Rimon Law Blog
Category: Entrepreneurship
Category: Financing
FINRA Regulatory Notice Regarding Regulation D Offerings
The Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 10-22 on April 20, 2010. The notice, which came in light of recent abuses in Regulation D offerings, was intended to be a reminder to broker-dealers of their obligation to conduct a reasonable investigation of the issuer and the securities they recommend in offerings made under the Security and Exchange Commission's Regulation D under the Securities Act of 1933 (also known as private placements).
This obligation arises from the broker-dealer's "special relationship" to the customer and the representation, in recommending the security, that the broker-dealer has conducted a reasonable investigation and is basing the recommendation on conclusions drawn from the investigation.
If such a reasonable investigation is lacking, the broker-dealer must make that fact and the risks that arise from the lack of information known when making a recommendation.
Additionally, broker-dealers recommending securities offered under Regulation D must meet its suitability requirement under NASD Rule 2310, and must comply with the advertising and supervisory rules of FINRA and the SEC. That is, a broker-dealer must conduct a suitability analysis when recommending securities to both accredited and non-accredited investors that will take into account the investor's knowledge and experience.
While the notice admits that no list of reasonable investigation practices would suffice since each investigation must be tailored to the specific facts of the Regulation D offering in question, it does provide a list of sample investigative practices. A few of those include:
- Examining the issuer's governing documents, noting particularly the amount of its authorized stock and any restriction on its activities.
- Looking for any trends indicated by the financial statements.
- Inquiring about internal audit controls of the issuer.
- Contacting customers and suppliers regarding their dealing with the issuer.
The full notice is available at FINRA.org.
An LLC Can be Treated as an S-Corporation for Tax Purposes
An LLC can be treated as an S-Corporation for tax purposes if it makes an S-Corporation election as long as the entity meets the IRS criteria to be taxed as an S-Corp, files an S-Corp election and gets approved by the IRS to be taxed as an S-Corporation. Without an S-Corporation election, single member LLCs default to be taxed as sole proprietors and a multi-member LLCs defaults to be taxes as partnership since they are considered “disregarded entities”. However, if a single or multiple member LLC agreement meets the IRS criteria to be classified as a small business corporation, the S-corporation election is filed and gets approved by the IRS, then for tax purposes, not legal purposes the entity is an S Corp not a LLC.
The Criteria for Being Classified as an S-Corporation
In order to be classified as an S-Corporation, a company must: be domestic, have no more than 100 shareholders, have one class of stock, all shareholders must be individuals, decedents’ estates, bankruptcy estates, trusts or tax-exempt charitable organizations, or wholly owned by another S corporation, and all shareholders must be residents of the United States (as defined by the tax code not immigration laws). Shareholders of an S-Corporation can not be financial institutions that use a reserve method of accounting for bad debts, companies taxable as insurance companies, taxable mortgage pools, or domestic international sales corporations. So, if a business entity meets these criteria it can be considered an S corporation by the IRS and taxed as an S corporation as long as the S corporation election forms are properly filled-out and approved by the IRS. Many states including California automatically give business entities an S-corporations tax status if it was approved by the IRS.
The tax benefits of making an S-Corporation Election?
Many small business owners incorporate their businesses not only for legal protection, but also to reduce owners’ payroll taxes through S-Corp tax election with the IRS. One advantage of an S-Corp is that it gives business owners the ability to reduce their self employment taxes. Any small business owner who has not made an S-Corp election and uses Schedule C for their personal tax return for 2010 is subject to both employer and employee FICA and Medicare payroll taxes at 15.3% up to $106,800, 2.9% Medicare for Schedule C net income greater than $106,800, and California SDI for 1.1% up to 93,316. If a business owner pays himself/herself a “reasonable salary”, the rest of the net income is not subject to these payroll taxes.
Venture Capital Survey of the Silicon Valley in 2009 Third Quarter
Dow Jones VentureSource is one of the most popular nationwide venture capital date reports in the United States. VentureSources published its latest data on the development of venture capital investments in the third quarter of 2009. Below are some overviews observed by VentureSource.
- With 616 venture deals and $5.1 billion invested, Q3 is a 6% drop over Q2;
- IT investment barely outpaces health care;
- Web2.0 investments surpassed the software sector for first time on record;
- Medical device investments nearly match biopharmaceuticals;
- Corporations investing instead of acquiring, commitments to VC-backed firms surpasses 2008 total;
- $5 million median deal size on par with Q1&Q2, but still lowest since 1999.
It is undeniable that the investments and fundraising by venture capitalists remained at low levels in 3Q’2009, but there is room for optimism as the economy is picking up slowly and Nasdaq continued to improve. In addition, with regard to the largest U.S. deals overall in 3Q’2009, eight deals are conducted in California, such as Facebook, Tesla Motors, and Pacific Biosciences of California, etc.
New Legal Trap for Employers in Hiring Independent Contractors
The United States Court of Appeals for the Second Circuit, in a September 10, 2009 ruling, held that an employer can be held liable for discriminatory hiring decisions made by its independent contractors. The case involved an independent contractor acting on behalf of the employer, telling the plaintiff that “they were looking for someone younger”.
The Second Circuit ruled that, even if the hiring decision is made by the authorized independent contractor, the employer was still responsible for the discriminatory hiring decision by the independent contractors. In a worse scenario, even if the independent contractor does not have the actual authority but the applicant thought that it did (“apparent authority” in legal terms), the employer is still liable.
Considering the harsh economy and fewer job opportunities these days, employers should be more cautious since the job applicant is more inclined to sue if he/she cannot get the job. Employers should avoid asking job applicant questions such as race, religion, national origin, gender and age, etc during the interview process; when entering into the independent contractor contract, it is a good idea to add an indemnification clause asking the independent contractor to indemnify the employer for any liability arising from the hiring process conducted by the independent contractor.
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No Smooth Road for Tech Giants
Oracle’s takeover of Sun Microsystems is facing the European Union’s competition regulator’s investigation, and the prospect of Google’s ambition of building a digital library is still unclear because some publishers and writers reckon the accessibility of large volume of online books will damage their economic interests. While small tech companies and start-ups are worrying about their sources of capital and the outlet of their products, the big tech companies are also undergoing tough scrutiny from both the governments and their competitors.
Oracle’s deal is a typical M&A deal among two tech companies in order to complement each other and expand their market shares, and it is not uncommon to trigger the anti-trust examination. Google’s “monopoly” is sort of untraditional, since the platforms of the competition are not overlapping: one from the physical word, i.e., the physical books, and the other is from the virtual word, i.e., the books on the internet.
I do like Google’s fantastic idea of making millions of books digitally available to the general public, and do admire its ability of making it true. While creation is the life of a tech company; having a good idea and making it good is the key to the success of a tech company, no matter it is only a startup or a giant.
Choosing Values for Your New Startup
So, you have this great idea, you are sure that it is going to be at least the next Google/Monster/Microsoft/Facebook. Now what?
Well, having a great idea is just the first step (and some say the easiest one) in a long long journey towards establishing your own living and kicking business. Since this platform of blogging requires us to divide this experience into small, 300-500 words sections, I find it to be a great opportunity to try to attack different aspects of starting up a new business one small piece at a time.
When Barak and I decided to “become serious” with the idea of www.Meijob.com, our first step was to sit and write down a business plan that we could present to potential investors. But how do you start writing a business plan? What is the “must have” information? How are we going to translate the storm in our heads into words and numbers?
We met one day in one of the (then) scarce coffee shops in Beijing and brainstormed about it for a while, until Barak said: “You know what, when I worked in Orange, we had these company values pumped to us all the time, and this might be a good place to start with.” At first I thought ”what is this new age nonsense? Why don’t we get down to the business itself – crunch numbers, business models, revenue streams, expenses etc.?’ But after giving it one more thought, I realized the potential. The process of creating these values will be the gateway to the actual business plan. Once we start dealing with the values, we will necessarily have the wind at our back and from there it will be easier to move forward – or so I thought.
It turned out to be one of the greatest ideas we had. The first step was to write down values that we would like our future company to respect, follow and represent. This was relatively easy. However, when we looked at the piece of paper on which we wrote down our suggestions, there were over 25 values listed, whereas it was clear to us that we needed to break the list down to a no more than five values, so that each value would have true meaning.
Eventually, we decided (as we continued to do many times later) to get a feminine point of view and consult with our spouses and friends. After a few beers and several servings of homemade finger food, it turned out to be a real fun, yet productive, evening, which resulted in not only our chosen values, but also a mantra and vision (one which I will post about seperately). Having a second and third and fourth opinion from different point of views and personas is, in my opinion, an essential step in creating and understanding your business’s personality. This process should repeat itself every once in a while, to make sure that you and your business are still on track.
The values we came up with are:
- Simple,
- Different / Creative,
- Together,
- Honest, and
- Possible.
I know that these terms may not fall exactly to the pure dictionary definition of “Values”. Perhaps a more accurate term would be “Foundations” or “Constitution” – any way it doesn’t really matter. The main idea is that you will have something that will unite all the people related to your business under one set of conceptual guidelines.
I can rant for hours about each of these values one by one, and what they mean to Meijob.com, but this is not important for the sake of this post. You should choose your own set of values and determine what they mean to you as an entrepreneur, a manager and a human being.
From there the path to start writing down our business plan was clear and wide open. We completed the first version in less than 10 days.
Final note – the first thing we did when we entered our office (which was actually an apartment close to Beijing’s Hutongs) is order posters of all the values – separate poster for each value in Chinese and English with a suitable picture to visualize the value – and hang them on the walls together with the brand of Meijob.com. From there on, each time we had a dilemma, or wanted to show our employees our way of thinking, we just pointed to the walls, to the relevant value hanging there, and said “how does this relate to our core value of _____?” Our employees loved it and we got to create a real personality for our company.
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Guy Rotberg is a serial entrepreneur who spent the past four years in one of the most exciting places to be for an entrepreneur in this century – Beijing, China. Recently relocated to SF Bay Area in California, Guy spends his time by combining his two loves (besides his wife…) Internet (advising start up companies, doing social media marketing and blogging) and Real Estate (investment advisory, syndication groups, private consulting).
Guy has over 10 years of experience in the Internet, HR and Legal industries in China and Israel. He Co-founded www.Meijob.com , the leading matching job search engine in China and www.jipingmi.com, the leading property search engine in China. Guy currently holds the position of Chairman in Meijob and a Director in Jipingmi. Prior to Meijob, Guy founded the Legal Recruitment Department for BGI China, a leading Chinese search & Recruitment firm, with offices in Beijing, Shanghai and Guangzhou and before that he practiced law in Israel for 6 years.Guy holds an LLB from Tel Aviv University and is a certified lawyer in Israel.
If you liked this post, you can visit Guy’s blog at The Local Outsider.
Tough Marriage?
On September 1, 2009, Ebay announced that it would sell 65% of Skype, an internet calling service to a group of investors which includes Silver Lake, a private-equity fund, and a venture-capital firm started recently by Marc Andreessen, founder of Netscape. The price was $1.9 billion in cash, higher than previously expected. Skype was purchased by Ebay in the year of 2005 and was targeted to strengthen the communication between buyers and sellers of Ebay.
The situation is not uncommon in the mergers of the technology companies. As early as in 2000, analysts had already pointed that the problem in the corporate alliance is especially rife in the tech industry, where executives working quickly on “internet time” often rush deals before assessing whether the companies fit well together. In order to determine whether the two companies match each other, merely prior transaction due diligence is not enough.
Reasons why some acquisitions fail, among other things, might be the unfitness of the technology developed by the acquired company to the acquiring company, corporate cultural clash, and disenchanted key employees of the acquired company who finally left the company. A competent law firm or lawyer can add value to the companies by doing adequate intellectual audit and designing an employment package to detain the key employees.