Tuesday, September 28, 2010

Small Business Jobs Act of 2010

On September 27, 2010, President Obama signed into effect a new law directed at helping small businesses survive and grow in this economy.  The most useful provisions of the Act, in my opinion, are those directed at making it easier for small businesses to obtain bank financing.  Businesses borrow money when they want to grow, which in turn leads to job creation.  Therefore, lending to small businesses can have a positive impact on lowering the unemployment rate.  In particular, the Act:


- provides $30 billion in cheap capital to community banks for use in making loans to small businesses;
- temporarily raises the government guarantee on certain Small Business Administration’s loans to 90% and waives fees on 7(a) and 504 loans;
- increases the size limits on various SBA loans (for example, a maximum $5 million 7(a) loan instead of a $2 million one); and
- allows temporary refinancing of unfavorable terms on commercial real estate loans through the SBA’s 504 program.


A link to the full text of the Act is below:
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h5297enr.txt.pdf

However, the Act also has its critics. See yesterday’s article posted by Barbara Weltman (link below). Ms. Weltman makes some valid observations about whether small businesses will actually be able to use all of the resources now available to them. My favorite point made by Ms. Weltman is that the most effective way to help small businesses is by actually listening to their problems (such as high regulatory compliance costs) and then creating regulation directed at solving those precise problems.

http://www.openforum.com/idea-hub/topics/innovation/article/small-business-jobs-act-of-2010-does-little-for-small-business-barbara-weltman



What are corporate formalities and why are they important to observe?

One of the main reasons why a business owner decides to incorporate is to limit his or her own personal liability for business debts. However, simply incorporating is not enough to enjoy protection of limited liability. One also needs to observe corporate formalities. Otherwise, the courts may decide to “pierce the corporate veil” of the business entity and hold the owner liable for the company debts. So, what does a business owner need to do to properly observe corporate formalities?

First, I want to point out that observing corporate formalities is important even for one-person corporations. Second, regardless of what anyone says, even LLC owners need to do it, not just owners of corporations (please keep reading, I’ll discuss LLCs a bit later).

Corporate formalities for corporations consist of the following (this may not be an all inclusive list, but I believe is a good start):

1. Bylaws. Every corporation must have bylaws, a set of internal rules governing how the corporation is run.

2. BOD Meetings. The board of directors of the corporation (needless to say that every corporation must have a board of directors, although these individuals can also serve as officers, subject to some exceptions) has to meet regularly. The secretary of the corporation should record minutes of the meetings, reflecting resolutions and discussions that the directors had at that meeting. The minutes would then need to be adopted by the board at the next meeting and put into a minutes book. All major decisions of the corporation should be adopted in a board resolution pursuant to the procedure set forth in the bylaws (such as mergers, stock issuances, major financial decisions such as loans, dividends, guarantees, hiring of consultants and legal or other experts, transactions with insiders, executive officer compensation, etc.).

3. Shareholders Meetings. Shareholders of the corporation should also have regular meetings (at least annually to elect directors), the secretary of the corporation should take minutes of the meeting and add them to the minutes book.

4. Stock Ledger. There needs to be a stock ledger reflecting the stock ownership of the corporation and the names and addresses of the shareholders.

5. Bank Account. The corporation has to have a separate bank account, and there should be no commingling of personal and business funds.

6. Business Name. All business of the corporation with third parties needs to be conducted in the name of the corporation so that it is clear that the directors and officers are acting on behalf of the corporation and not in their individual capacity.

7. Filings, Taxes. The corporation should file all appropriate federal, state and local tax returns and pay taxes when due, as well as obtain all necessary permits and licenses.

8. Assets. The corporation must have adequate capitalization and maintain proper operating capital.

9. Debt Guarantees. Shareholders should be careful not to personally guarantee and pay the debts of the corporation (at least not on the recurrent basis). Otherwise, the courts may decide that the owners act as alter egos of the corporation and the corporation has lost its separate entity status. Board resolutions should be adopted allowing guarantees for specified purposes only.

LLCs generally require less corporate formalities to preserve limited liability of their members. However, it is still important to do the following:

1. Have an operating agreement that defines member roles, outlines distribution guidelines and specifies operational and taxation rules.

2. Hold regular member meetings (some states like New York require at least annual meetings), adopt resolutions, record minutes, keep a minutes book.

3. Follow guidelines #4-9 above.

Following corporate formalities should become a part of doing business for both corporation and LLC owners. Board, shareholder or member meetings should take place on ongoing basis, and minutes of such meetings should be kept regularly. After all, it may be difficult if not impossible to recreate corporate formalities retroactively if the limited liability protection has been challenged.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

Friday, September 24, 2010

NYSE Commission Announces Core Corporate Governance Principles

On Thursday, September 23rd, the New York Stock Exchange-sponsored commission on corporate governance issued a report that contained 10 core corporate governance principles. Even though these principles apply to public companies, private companies should also be aware of them and try to apply them on an ongoing basis. Apart from the principles themselves, the commission noted that:


- the objectives of a board of directors should be directed at long-term growth, and any measures by the management aimed at short-term stock price increases are inconsistent with the corporate governance principles of the company;

- it is not just the board’s responsibility to make sure that the company has sound corporate governance practices, but importantly it is the management’s responsibility to create an environment where these principles are created, respected and fostered;

- a board of directors should be comprised of a mix of independent directors and those who are not independent, so that all points of view can be presented and considered; and

- best corporate governance principles are those that are created by the market itself (ie, other companies), not those that are dictated from above by a rule-making authority.

I am copying below the 10 core principles from the NYSE news release:

• The Board’s fundamental objective should be to build long-term sustainable growth in shareholder value for the corporation;

• Successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior;

• Good corporate governance should be integrated with the company’s business strategy and not viewed as simply a compliance obligation;

• Shareholders have a responsibility and long-term economic interest to vote their shares in a reasoned and responsible manner, and should engage in a dialogue with companies thoughtful manner;

• While legislation and agency rule-making are important to establish the basic tenets of corporate governance, corporate governance issues are generally best solved through collaboration and market-based reforms;

• A critical component of good governance is transparency, as well governed companies should ensure that they have appropriate disclosure policies and practices and investors should also be held to appropriate levels of transparency, including disclosure of derivative or other security ownership on a timely basis;

• The Commission supports the NYSE’s listing requirements generally providing for a majority of independent directors, but also believes that companies can have additional non-independent directors so that there is an appropriate range and mix of expertise, diversity and knowledge on the board;

• The Commission recognizes the influence that proxy advisory firms have on the markets, and believes that it is important that such firms be held to appropriate standards of transparency and accountability;

• The SEC should work with exchanges to ease the burden of proxy voting while encouraging greater participation by individual investors in the proxy voting process;

• The SEC and/or the NYSE should periodically assess the impact of major governance reforms to determine if these reforms are achieving their goals, and in light of the many reforms adopted over the last decade the SEC should consider the expanded use of “pilot” programs, including the use of “sunset provisions” to help identify any implementation problems before a program is fully rolled out.

Here is a link to the press release: http://www.nyse.com/press/1285236224629.html

Here is a link to the full commission report: http://www.nyse.com/pdfs/CCGReport.pdf

Tuesday, September 21, 2010

What is a trade dress?

This is not just about any dress. A trade dress is actually a form of a trademark. It protects the “touch and feel” of a product, its total presentation, total experience. Examples inlcude The Hard Rock CafĂ© and the shape of Absolut vodka. The concept of a trade dress is based on distinctiveness and customer recognition and can include unique size, shape, feel, look, design, graphics, color combinations, etc.


The same rules apply to trade dress as to trade marks or service marks. The feature for which you seek protection has to be distinct. Distinctiveness can be either inherent or acquired. Some features can be inherently distinct, on the basis of the feature itself. Fashion designs, for example, are not inherently distinct. The Supreme Court held in Wal-Mart Stores, Inc. v. Samara Brothers, Inc., 120 S.Ct. 1339 (2000) that product designs such as the appearance of a line of children’s clothing are not considered to be inherently distinctive and can only be protected if they acquire distinctiveness through sales or advertising. Accordingly, acquired or secondary distinctiveness comes from the public’s growing association of this image with one particular source. This can be proven by showing the owner’s advertising, promotions and sales.

Another rule relevant to trade dress is that the feature for which you seek protection cannot have a functional purpose. This may be difficult as even the most unique packaging, for example, has a functional purpose of protecting the product. However, the rule remains, - design or feature has to be nonfunctional and be used only to identify the source.

Similarly to other types of trade marks or service marks, infringement of a trade dress happens when there is a likelihood of confusion by customers between similar goods/services and their sources. These are just the “nuts and bolts” of trade dress law. Trade dress protection can get quite complicated, and assistance of an experienced attorney may be required to obtain it.

Thursday, September 16, 2010

Why you should federally register your trademark ASAP?

Trademarks identify and distinguish your products or services from other similar products and services in the marketplace. Trademarks are essential when creating a brand. According to Wikipedia, trademarks were first used in the Roman Empire where the blacksmiths would stamp the swords they made to show the source of origin. Other early uses included Lowenbrau beer (since 1383) and Stella Artois (since 1366). Now, trademarks are used as a marketing tool to build a brand and to allow consumers to rely on and expect certain quality and experience associated with that particular brand.


Trademark is created the moment you start using it. You do not have to register it to have it. However, this so called “common law” trademark protects your goods or services only in the territory of use (not nationally). Also remember, - trademark law is all about who was the first to use that particular mark.

In short, federal registration (registration with the US Patent and Trademark Office) gives you the following advantages:

1. Exclusive nationwide ownership of the mark.

2. Official notice to other potential users that the mark is not available (can put an ® after it).

3. Right to sue in federal courts (where it is more likely to win an infringement lawsuit and get larger damages, including attorney fees).

4. Presumption that the trademark owner is the rightful owner of the mark (although this presumption can be rebutted with proof of prior use by another party).

5. An option for the owner to file an “intent to use” application (instead of traditional actual use). This still gives the owner priority of use provided the owner filed the application before another party used the mark and the owner later puts the mark to actual use.

I believe that, taken together, these benefits outweigh the costs ($275 to $325 if filing electronically and $375 if filing a paper application, plus attorney fees). I know, the costs may seem high, but are they really that high if you compare them to the costs of spending a year developing your brand just to find out later that the name was not available?

Wednesday, September 15, 2010

NY State Provides Tax Benefits for Companies in BioTech, HighTech, CleanTech, GreenTech and certain other industries

Now NY small businesses in certain industries can get significant tax benefits if they qualify and participate in the new Excelsior Program. This is an important step taken by the government in an effort to encourage these businesses to develop and stay in New York State despite the hard economic times. I have personally noticed a lot of enthusiasm around the City with respect to creation of new high-tech or clean energy start-ups, and it seems that the government is backing up these efforts.


In short, the Program is run by the Empire State Development (ESD) and provides tax credits to the qualifying businesses to be used over a five-year term. The Program offers four new fully refundable tax credits:

1. the Excelsior Jobs Tax Credit (a refundable tax credit of up to $5,000 per new job, available to all certified firms);

2. the Excelsior Investment Tax Credit (a refundable credit equal to 2% of the cost of qualified investments, available to all certified firms). Generally, a qualified investment is depreciable property with a useful life of four or more years located in New York and placed in service on or after the date ESD issues an eligibility certificate to the taxpayer;

3. the Excelsior Research and Development Credit (a refundable tax credit equal to 10% of new investments based on the Federal Research and Development Credit, available to all certified firms); and

4. the Excelsior Real Property Tax Credit - this refundable 5 year tax credit is available only to businesses located in designated distressed areas of the state and to businesses in targeted industries that meet higher employment and investment thresholds. The credit is equal to 50% of the property taxes assessed and paid in the year prior to a taxpayer’s application to the Excelsior Program. The credit decreases by 10% each year following thereafter.

The credits are capped at $250 million annually and businesses will be granted the credits only after they have met the annual program requirements. Eligibility is based upon projected long term growth, job creation and expansion in New York.

For more information, click here: http://www.empire.state.ny.us/BusinessPrograms/Data/Excelsior/Excelsior_ProgramOverviewedit.pdf.

Sunday, September 12, 2010

L3C – a Welcome Hybrid for Social Entrepreneurs

Please meet a new business entity form that is quickly attracting attention of businesses with social message, investors and entrepreneurs all around the country. L3C, a low-profit limited liability company, is a hybrid legal entity form that has a flexible structure of an LLC but a well defined purpose of a nonprofit. Five states have already adopted L3C as a legal entity form, and many more states have L3C legislation pending. New York is about to adopt (in my opinion) an L3C act (Senate passed the bill S6726 on June 29, 2010 and it is now in front of the Assembly).


L3C is an exciting business form that is designed to tap into a wealth of tax-exempt funds while still attracting regular capital, all for a social good. At least in theory, L3Cs have the capability of channeling numerous funds into the nonprofit or social enterprise sector and making a difference where our taxes fail to work. But in practice, it is not certain that L3Cs will achieve their objective. Here is why.

Purpose:

An L3C is a regular business and can be profitable. The primary purpose of an L3C cannot be to make a profit, but rather to further a social purpose. In particular, an L3C must significantly further the accomplishment of one or more charitable or educational purposes; it would not be formed except to further such purpose(s); it cannot make the production of income or appreciation of property as its primary purpose; and it cannot be created for any political or legislative purpose.

Taxation:

L3C is not exempt from federal or state tax and contributions to L3C are not tax deductible. L3C can be classified as a “pass through” entity, which means that the entity itself does not pay federal tax, but rather the tax is passed through to its members and is allocated proportionally to their ownership. L3C profits are also subject to taxation.

Good things:

L3Cs are not subject to nonprofit regulation, which can be quite complex. L3Cs are designed to attract funding from both nonprofit and for-profit sectors: program-related investments (PRIs) from private foundations, as well as private investments from individuals and businesses. Private foundations can become part owners or lenders to an L3C. In fact, since L3C has no limitation on ownership, all entities (foundations, trusts, pension funds, for-profit businesses, etc) and individuals can be members of an L3C.

Problems:

Mainly, L3C structure is created to attract PRIs from private foundations, which are seen as a great underutilized source of funding (in 2006 and 2007, less than 1% of all foundation funding was PRI). And here lies the main challenge of L3Cs: foundations are still reluctant to invest PRI money into L3Cs for reasons I explain below.

PRI investments are quite rare and risky because when the foundation is filing its tax returns, IRS can refuse to recognize PRIs if the investment is not made in furtherance of the foundation’s charitable purpose. This can result in high excise taxes, both on the foundation and the foundation’s manager. Foundations can request an advance ruling from the IRS, but such requests may be expensive and time consuming. Additionally, even a qualified PRI may be subject to expenditure excise tax unless the foundation monitors that the L3C uses the funds in furtherance of the charitable purpose. This requires expenditure approval by the foundation and a detailed report by L3C. The foundation may even lose its tax-exempt status if the PRI confers a benefit on a third party (if the terms of the investment are unfavorable).

The foundations’ involvement with the L3Cs is also complicated by the proposed tranche investment scheme. Investments by the foundations would be in a tranche with high risk and low return, so as to attract private capital to be invested in a separate tranche with low risk and high return. A flexible LLC structure allows for uneven distribution of returns, but may create problems for the foundations unless the investment is in line with the foundation’s charitable mission and is therefore a PRI.

The IRS is still silent regarding whether investments into L3Cs by private foundations can automatically be considered PRIs. Until the IRS adopts this position, PRI investments by the foundations remain risky and the most promising funding option for L3Cs remains uncertain. Even if IRS adopts this position, foundations may be discouraged by the amount of policing and monitoring they’ll have to do to ensure that L3Cs use their PRI money in furtherance of the right purpose.

Conclusion:

The idea of having L3Cs is very appealing. The ability of using private capital together with tax-exempt capital for social purposes while still generating profits seems perfect from all angles. However, to make L3Cs a success, L3Cs would need to be carefully regulated and monitored to ensure that their social purpose remains primary at all times and the IRS will need to qualify investments into L3Cs as PRIs.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

Friday, September 10, 2010

About Tweets – is it OK to collect them?

I want to share with you an interesting article I found about the legality of use of Tweets for marketing and research purposes. The article suggests that it is legal, given that Tweets are not designated private. However, privacy concerns still exist, and in the future the answer to this question may be different.


I am reprinting the article below:


Harvesting Tweets for Research and Profit - Is it Legal?

Harvesting tweets is on the rise. Researchers and marketers alike are now capturing and downloading Tweets from Twitter's database. Privacy activists argue privacy concerns. Researchers, marketers, and Twitter users all want to know - is Twitter harvesting legal?

How and Why

Every day, users of the Twitter social media publishing platform send out millions of Tweets -- short electronic messages of 140 characters or less -- to their readers and followers.

Most Twitter users are not aware that it's relatively easy for anyone with a skilled programmer to harvest and download their Tweets. All a programmer has to do is to gain access to Twitter's Application Programming Interface (API), and then to write code that requests data from Twitter's servers through the API. The code contains search criteria, usually in the form of key words and phrases of interest.

One prime example of why Tweets are harvested is the harvesting of Tweets by news organizations Tweets during the riots that followed the Iranian presidential election of 2009. The results provided an excellent source of real time information from a closed society as events unfolded, and afterwards, a fascinating historical record of how the protesters worked together under difficult conditions.

Advertisers have also joined the Tweet harvesting process. For example, suppose you're going to lunch in an urban office setting, and you tweet a collection of co-workers suggesting a specific restaurant. A savvy marketer harvests your Tweet, and then emails to your smart phone a coupon for a hefty discount at another restaurant nearby. Pretty nifty for the savvy marketer, and perhaps a welcome suggestion for a discounted lunch, but is it legal?

The Electronic Communications Privacy Act

In 1968, the Wiretap Act was passed to impose rules for obtaining wiretap orders. In 1986, the Wiretap Act was amended by The Electronic Communications Privacy Act to extend coverage of the Wiretap Act to electronic communications.

Generally, the Wiretap Act as amended prohibits the intentional interception, use, or disclosure of wire and electronic communications, unless a statutory exception applies. This means that all persons (including governments) are prohibited from wiretapping phones and intercepting electronic communications over the Web, unless a statutory exception (safe harbor) applies.

How does this apply to Tweets? A specific statutory exception applies to electronic communications that are publicly accessible. This is the exact language of the statutory exception: "It shall not be unlawful... for any person... to intercept or access an electronic communication made through an electronic communication system that is configured so that such electronic communication is readily accessible to the general public".

Readily accessible to the general public is defined by the statute as follows: "... with respect to a radio communication, that such communication is not... scrambled or encrypted".

It would appear that any Tweet that is not designated by the Twitter user as "private" would clearly fall within the statutory exception because the Tweet is not scrambled or encrypted. So, Tweet harvesters appear to have a strong argument that they're protected by the publicly accessible safe harbor.

The Google Litigation

Google is now involved in litigation involving its collection of WiFi data. It seems that Google's Street View cars have engaged in the now-ended practice of collecting bits of private wireless data while cruising neighborhoods for data used in its Google Maps online service.

Although Google ceased this type of electronic data collection and stated that it was not intentional, a class action suit has been filed against Google.

Conclusion

The harvesting of Tweets that are not designated as private would appear to be protected by the publicly accessible safe harbor.

It's interesting that Google's collection of WiFi data is very similar to Tweet harvesting. It would seem that publicly accessible safe harbor would also protect Google in this litigation, but we'll have to wait and see how this case is resolved.

Copyright © 2010 Chip Cooper

This article is provided for educational and informative purposes only. This information does not constitute legal advice, and should not be construed as such.

Leading Internet, IP and software lawyer Chip Cooper has automated the process of drafting Website Legal Forms. Use his free online tool - Website Documents Determinator -- to determine which documents your website really needs for FTC website forms and website legal compliance. Discover how quick, easy, and cost-effective it is to draft your website contracts at http://www.digicontracts.com/.

Thursday, September 9, 2010

Changes to the “Accredited Investor” Definition - a Clarification

As I posted earlier, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") amended the definition of an accredited investor to exclude the value of the person’s primary residence from the calculation of net worth. Prior to the Dodd-Frank Act, a natural person was an accredited investor if such person’s net worth, together with spouse, exceeded $1 million. Investors could previously include the value of their primary residence.


The Securities and Exchange Commission (the “SEC) issued a Compliance and Disclosure Interpretation relating to the change, clarifying that since the primary residence is now excluded from the calculation, so is the mortgage for that residence up to the fair market value of the residence (it also relates to any other loan secured by the residence). However, any mortgage in excess of the FMV of the residence is to be counted as a liability in calculating the net worth of the investor. This clarification is particularly relevant in the view of the recent decline in real estate prices. It is not uncommon that the mortgage for the residence exceeds its fair market value.

The other way for a natural person to become an accredited investor (if such person had an individual income in excess of $200,000 in each of the two most recent years or joint income with their spouse exceeding $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year) remains unchanged.
A link to the SEC Interpretation is here: http://sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#179.01.

Thursday, September 2, 2010

Misleading Online Endorsements

On August 26, 2010, a public relations firm, Reverb Communications, agreed to settle the Federal Trade Commission (FTC) charges relating to misleading online endorsements. Reverb was hired by developers of a video game application to promote the game app. Reverb had its employees pose as independent disinterested customers and post game reviews at the online iTunes store, while not disclosing the financial connection Reverb had with the game developers.

The proposed settlement order requires Reverb to remove any posted endorsements that say that the reviewers are independent consumers and fail to disclose connection with the game developers. Also, going forward Reverb and its employees cannot post reviews without disclosing such material connections.

This settlement order should not come as a surprise given that last year the FTC revised its Endorsements and Testimonials Guides to include all media – including blogs and social networking sites. The previous Guides were written in 1980 and did not extend to social media. The legal principles, however, stayed the same. The Guides reflect three basic principles:

1. Endorsements must be truthful and not misleading;
2. If the advertiser doesn’t have proof that the endorser’s experience represents what consumers will achieve by using the product, the ad must clearly and conspicuously disclose the generally expected results in the depicted circumstances; and
3. If there’s a connection between the endorser and the marketer of the product that would affect how people evaluate the endorsement, it should be disclosed.

The full text of the FTC press release relating to the settlement is available here: http://www.ftc.gov/opa/2010/08/reverb.shtm

The full text of the Revised Guides is available here:
http://ftc.gov/os/2009/10/091005revisedendorsementguides.pdf

Also, I recommend all bloggers, users of social media sites and online businesses to review the following helpful Q&A posted by the FTC relating to the Revised Guides:
http://ftc.gov/bcp/edu/pubs/business/adv/bus71.shtm