives money and additional resources or value. Dumb money just gives money and nothing else. It’s passive and doesn’t jump into the business (note the panelists disagreed as to whether this was a good or bad thing). Another panelist noted the distinction between helpful and harmful money. Harmful people think they are helpful and give advice when they don’t have a lot to add but take up a lot of time. Sometimes helpful money just gives a check and then gets out of the way. It’s the people in between that can cause the problems.
10) VCs and angels invest in teams as well as ideas. They look for the right fit and a mix of veteran entrepreneurs, a team/product fit, a mix of technical and nontechnical people, professionals whose reputations and resumes can be verified. They want to know whether the people they are investing in have been in a competitive environment and have learned from success or failure.
11) Crowdfunding can be complicated because investors don’t meet the entrepreneurs. They see everything on the web so the reputation and the need for a good team is even more important.
12) Convertible notes are the “gold standard” according to one speaker and it’s the workhorse for funding. There was some discussion of safe notes, but most panelists didn't have a lot of experience with them and that was echoed this week by attorney David Salmon, who advises small businesses and holds his own monthly meetups. One panelist said that the sole purpose of safe notes was to avoid landmines that can blow up the company. Another panelist indicated that from an investor standpoint it’s like a blackhole because it’s so new and people don’t know what happens if something goes wrong.
13) The panelists indicated that businesses need to watch out for: the maturity date for their debt (how long is the runway); when can the investors call the note and possibly bankrupt the company; how will quirky covenants affect the next round of financing and where later investors will fall in line; and covenants that are easy to violate.
14) There was very little discussion of Regulation A+ but it did raise some interest and the possibility to raise even more funds from non-accredited investors. Only 3% of the eight million who can invest through crowdfunding actually do, so Reg A+ may help with that.
16) All of the panelists agreed that entities may start out as LLCs but they will have to convert to a C Corp to get any VC funding.
There was a lot more discussion but this post is already too long. Because I've never been an angel nor sought such funding, I don’t plan to provide any analysis on what I’ve typed above. My goal in attending this and the other monthly events like this was to learn from the questions that entrepreneurs ask and how the investors answer. Admittedly, most of my students won’t be dealing with these kind of issues, but I still introduce them to these concepts so they are at least familiar with the parlance if not all of the nuances.
July 30, 2015 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Financial Markets, International Business, Law School, Legislation, LLCs, Securities Regulation, Teaching | Permalink | Comments (0)
Wednesday, May 27, 2015
As a semi-closeted (now "out," I guess) foodie* and as a lover of "things Brazilian" (including Havaianas flip-flops and Veja sneakers, as well as churrascarias and caipirinhas), I read with interest a recent electronic newsletter headline about a thriving Brazilian chef. I clicked through to the article. I loved it even more than I had thought I would.
The article tells the story of an emergent Brazilian chef and restauranteur, Rodrigo Oliveira, and his flagship establishment (Mocotó), as promised. That was great. But that was not all. The piece also told the story of a business run using a "holistic business model."
Today, Oliveira focuses on his employees as much as his customers. . . . Oliveira pays for his employees’ part-time education. And their kids’ health care. And daily jiujitsu and yoga classes in the room he built upstairs. It’s a rarely encountered, holistic business model that contributes to his restaurant’s roaring success. . . .
. . .
Beneath the street level they’re boring out new dormitories for employees, for a quick nap and shower between jiujitsu, work and class. . . .
He also seems to be attentive to the greater local community beyond his customers and employees, preferring (to date) to expand his business locally rather than into larger metropolitan areas. Good business? Yes! But it seems like more than that. This business appears to have more than one bottom line!
Perhaps this is not a remarkable story, in the end. Regardless, I wanted to share it. Another Brazilian social enterprise, Ashoka, gets a lot of attention.** But it's now clear to me that we can and should look beyond larger, storied examples of social entrepreneurship for other manifestations of social enterprise in action in Brazil.
**Actually, much to my surprise, Ashoka is a U.S. organization that networks social enterprises across the globe. So, it's not even Brazilian! Having been in Rio teaching for a few summers and known of its presence there, I assumed it was a Brazilian organization. Please forgive the error. Hat tip to co-blogger Haskell Murray for pointing it out to me.
Wednesday, May 13, 2015
As some readers may recall, I posted twice back in November about The University of Tennessee, Knoxville's decision to drop the Lady Vols moniker and mark from all women's sports teams at UTK other than women's basketball. The first post primarily wondered about university counsel's consideration of trademark abandonment in the rebranding effort. The second post unpacked some additional issues raised by the first post and addressed some readers' and friends' concerns about my stance opposing the rebranding.
Interestingly, adverse reactions to the branding change, which is effective on July 1 (the beginning of the new academic year at UTK), have not died down since those original posts. Letters from concerned citizens have been published in the local paper, and the paper even published a recent news article documenting some of the back-and-forth between Lady Vol fans and the campus administration. [Ed. Note: this article may be protected by a firewall.] I have followed all of this with some interest.
Honestly, part of me just cannot wait for the university to drop the mark altogether so that I can start using it to mass merchandise retro Lady Vols t-shirts, hats, and other merch. Entrepreneurial pipe dream? Maybe. But it seems like a great idea, yes?
And there's a case involving Macy's that I will be following to help me to assess whether and, if so, when to launch my venture. The case, covered in an article in the New York Law Journal on Monday, involves Macy's and its disuse/limited use of department store names forsaken as a result of its own rebranding efforts. You know the names well if you're a person of a certain age--A&S, Filene's, Marshall Fields, Stern's, etc. (I shopped at all of them. Eek!) The defendant in the action, Strategic Marks, claims the right to use these so-called "heritage marks" for bricks-and-mortar and online shopping services. Apparently, Strategic Brands filed intent to use applications and statements of use with the U.S. Patent and Trademark Office. In the case, Macy's challenges Strategic Marks's right to use the heritage marks--asserting, among other things, that the marks have not, in fact, been abandoned (given that Macy's still uses them on the occasional plaque, t-shirt, and tote bag.) The case had been scheduled for trial earlier this year, but the trial date was postponed to reflect new claims by Macy's regarding Strategic Marks's use of additional marks earlier registered by Macy's.
The case apparently raises some interesting trademark abandonment issues that also may apply to the Lady Vols rebranding effort as time moves on. Among them: the length of time a mark must be in disuse before it is considered abandoned (although a presumption of abandonment apparently arises after non-use for three consecutive years), the types of behavior that constitute an intent not to resume use of a mark, and the effect of residual goodwill associated with a mark on claims of abandonment. Although Macy's and Strategic Marks do not agree on the facts of the case, it is the law as applied to those facts that I am most interested in knowing.
Of course, since UTK is keeping the Lady Vols name for the women's basketball team, at least for now, the trademark abandonment issue is not ripe. Accordingly, I cannot yet think about quitting my day job to promote the Lady Vols brand to all the passionate UTK women's sports fans out there. But I am keeping my entrepreneurial eyes on this issue. If they do away with tenure in The University of Tennessee system, for example, I may need an opportunity like this . . . !
Friday, May 8, 2015
On May 12, 2015, I will present at a breakout session of the Center for Nonprofit Management's 8th Annual Bridge to Excellence Nonprofit Conference. My talk will focus on the legal issues facing entities with multiple bottom lines.
If interested, you can register here.
As you can tell from the conference description, this conference is designed for nonprofit and community leaders. From the conference schedule, it appears that I will be the only professor presenter. While I enjoy academic conferences, and find them useful, I also think it is important for professors to engage with practitioners. Professors should share the knowledge they have uncovered and should also listen to the current, practical concerns.
Thursday, May 7, 2015
This coming Monday, I will be presenting – virtually – at the above titled conference. My piece of the presentation will cover my recent research on benefit corporation reporting.
Further information is available here and reproduced below. Personally, I am looking forward to hearing from the many impressive speakers, including Sara Burgess, the Regulator of Community Interest Companies in the UK.
May 11, 2015
08:00 AM - 06:00 PM ET
Morgan Lewis, in conjunction with the Impact Investing Legal Working Group, invites you to join us for an exclusive all-day conference featuring panels of leading lawyers who work in the area of impact investing—in business, academia, government, multilateral development institutions, and nonprofit organizations and foundations.
Topics will include:
How are investors aggregating capital for impact investing?
What are the newest social finance innovations in impact investing?
How can we build a robust legal community of practice in impact investing?
How can we advance the development of regulatory regimes and government policies that promote impact investing?
8:00 - 8:30 AM | Registration
8:30 - 6:00 PM | Program
6:00 PM | Networking reception
CLE credit in CA (1.25 hours), FL, IL, MA, NY, NJ, PA, VA, and TX is currently pending approval.
For more information/registration
Please contact Gail Sobha Lynes at +1.617.951.8607 or firstname.lastname@example.org.
Wednesday, May 6, 2015
This article builds on Ben's previous, extensive and well-regarded research on family businesses. Ben's analysis of the relationship between family businesses and wealth inequality is carefully done and thought-provoking. The abstract is posted below, and I recommend reading the entire article.
Wealth inequality endangers democratic values and calls for a public response. This Article contends that family businesses merit special scrutiny because they control vast amounts of private wealth and combine two of society’s most important economic institutions: family and business. Accordingly, family businesses implicate concerns regarding both inherited wealth and the concentration of economic power made possible by the corporate form.
Despite their economic significance, little has been done to investigate whether family businesses contribute to wealth inequality. This Article offers the first legal, and one of the only academic, treatments of the topic and shows that family businesses play a double role. On the one hand, family businesses reinforce existing disparities in wealth and opportunity. Heirs, after all, stand to benefit from the hard work of previous generations. On the other hand, family businesses can be a powerful antidote to inequality, disrupting entrenched class hierarchies and creating opportunities for individuals, families, and ethnic communities.
This Article concludes that whether family businesses produce net social costs or benefits depends crucially on two principal factors. First, to the extent there is a lack of public investment in social mobility, family businesses can increase the distribution of wealth by providing needed investments in human capital. Second, to the extent the rewards of capitalism are not widely shared, family businesses can offer a source of opportunity, not just for family members, but also for employees and the communities in which family businesses operate. Thus, family businesses should not be viewed in isolation; a comprehensive response to the problem of wealth inequality must involve the state, the family, and the market.
Friday, May 1, 2015
Almost three years ago, I helped organize a conference on social enterprise law. (The law review members, especially Rachel Bauer and Sam Moultrie, were responsible for most of the organizing and did an excellent job).
My co-bloggers Joan Heminway and Marcia Narine were among the speakers.
Also joining us was Michael Pirron of Impact Makers, one of the first certified B corporations in Virginia. While Impact Makers was a certified B corporation at the time of the conference, it was organized as a Virginia nonstock corporation; now Impact Makers is organized as a benefit corporation. Michael did an excellent job serving as a panelist and the keynote speaker.
Recently, I saw Michael back in the news. He transferred ownership of his company (valued at approximately $11.5 million) to two foundations. As Michael mentioned to me over e-mail, this was not a radical departure from his previous business model for Impact Makers. Previously, Impact Makers donated 100% of its profits to area charities, so this move just formalized their previous commitment. Impact Makers has given away approximately $1 million to date.
At the University of Connecticut social enterprise and entrepreneurship conference I attended and presented at last week, Mike Brady (Greyston Bakery) and Jeff Brown (Newman's Own) presented. Jeff called Newman's Own a "grandfather of social enterprise" Both companies started business in 1982, well before heavy use of the term "social enterprise."
Also, both Greyston Bakery and Newman's Own appear to have adopted a structure where a foundation owns the stock of their for-profit company. You can learn a bit more about the structure of Newman's Own here. Greyston Bakery's annual reports are here and you can view a video about Greyston Bakery (and their client Ben & Jerry's).
From a legal perspective, Greyston Bakery and Impact Makers are benefit corporations, under New York and Virginia law respectively (in addition to being certified B corporations.) Newman's Own, however, is a traditional c-corporation. With foundations owning 100% of the stock, the benefits of using the benefit corporation form are likely limited. There still may be some branding value and most benefit corporation statutes require consideration of a broad group of stakeholders, which might prevent the foundation from focusing on a smaller subset of stakeholders. That said, shareholders are the one expected to bring lawsuits to enforce this consideration requirement in the benefit corporation statutes, so as a practical matter, the benefit corporation and c-corporation forms may operate similarly when wholly-owned by one or more foundations.
Friday, April 24, 2015
These types of social impact funds seem to becoming more and more common. Social impact funds, however, vary greatly. Some social impact funds appear to be primarily focused on profits (while simply avoiding some "sin stocks"), others focus on serious social enterprises, and others fall somewhere in-between.
Friday, April 17, 2015
At the end of next week, I will be at the University of Connecticut School of Business and the Thomas J. Dodd Research Center for their Social Enterprise and Entrepreneurship Conference.
Further information about the conference is available here, a portion of which is reproduced below:
In October 2014, Connecticut joined a growing number of states that empower for-profit corporations to expand their core missions to expressly include human rights, environmental sustainability, and other social objectives. As a new legal class of businesses, these benefit corporations join a growing range of social entrepreneurship and enterprise models that have the potential to have positive social impacts on communities in Connecticut and around the world. Designed to evaluate and enhance this potential, SE2 will feature a critical examination of the various aspects of social entrepreneurship, as well as practical guidance on the challenges and opportunities presented by the newly adopted Connecticut Benefit Corporation Act and other forms of social enterprise.
Presenters at the academic symposium on April 23 are:
- Mystica Alexander, Bentley University
- Norman Bishara, University of Michigan
- Kate Cooney, Yale University
- Lucien Dhooge, Georgia Institute of Technology
- Gwendolyn Gordon, University of Pennsylvania
- Gil Lan, Ryerson University
- Diana Leyden, University of Connecticut
- Haskell Murray, Belmont University
- Inara Scott, Oregon State University
Presenters at the practitioner conference on April 24 are:
- Gregg Haddad, State Representative, Connecticut General Assembly (D-Mansfield)
- Spencer Curry & Kieran Foran, FRESH Farm Aquaponics
- Sophie Faris, Community Development, B-Lab
- James W. McLaughlin, Associate, Murtha Cullina LLP
- Michelle Cote, Managing Director, Connecticut Center for Entrepreneurship and Innovation
- Mike Brady, CEO, Greyston Bakery
- Jeff Brown, Executive Vice President, Newman’s Own Foundation
- Justin Nash, President, Veterans Construction Services, and Founder, Til Duty is Done
- Vishal Patel, CEO & Founder, Happy Life Coffee
- Anselm Doering, President & CEO, EcoLogic Solutions
- Dafna Alsheh, Production Operations Director, Ice Stone
- Tamara Brown, Director of Sustainable Development and Community Engagement, Praxair
Monday, April 6, 2015
Yesterday was the third anniversary of the JOBS Act. President Obama signed it into law on April 5, 2012. The JOBS Act, as regular readers of this blog know, requires the SEC to adopt rules to enact an exemption for crowdfunded securities offerings. The statutory deadline for the SEC to do so was December 31, 2012. The SEC proposed the required rules on October 23, 2013, but it still has not adopted them.
It is now
- 1096 days since Congress passed the JOBS Act
- 826 days since the deadline for the SEC to adopt the required rules
- 530 days since the SEC proposed the rules
. . . and still no crowdfunding exemption.
If I treated my tax returns like the SEC has treated the crowdfunding rules, I would be in jail.
SEC Chair Mary Jo White has recently said that the SEC hopes to finalize the rules by the end of the year. I certainly hope so.
Thursday, April 2, 2015
In connection with the current legislative debate on benefit corporations in Tennessee (which has been gathering momentum since I last wrote on the topic), I have repeatedly asked about the impetus for the bill. Of course, there is the obvious "push" for benefit corporation legislation by the B Lab folks, who have gotten the ear of folks at the Chamber, convincing them that the legislation is needed in Tennessee to protect social enterprise entities from the application of a narrow version of the shareholder wealth maximization norm (a conclusion that I dispute in my earlier post). But what else? What real parties in interest in Tennessee, if any, have expressed a desire that Tennessee adopt this form of business entity?
There is anecdotal information from one venture attorney that some Tennessee entrepreneurs have indicated a preference for the benefit corporation form and have specifically requested that their business be organized as a Delaware benefit corporation. Leaving aside the Delaware versus Tennessee question, why are these entrepreneurs looking to organize their businesses as benefit corporations? Where does this idea come from?
Earlier this week I went to a really useful workshop conducted by the Venture Law Project and David Salmon entitled "Key Legal Docs Every Entrepreneur Needs." I decided to attend because I wanted to make sure that I’m on target with what I am teaching in Business Associations, and because I am on the pro bono list to assist small businesses. I am sure that the entrepreneurs learned quite a bit because I surely did, especially from the questions that the audience members asked. My best moment, though was when a speaker asked who knew the term "right of first refusal" and the only two people who raised their hands were yours truly and my former law student, who turned to me and gave me the thumbs up.
Their list of the “key” documents is below:
1) Operating Agreement (for an LLC)- the checklist included identity, economics, capital structure, management, transfer restrictions, consent for approval of amendments, and miscellaneous.
2) NDA- Salmon advised that asking for an NDA was often considered a “rookie mistake” and that venture capitalists will often refuse to sign them. I have heard this from a number of legal advisors over the past few years, and Ycombinator specifically says they won't sign one.
3) Term Sheets- the seminar used an example for a Series AA Preferred Stock Financing, which addressed capitalization, proposed private placement, etc.
4) Independent Contractor Agreement- the seminar creators also provided an IRS checklist.
6) Employment Agreement- as a former employment lawyer, I would likely make a lot of tweaks to the document, and vey few people have employment contracts in any event. But it did have good information about equity grants.
7) Convertible Promissory Note Purchase Agreement- here's where the audience members probably all said, "I need an attorney" and can't do this from some online form generator or service like Legal Zoom or Rocket Lawyer.
8) Stock Purchase Agreement- the sample dealt with Series AA preferred stock.
9) IRS 83(b) form- for those who worry that they may have to pay taxes on "phantom income" if the value of their stock rises.
10) A detailed checklist dealing with basic incorporation, personnel/employee matters, intellectual property, and tax/finance/administration with a list of whether the responsible party should be the founders, attorney, officers, insurance agent, accountant, or other outside personnel.
What’s missing in your view? The speakers warned repeatedly that business people should not cut and paste from these forms, but we know that many will. So my final question- how do we train future lawyers so that these form generators and workshops don't make attorneys obsolete to potential business clients?
Monday, March 23, 2015
The JOBS Act requires the SEC to create an exemption for small, crowdfunded offerings of securities. That exemption, if the SEC ever enacts it, will allow issuers to raise up to $1 million a year in sales of securities to the general public. (Don’t confuse this exemption with Rule 506(c) sales to accredited investors, which is sometimes called crowdfunding, but really isn’t.)
The crowdfunding exemption restricts resales of the crowdfunded securities. Crowdfunding purchasers may not, with limited exceptions, resell the securities they purchase for a year. Securities Act sec. 4A(e); Proposed Rule 501, in SEC, Crowdfunding, Securities Act Release No. 9470 (Oct. 23, 2013). Unlike the resale restrictions in some of the other federal registration exemptions, the crowdfunding resale restriction serves no useful purpose. All it does is to increase the risk of what is already a very risky investment by reducing the liquidity of that investment.
Enforcing the “Come to Rest” Idea
Some of the resale restrictions in other exemptions are designed to enforce the requirement that the securities sold “come to rest” in the hands of purchasers who qualify for the exemption.
Rule 147, the safe harbor for the intrastate offering exemption in section 3(a)(11) of the Securities Act, is a good example. To qualify for the intrastate offering exemption, the securities must be offered and sold only to purchasers who reside in the same state as the issuer. Securities Act sec. 3(a)(11); Rule 147(d). This requirement would be totally illusory if an issuer could sell to a resident of its state and that resident could immediately resell outside the state. Therefore, Rule 147(e) prohibits resales outside the state for nine months.
The resale restrictions applicable to the Rule 505 and 506 exemptions have a similar effect. Rule 506 only allows sales to accredited investors or, in the case of Rule 506(b), non-accredited, sophisticated investors. Rules 506(b)(2)(ii), 506(c)(2)(i). These requirements would be eviscerated if an accredited or sophisticated purchaser could immediately resell to someone who does not qualify.
Rule 505 does not limit who may purchase but, like Rule 506, it does limit the number of non-accredited investors to 35. Rules 505(b)(2)(ii), 501(e)(1)(iv). If an issuer could sell to a single purchaser who immediately resold to dozens of others, the 35-purchaser limitation would be meaningless.
To enforce the requirements of the Rule 505 and 506 exemptions, Rule 502(d) restricts resales in both types of offering.
Preventing an Information-less Resale Market
Rule 504 also includes a resale restriction, Rule 502(d), even though it does not impose any restrictions on the nature or number of purchasers. A resale would not, therefore, be inconsistent with any restrictions imposed on the issuer’s offering.
However, Rule 504 does not impose any disclosure requirements on issuers. See Rule 502(b)(1). Because of that, people purchasing in a resale market would not have ready access to information about the issuer. But the Rule 504 resale restriction does not apply if the offering is registered in states that require the public filing and delivery to investors of a disclosure document. Rules 502(d), 504(b)(1). In that case, information about the issuer is publicly available and there’s no need to restrict resales. People purchasing in the resale market would have access to information to inform their purchases.
The resale restrictions in Rule 505 and 506 offerings could also be justified in part on this basis. If issuers sell only to accredited investors in those offerings, there is no disclosure requirement. If they sell to non-accredited investors, disclosure is mandated, but even then there’s no obligation to make that disclosure public. See Rule 502(b). People purchasing in the resale market therefore would not have ready access to public information about the issuer.
This lack-of-information justification is consistent with the lack of resale restrictions in Regulation A. To use the Regulation A exemption, an issuer must file with the SEC and furnish to investors a detailed disclosure document. Rules 251(d), 252. Because of that, information about the issuer and the security will be publicly available to purchasers in the resale market.
The Crowdfunding Exemption
Neither of these justifications for resale restrictions applies to offerings pursuant to the forthcoming (some day?) crowdfunding exemption.
The come-to-rest rationale does not apply. The crowdfunding exemption does not limit the type or number of purchasers. An issuer may offer and sell to anyone, anywhere, so no resale restriction is necessary to avoid circumvention of the requirements of the exemption.
The information argument also does not apply. A crowdfunding issuer is required to provide a great deal of disclosure about the company and the offering—as I have argued elsewhere, probably too much to make the exemption viable. See Securities Act sec. 4A(b)(1); Proposed Rule 201 and Form C. The issuer is also obligated to file annual reports with updated information. Securities Act sec. 4A(b)(4); Proposed Rule 202. All of that information will be publicly available. Even if one contends that the information required to be disclosed is inadequate, it will be no more adequate a year after the offering, when crowdfunding purchasers are free to resell. Securities Act sec. 4A(e); Proposed Rule 501.
Some people, including Tom Hazen and my co-blogger Joan Heminway, have argued that resale restrictions may be necessary to avoid a repeat of the pump-and-dump frauds that occurred under Rule 504 when Rule 504 was not subject to any resale restrictions. As I have explained, Rule 504, which requires no public disclosure of information, fits within the information rationale. Such fraud is much less likely where detailed disclosure is required. There will undoubtedly be some fraud in the resale market no matter what the rules are, but public crowdfunding will be much less susceptible to such fraud than the private Rule 504 sales in which the pump-and-dump frauds occurred.
The resale restrictions are consistent with neither the come-to-rest rationale nor the information rationale for resale restrictions Forcing crowdfunding purchasers to wait a year before reselling therefore serves no real purpose. The only real effect of those resale restrictions is to make an already-risky investment even riskier by reducing liquidity.
Wednesday, March 18, 2015
Avantages de Participation à des Conférences Internationales Interdisciplinaires (Benefits of Attending Interdisciplinary International Conferences)
Greetings from Lyon, France, where I am presenting a work-in-process at an international conference on microfinance and crowdfunding organized by the Groupe ESC Dijon Borgogne (Burgundy School of Business) Chaire Banque Populaire en Microfinance. As the only legal scholar, the only U.S. researcher, and the only presenter with an orange-casted arm (!), I stand out in the crowd. So what is a one-armed U.S. law professor like me, with limited French language skills, doing in a place like this on my spring break? Among other things, I am:
- Broadening my academic and practical view of the world of business finance;
- Making new connections, personally and substantively;
- Getting different, pointed feedback on my ongoing crowdfunding work;
- Offering assistance and new perspectives (U.S.-centric, legal, regulatory, etc.) to scholars and industry participants from a spectrum of countries; and
- Securing potential partners and resources for future projects.
Although most of the participants speak English, I am still living at the edge of my socio-lingual comfort zone. It helps that I am an off-the-charts extrovert. Regardless, however, the benefits of attendance have been immediate and meaningful.
Questions for our readers:
Do you participate in interdisciplinary research conferences?
If not, why not?
If so, what scholarly traditions were emphasized? What did you find most beneficial . . . or most difficult?
Have you attended international research conferences?
If not, is it because of cost, personal discomfort, or another reason?
If so, how (if at all) have you benefitted from your attendance? What insights can you offer those considering doing the same?