Wednesday, December 28, 2011

SEC Adopts New Definition of Accredited Investor

On December 21, 2011, the Securities and Exchange Commission adopted final rules for calculating net worth under the new definition of Accredited Investor. http://www.sec.gov/rules/final/2011/33-9287.pdf
As adopted in July 2010, Section 413(a) of the Dodd-Frank Act requires the definition of “accredited investor” in the Securities Act rules to exclude the value of a person’s primary residence for purposes of determining whether the person qualifies as an “accredited investor” on the basis of having a net worth in excess of $1 million. On December 21, 2011, the SEC adopted conforming amendments to Securities Act Rule 501(a)(5) of Regulation D and Securities Act Rule 215(e).

As clarified by the SEC, investor now has to exclude the positive equity of his or her primary residence from the calculation of net worth to determine if he or she is an accredited investor. For example, if the fair market value of the primary residence is $500,000 and the mortgage on that residence is $300,000, then the positive equity is $200,000. This is the amount the investor excludes from the calculation of net worth. However, if the mortgage exceeded the fair market value (for example, the mortgage is $600,000 rather than $300,000 in the previous example), then that difference of $100,000 is reflected as a liability in the balance sheet of the investor.

There is another twist. According to the final rules, if the investor takes out more mortgage (debt secured by the primary residence) in the 60 days before the accredited investor determination is made (other than debt incurred in connection with the acquisition of a primary residence), then all such debt will be treated as a liability in the net worth calculation and will not be netted against the value of the residence. This provision eliminates investors’ ability to artificially inflate their net worth for purposes of the accredited investor definition by taking on extra debt secured against their residence shortly before participating in an exempt offering.

Investor questionnaires may need to get adjusted to reflect these new tests. Investors will likely need to get a valuation of their residences to determine their fair market value. They will also need to disclose value of the mortgages and the timing of when such mortgages incurred.

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.

Tuesday, December 27, 2011

Who Owns a Twitter Account and What is Its Worth?

The answer to this question is far from clear, but is about to be ruled on by the courts. A recent article by The New York Times, A Dispute Over the Twitter Account Goes to Court, by John Biggs (http://nyti.ms/tCivG9) highlighted an interesting legal development. Phonedog Media L.L.C. sued his former employee, Noah Kravitz, over the ownership of the NoahKravitz Twitter account. Mr. Kravitz started tweeting under the name Phonedog_Noah while being employed by Phonedog Media L.L.C. Upon his departure, the company owner allegedly let him keep the Twitter account in exchange for occasional postings. Mr. Kravitz switched the name of the account to NoahKravitz and continued tweeting, increasing the number of followers from 17,000 to 20,000. However, eight months later, the company sued Mr. Kravitz, claiming that the twitter followers list was its customer list. The company also asked for damages of $2.50 per month per follower for eight months, totaling $340,000.

Businesses use social media to increase awareness of their brands and to attract new customers. However, it is not always clear who owns the Twitter account absent a written agreement. If an employee tweets during the work day, does it mean that his or her Twitter account is owned by the employer? Can the employer restrict/monitor what the employee tweets about during the work hours? Also, how does one determine the value of a Twitter account and the value of the number of the followers the account has?

Much depends on what the employee tweets about and whether the employee’s responsibilities include establishing and maintaining social media presence on behalf of the employer. Also, one needs to examine the purpose of the social media account. Was it opened upon the request by the company management? Did the company use it to announce various sales, promotions and company news?

In light of this case, regardless of the outcome, business owners should remember to clearly establish the ownership of social media accounts. This can be done through company policies and employment agreements. It is possible that Noah Kravitz’s predicament could have been avoided if he signed a separation agreement with Phonedog Media L.L.C. upon his departure that transferred and assigned any and all Phonedog’s rights in the Twitter account to Mr. Kravitz. Perhaps then it would not have turned into “he said, she said” battle that ended up in court.

Monday, December 19, 2011

Startup Legal Fees

I just came across an article (see link below) that discusses legal fees paid by startups in the Silicon Valley in 2011. On average, the startups paid $23,000 for a formation package and $52,000 for representation in the Series A seed capital round of financing. The legal market in California is dominated by several large firms that charge these hefty fees. Wouldn't it be more suitable for the small law firms to represent the small businesses? Fees may be a lot less, and legal advice may be just as sound (especially if the small law firms are founded by the same attorneys who used to work in those big law firms that charge high fees). I encourage startup founders to look around and locate small firms/solo practitioners who can represent them cost effectively during the initial stages of their growth.

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, December 16, 2011

A Practical Approach to Crowdfunding

While preparing a post about the recent legal developments related to crowdfunding, I came across a blog article that provides practical advice on how to run an effective crowdfunding campaign. Although the author uses Kickstarter as a platfrom example, there are other crowdfunding platforms where the same recommended approach can be used (see my previous summary of several crowdfunding platforms). It is actually hard work raising money through crowdfunding. Companies need to create a compelling story, a pitch video, and a network of supporters to spread the word. They also need to use social media to access the crowds. All this and more is explained in this article.

I hope that you will find it useful.

One last thought: most of the advice given by Nathaniel can be used in any campaign, when you are promoting your products or services.

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.

Sunday, December 11, 2011

Annual H-1B Cap for 2012 Has Been Reached Before Thanksgiving

Right before the Thanksgiving holiday, the USCIS announced that the 85,000 H-1B visas cap for 2012 had been reached. This means that American employers will not be able to hire foreign nationals in 2012 unless applications for their work visas have been submitted prior to November 23, 2011. This sounds pretty restrictive, especially considering how vital high tech expertise is to the growing digital and mobile technology sectors.

The pace of reaching the H-1B cap can be used as an indicator of economic recovery. Prior to the recession, the H-1B cap was typically reached within one week of April 1st, when it first became available. This year, it took almost eight months to reach the cap. In 2010, it took almost ten months (the H-1B cap was reached on January 26th of this year), and in 2009, it took close to nine months (the cap was reached on December 21st, 2010). So, by comparison to 2010 and 2009, reaching the H-1B cap on November 22 of this year appears to signal slight economic recovery.

There is a lot of criticism of the H-1B caps. One of the opponents is NYC Mayor Bloomberg, who in September 2011 spoke at the U.S. Chamber of Commerce in favor of eliminating the caps and lifting other restrictions that make it difficult for foreign entrepreneurs to work in the United States. http://bit.ly/tE2aHO Both the U.S. House and the Senate are currently considering proposals relating to H-1B visas, caps and making green cards available to graduates of U.S. universities with advanced degrees.

The text of the USCIS release can be found here: http://1.usa.gov/vMJIxs.

Saturday, December 10, 2011

When Buying a Business: Asset Purchase vs Stock Purchase? Part II

In this post, I will discuss some advantages and disadvantages of a stock purchase vs asset purchase. Of course, every deal is different, and this post is meant only for general discussion purposes. This blog is just a list of questions to consider, when structuring a transaction.

Two main advantages of a stock purchase, in my opinion, are:

• A stock sale is more beneficial to target’s shareholders because the purchase price that the target corporation shareholders receive in a stock purchase will not be subject to double taxation (unlike in the case of asset sale).

• Typically, a stock purchase transaction is easier and cheaper to execute (there may be no or little need for third party consents as stock sale would typically be considered an assignment by “operation of law”).

There are several disadvantages or challenges associated with a stock purchase deal. These include:

• When buying stock, purchaser buys all the liabilities of the business as well, including contingent liabilities, disclosed and undisclosed liabilities. Buyers should be aware that not all liabilities may be revealed by due diligence.

• Another risk with stock purchase may arise if the stock of the target is owned by multiple shareholders who do not all want to sell, at least not on the same terms. The buyer may not be able to enter into the same stock purchase agreement with all of the current shareholders, thus risking that it will acquire less than 100% of outstanding shares. In this case, the buyer, assuming it becomes a majority stockholder, will owe fiduciary duties to the minority shareholders.

• From tax perspective, a buyer does not achieve as much tax benefit from a stock purchase transaction because in a stock purchase, all the tax attributes of the target company are carried over to the buyer and the buyer will not be able to have a new step up basis for the purchased assets of the business or higher depreciation and amortization deductions.

• Under Delaware law, those shareholders who did not vote in favor of the all stock sale get appraisal rights. An appraisal process can be an expensive and time-consuming process.

Do advantages of a stock purchase deal outweigh the disadvantages? The answer is “it depends…”. Each transaction is unique, and obtaining expert legal and accounting advice early on is key to structuring a successful business acquisition.

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.

Wednesday, November 30, 2011

When Buying a Business: Asset Purchase vs Stock Purchase?

There are essentially three ways how to structure an acquisition of a company. The primary methods include a statutory merger or share exchange; purchase of business assets; or purchase of shares from the existing shareholders. When purchasing assets, the purchaser only buys specified assets of a business (which may or may not be substantially all business assets) and specified liabilities (if any at all). When purchasing the shares, the purchaser buys ownership in the company, including all of its assets and liabilities. Which method is preferable? Below are some advantages and disadvantages of each method. Please note that it is essential to involve a tax lawyer or an accountant in the structuring of the acquisition.

Asset purchase advantages:

• Buyers can purchase only selected assets of the business and not liabilities to minimize the risk.

• Under Delaware law, sale of all or substantially all assets requires the majority vote of the target’s shareholders and there are no appraisal rights for shareholders who did not vote in favor of the transaction.

• An asset purchase allows buyers to allocate the purchase price among the assets to reflect their fair market value. This results in a step-up of tax basis, allows higher depreciation and amortization deductions, and results in future tax savings.

Asset purchase disadvantages

• It may be a challenge to define which assets the purchaser wants to acquire. Usually, businesses sell a subsidiary or a division. So, they typically sell the assets that are used exclusively or primarily in that subsidiary or division. However, there may be “shared assets” that would need to be negotiated, properly licensed to the purchaser, and accounted for in the purchase price.

• An asset sale typically requires numerous third party consents, approvals (such as agreeing to substitute a lesee on an office space lease, or consent to assign a contract, or transfer a permit). The third parties may view the transaction as an opportunity to renegotiate their contracts, which could delay the deal and add to the transaction costs.

• If there are any liabilities (disclosed or undisclosed) that the buyer is not including in the purchase, parties have to make sure that the purchase is not being made for less than the fair value of the assets and that following the sale, the company will still be sufficiently capitalized to pay its debts and liabilities. Otherwise, the transaction may violate fraudulent conveyance laws. Parties would need to obtain a solvency opinion, which can add to the transaction costs.

• An asset sale is subject to double taxation if the target is a C-corporation, so it is not advantageous from the perspective of the target’s shareholders. However, this disadvantage disappears if the target is an S-corporation or another entity with pass-through taxation (LLC, partnership).

Given the challenges associated with an asset purchase transaction, between 2002 and 2009, only 18% of all acquisitions were structured as asset purchases.

In the next post, I’ll discuss advantages and disadvantages of a stock purchase.

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.

Wednesday, November 2, 2011

Maximum Interest on Private Loans in New York

Much has been written about how difficult it is now to obtain financing for small businesses. Banks charge high interest rates, and it is tough to qualify even for a bank loan. Angel or VC funding is even harder to come by. So, to secure funding, business owners turn to their friends and family members for loans. Business owners may feel so appreciative of much needed loans, that they may be willing to pay whatever interest they are asked, even if it is 50%.

This blog is to educate the New York residents and business owners as to how much interest they can really charge or be charged on such private loans made by private individuals or corporations (not banking institutions or credit card companies, where separate laws apply).

Charging high interest rates (that exceed the state maximum) is called “loansharking” (as many may be familiar with such term through the movies). In legal jargon, excessively high interest rates are called “usurious”, i.e., illegal. Usury laws regulate within each state the maximum interest rate that may be charged on a money loan. In New York, there are civil law limits found in the General Obligations Law and the Banking Law, and there are criminal law limits, found in the Penal Code.

So, what are the usury limits in New York?

For loans made to individuals, if the loan does not exceed $250,000, the maximum annual civil law interest rate is 16%, and the maximum criminal law interest rate is 25%. For loans between $250,000 and $2.5 million, there is no maximum civil law rate, but there is a 25% maximum criminal law rate. There is no maximum on the interests charged on loans over $2.5 million.

For loans made to corporations, there is no maximum civil law rate of interest, but there is a 25% maximum criminal law interest rate for loans not exceeding $2.5 million.

What happens if the interest rate exceeds the state limit?

If this happens, the entire loan is considered void, and the lender may be denied the right to recover the interest and even the principal. In addition, the borrower may be allowed to recover any “extra” portion of interest that he or she has paid to the lender. If the interest exceeds the maximum criminal usury limit, the lender may face a felony prosecution.

Please note that laws change all the time, and the information in this blog is only accurate as of the time when it was written. Also, this blog does not provide information regarding loans secured by mortgages (where separate rules apply). It is always best to consult a business attorney to check the current usury laws and to prepare the appropriate loan documentation.

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.

Tuesday, November 1, 2011

Protecting Your Trade Secret While Protecting Your Code with Copyright Registration

This post is about protecting the secrecy of your code while registering it with the US Copyright Office. Copyright.gov website provides useful information about copyright in general and the process of filing a copyright application in particular. Circular 61, available on the copyright.gov website, addresses copyright registrations of computer programs.

A copyright application contains three elements: (1) a completed application form, (2) a fee, and (3) a non-refundable deposit (a copy of the work being registered and “deposited” with the Copyright Office). The main concern that developers express is that the deposit requirement causes them to reveal their confidential source code.

Below is what developers should do, according to the Copyright Office:

For software without trade secrets, the registrant needs to submit the first 25 and last 25 pages of source code. If making an on-line application, the source code can be downloaded electronically, in a pdf format. If the entire source code is less than 50 pages long, you should send in the entire source code.

For software containing trade secrets, you need to submit a cover letter stating that the claim contains trade secrets, a page with copyright notice, if any, and the source code as described below:

For new software:

First 25 and last 25 pages of source code with portions containing trade secrets blocked out, OR

First 10 and last 10 pages of source code along, with no blocked out portions, OR

First 25 and last 25 pages of object code plus any 10 or more consecutive pages of source code, with no blocked-out portions, OR

If less than 50 pages, - entire source code with trade secret portions blocked out.

There are also rules applicable for revised computer programs.

Note that the blocked out portions must be proportionately less than the remaining material, and the visible portion must represent an appreciable amount of original computer code.

Finally, as Circular 61 points out, each subsequent version of the software should be registered separately. The first registration covers the entire software, whereas submissions with subsequent version – only the new or revised material.

Please note that the information in this blog is derived from Circular 61 published by the US Copyright Office and is not intended as legal advice.

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.

Wednesday, September 28, 2011

Mobile Apps Developers: Please Read if Your Apps Target Young Audiences

On September 8, 2011, the U.S. District Court for the Northern California entered a Consent Decree and Order for Civil Penalties, Injunction and Other Relief against a mobile apps developer, W3 Innovations LLC, and its owner, Justin Maples.

There are several commentaries about this that immediately jump to mind. First, the enforcement action was brought by the Federal Trade Commission (“FTC”) against the corporate entity, W3 Innovations LLC, and personally against its officer and owner Justin Maples. This poses a question about the limited liability protection of a corporate entity and why it was pierced in this case. Second, this action is the first FTC action against mobile apps developers, and it sends (or at least should send) a strong message to the whole developers community. Third, in my opinion, this situation could have been avoided if Justin Maples retained a good intellectual property lawyer before launching the apps (a good IP lawyer should be familiar with the Children’s Online Privacy Protection Act (“COPPA”)). Many start-up owners avoid extra costs by not consulting attorneys, but expose themselves to large financial risks later on. Most often, as in this case, such risks could easily be avoided.

COPPA requires that website operators notify parents and obtain their prior consent before collecting children’s personal information. COPPA also requires to post a privacy policy that is clear, understandable and complete.

According to the FTC press release and the Consent Decree, each available here (http://www.ftc.gov/os/caselist/1023251/110908w3order.pdf and http://www.ftc.gov/opa/2011/08/w3mobileapps.shtm), the FTC charged the defendants with violating COPPA by illegally collecting and disclosing personal information from thousands of children under age 13 without their parents’ consent. In fact, there were over 50,000 downloads of the games that collected personal information. As part of settlement, the defendants agreed to pay a $50,000 penalty, among other things.

The “Emily” apps developed by W3 Innovations allowed children to create virtual models and design outfits. The apps then encouraged kids to email “Emily” their comments and submit blogs via email. The FTC alleged that the defendants collected and maintained thousands of email addresses of the app users. The apps also allowed kids to post information, including personal information, on message boards.

According to the FTC, the defendants did not disclose their practices and did not ask for parental consent before they collected, used and disclosed their children’s personal information. Please note that the Consent Decree is a settlement, and does not constitute an admission by defendants of violation of the law.

There are many lessons to be learned here. For mobile developers and website owners: please create, review, update and disclose your privacy policies. These are not just boilerplate documents that can be copied from another site. For parents: check what games your kids are playing and what are the information collection practices of every app and every website that your children frequent.

Please note that this is not a legal advice and is for general informational purposes only.

Tuesday, September 27, 2011

America Invents Act Introduces a New Patent System

On September 16, 2011, President Obama signed a new act “America Invents Act” that is going to radically change the way Americans file patents. Found here: http://judiciary.house.gov/issues/Patent%20Reform%20PDFS/112hr1249eh.pdf. The Act will become effective 180 days after signing, - just enough time to understand the new system introduced by it.

Although not an expert in this field, to me, a major difference introduced by the Act is the change from the “first to invent” to the “first to file” system, which is more in line with the patent systems in the other countries.

For a detailed review of the Act, check out the article written by attorneys at Sunstein Kann Murphy & Timbers LLP, a Boston-based IP firm, found here: http://www.sunsteinlaw.com/publications-news/news-letters/2011/09/Sunstein_Blau_201109.html.

Copyright for Computer Software

Intellectual property is an asset that affects the valuation of a business. When a business owner wants to sell his or her business or issue securities to an investor, the price per share the owner is going to receive depends on the valuation of the business. The more assets the business has, - the higher valuation it is going to receive.

Some owners of software companies may not realize that their software programs should be copyrighted with the U.S. Copyright Office. Technically, software programs (like any other copyrightable work) automatically get copyright once the work is done or there is at least a working version of the program, even if incomplete. So, if the copyright already exists, why file a copyright application with the U.S. Copyright Office?

Here is why:

1. Registration establishes a public record and lets others know that you hold a copyright on this work.

2. Registering the software program with the U.S. Copyright Office within 5 years of publication (i.e., first availability to the public, such as software release) creates a legal presumption that you are the owner of the program and that all facts in your copyright application are true. It means that if there is ever a dispute over the ownership, the court will presume that you are the rightful owner, and it will be up to the other side to prove otherwise.

3. If you find out that someone is infringing on your software program, you need to have the registration done in order to be able to bring a law suit in the federal court.

4. If you register your software program prior to an infringement or within 3 months of publication (ex: software release), you may be entitled to recover statutory damages and attorney fees from the person you sued. Otherwise, you can only get the actual damages and lost profits, usually a much smaller amount.

5. Finally, registration with the U.S. Copyright Office allows you to record the registration with the U.S. Customs Services (this is less relevant for software programs, but I wanted to mention this anyway).

It does not cost much to register a copyright with the US Copyright Office (currently, $35 for an online registration and $50 for a mail-in one). But the benefits are obvious.

In the next post, I will discuss how you can preserve your trade secrets in the software source code and still file the federal copyright application.

Monday, September 26, 2011

The legal benefits of New York surety bonds for business owners

The following is a guest post submitted by Danielle Rodabaugh, editor of the Surety Bonds Insider.

Although surety bonds have been used as a means of legal reinforcement for decades, many New York business owners only learn about their benefits once it's too late. Only after they're in the midst of a lawsuit for failing to meet a bonding requirement do they care about why they need one. To prevent such situations, business owners should understand a few basic legal functions of New York surety bonds.


Surety bonds are legally binding contracts.


Each surety bond that's issued functions as a legally enforceable contract that binds together three parties.

  1. The principal is the business owner that purchases the surety bond.

  2. The obligee is the entity, typically a government agency, that requires the surety bond.

  3. The surety is the agency that executes the bond, thus providing a legally binding financial guarantee that the principal will fulfill certain obligations.


If a principal fails to meet the bond's terms, harmed parties can make a claim to gain reparation. For example, earlier this year the NewYork State Liquor Authority revoked five alcoholic beverage licenses and cancelled 10 more for liquor law violations. The authority requires all businesses with a retail liquor license to maintain a $1,000 surety bond. As is customary with liquor license revocation and cancellation in New York, the authority made claims on most of the bonds and collected a total of $12,000.


The surety that issued the bond is ultimately responsible for paying any claims, but in some cases the principal signs an indemnity agreement as a legal promise to repay the surety for potential losses. When a claim is made on a bond, it is examined on an individual basis to determine the obligation each party held under the bond's legal language. Before purchasing a surety bond, applicants should always be sure they understand the contractual obligations to which they're agreeing — no matter the specific surety bond type.


Surety bonds regulate industries and keep government agencies from losing money.


When business owners are looking to buy surety bonds, it's typically because they have to fulfill some sort of requirement outlined in a law that regulates the profession. For this reason license and permit bonds are some of the most prevalent in today’s bonding market. These bonds are required as a prerequisite to getting a business license. For example, New York auto dealers must post a surety bond before they can be licensed to sell cars in the state. As such, New York auto dealer bonds reinforce state laws that regulate car dealerships.


Surety bond requirements also protect government funds as well as taxpayer money. For example, contract bonds are used by New York's construction industry to guarantee that contracting firms complete projects appropriately. If a contractor abandons work on a publicly funded project, the government can make a claim on the bond so the funds won't be lost.


Surety bonds protect business owners and their customers.


The surety bond process is especially valuable because a neutral third party, the surety, evaluates the applicant before determining whether to issue a bond. The surety bond process can be frustrating for some applicants, and for good reason. Because surety providers want to avoid claims, they set stringent qualifications for their applicants. Surety providers are hesitant to issue bonds to applicants that have low credit scores, poor work histories or other signs of financial instability. The nature of this process keeps such individuals from entering the market, which protects consumers and legitimate companies from working with or losing business to risky enterprises.


Whatever the specific law be that requires a surety bond, rest assured it was put in place to protect against financial loss, whether it be on behalf of consumer purchases or government funds. Failing to maintain a surety bond as required by law can mean legal action for a business owner. Although the surety bond process might seem like a hassle to business owners who need bonds, the legal implications should be taken seriously.


This article was written by Danielle Rodabaugh, editor of the Surety Bonds Insider. One of the publication's ongoing goals is to educate professionals and their lawyers about the legal implications of surety bonds.

Wednesday, August 31, 2011

Are Emails to Your Attorney Always Covered by Attorney-Client Privilege?

Employees should be aware that emails to their attorneys originating from employer-owned equipment may not be protected by attorney-client privilege even if the employees use their personal email accounts to send such emails. It depends on the corporate policy regarding the use of employer’s equipment and network.

In 2007, a New York court considered the following case: Dr. Scott, an employee of Beth Israel Medical Center, sent emails to his attorney from his work email account about suing his employer. Beth Israel Medical Center had a corporate policy providing that employer’s computer systems should be used for business purposes only, that all information and documents created or transmitted through the employer’s communications and computer systems were company property and that “employees have no personal privacy right in any material created, received, saved or sent using Medical Center communication or computer systems.” Scott v. Beth Israel Med. Ctr., 847 N.Y.S.2d 436 (N.Y. Sup. Ct. 2007). So, since the policy was clear, the NY court held that Dr. Scott had no expectation of privacy and that his emails to his attorney were not privileged.

If the corporate policy is absent, not clearly drafted or if it allows personal use of email, then NY courts may decide that attorney-client privilege applies to emails to personal attorneys sent from office. For example, in In re Asia Global Clossing, Ltd., 322 B.R. 247, 257 (Bankr. S.D.N.Y. 2005), the court held that it was unclear whether there was a corporate policy regarding personal use of company computers, and so the attorney-client privilege was upheld.

Courts are also more likely to uphold the privilege if the employee is working from home and sends an email to his or her attorney from home using the employer laptop. In Curto v. Med. World Commc’ns, Inc., 99 Fair Empl. Prac.Cas (BNA) 2006 WL 1318387 (E.D.N.Y. May 15, 2006), the plaintiff Lara Curto worked from home using company laptop until she was fired. Curto used the laptop to send personal emails and to store documents from her attorney. The court ruled that the attorney-client privilege existed because the laptop was not connected to the office network, the employee attempted to delete emails and documents from her drive prior to returning the computer, and even though the company had a corporate policy prohibiting personal use of company equipment, it did not enforce it.

It is clear that the outcome of these cases varies based on the specific facts at issue. Therefore, it is advisable for the employees to be well familiar with their company policy regarding computer use (usually found in an employee handbook) and to use their personal home computers in the evenings or weekends to communicate with their personal attorneys.

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.

Addressing the Legal Needs of Small Businesses

The advance of the Internet has changed how we do business. Now, many businesses have moved online. One can do all the shopping, including the grocery shopping, without leaving home. Legal services have also evolved. While most law firms still hold on to their traditional impressive offices, there are some law firms that communicate with clients virtually, avoiding the costs of expensive office space rental. Virtual law firms apart, there are now companies that offer online legal services while saying that they are not actually practicing law.

Rocket Lawyer and LegalZoom are not set up as law firms. Their staff members do not hold legal licenses. They are not bound by the rules of ethics. They simply offer their clients a low cost DIY option of preparing the necessary legal documents using their templates. The LegalZoom services have been challenged in court for practicing the law without a license. The outcome is pending.

These companies are growing fast. Rocket Lawyer has 70,000 users a day (more than any law firm has clients). Are they competing with traditional law firms?

Yes. They compete, and quite effectively, in a number of ways. First, for a low price, they offer access to document templates. Second, templates enable business owners to create simple and straight-forward documents on their own, thus avoiding costly billable rates. Third, they offer an opportunity for a low-cost consultation with an attorney from their network to check the created documents. Fourth, and most important, they are not bound by the rules of ethics, which prohibit non-lawyers from owning law firms. This last point allows Rocket Lawyer and LegalZoom to accept outside investments and improve their offerings through an infusion of outside capital. In August, Google Ventures, along with several other investors, invested $18.5 million in Rocket Lawyer. A traditional law firm would not be able to get such funding.

In fact, lawyers are feeling the pressure. The law firm Jacoby & Meyers has recently filed law suits in several states claiming that the bar on non-lawyer ownership of law firms was unconstitutional. The American Bar Association voted to circulate a proposal to permit non-lawyers to hold a minority ownership role in law firms. This rule was originally designed to insulate lawyers from any influences by outside investors that may jeopardize client loyalty.

Companies like Rocket Lawyer and LegalZoom may be a good way for a startup to save money on legal fees at the initial stages of development by using templates to create simple and straight-forward documents. However, every deal and every business relationship is unique, and templates, although a good starting point, do not address every situation. Even though a start-up may save some money by purchasing a template instead of having a lawyer draft the agreement, it is still wise to ask a lawyer to review it. A legal consultation is particularly important when considering more complex business arrangements. Business owners should realize that the validity of contracts does not typically get tested right away, but at the time of disagreement among parties when the risk of litigation is high. So, business owners should ask themselves this question: are they really saving money in the long run by going to Rocket Lawyer or LegalZoom? The answer may depend on the task at hand. After all, it is like buying health insurance. You don’t really need it until you get sick.

It looks like, despite all the legal challenges, Rocket Lawyer and LegalZoom are here to stay. However, amendments to the ethics rules, if adopted, will change the way law firms can compete with online businesses like Rocket Lawyer and LegalZoom, leading to more cost-effective client representation.

Please note this is my personal point of view, and should not be taken as an endorsement of any of the companies mentioned above.

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.

Tuesday, August 23, 2011

Raising Capital on the Internet

Many business owners ask the same question: can they raise capital on the Internet. My short reply to them is: "It's complicated." The securities rules do not specifically address the Internet offerings, so each offering has to be reviewed on a case-by-case basis to ensure that it satisfies the requirements that apply to private placement offerings. With the creation of online communities and networks, it seems like the Internet would be the logical place to conduct such offerings, as companies can inexpensively reach out to many potential investors at the same time. However, using the Internet to solicit interest in an offering is likely to invalidate the whole transaction since it would violate the ban on general solicitation and advertising that applies to most private placements.

Below is an excerpt from an article published by Michael T. Raymond, a partner in the Ann Arbor office of the law firm Dickinson Wright PLLC, regarding securities offerings on the Internet. Mr. Raymond did an excellent job in summarizing the current applicable securities laws. His article can be found here: http://tenonline.org/art/sl/0611.html.

An excerpt from his article is below:

"As a matter of background, a general solicitation (which, as noted, is prohibited by Rule 502(c) of Regulation D) is typically not found when a pre-existing, substantive relationship between an issuer (or its broker-dealer) and an offeree exists. A 1996 SEC No-Action Letter (IPOnet, SEC No-Action Letter (July 26, 1996)) extended this principle to private offerings posted on the internet. In that case, access to private offering material was granted only after a "member" had been pre-qualified as an "accredited investor" by completing a generic questionnaire. Once qualified, the member was issued a password which enabled access to a website page containing a notice of a private offering. In addition, the operator imposed a suitable "cooling off" period before the qualified member was granted access to the private offering material. The SEC approved the operation of this website. In doing so, the SEC found that the website operator had taken sufficient steps to allow a "pre-existing, substantive" relationship to be established between the issuer/broker-dealer and the offerees.

A similar 1997 No-Action Letter (Lamp Technologies, Inc., SEC No-Action Letter (May 29, 1997)) involved a company that administered a website containing certain hedge funds offered on a semi-continuous basis. The SEC staff determined that the proposed operation of the website would not involve a general solicitation since it was password-protected and accessible only to members who had been pre-qualified as accredited investors. The investors were also subject to a 30-day "waiting" period before investments could be made.

Based upon concerns that certain website operators conducting online private offerings may have been overly zealous in their interpretations of the IPOnet and Lamp Technologies No-Action Letters, the SEC issued a clarifying release in April, 2000 (Release No. 33-7856 (April 28, 2000)). The SEC expressed its concern that certain entities (notably those who were not broker-dealers or affiliated with broker-dealers) may have engaged in practices that deviated substantially from the facts set forth in the IPOnet and Lamp Technologies No-Action Letters in offering private placements over the internet.

For example, some third party service providers had set up websites that invited prospective investors to respond to a questionnaire, ostensibly for the purpose of qualifying them as an "accredited investor". Completion of the questionnaire permitted access to private offerings displayed on those websites. Some of the websites did not even require the completion of a questionnaire; instead, they simply invited the user to check a box as a means of self-accreditation and immediate access. The SEC staff expressed their view that these types of websites raise significant concerns that a general solicitation is occurring."

"Based on available SEC No-Action Letters and other commentary, it appears that the safest online private offerings under Regulation D will involve: (a) a password-protected website directly operated by an issuer or its broker-dealer firm (as opposed to an unlicensed third party), (b) use of a comprehensive, generic (non-offering specific) questionnaire that elicits sufficient information to permit a thorough evaluation of the prospective investor's financial standing and sophistication level, and (c) a requirement that a sufficient amount of time lapse between the response to the questionnaire and actual participation in a private offering. While the time may come when the SEC will truly embrace an online Regulation D offering sponsored by a non-broker-dealer, currently the SEC has shown practically no support for such offerings. Accordingly, start-up and early stage business seeking to utilize online angel investor networks or matching services to raise capital should ensure that these service providers have been registered as broker-dealers, and that they follow at least the "general solicitation" precautions noted above."

Please note that this post is for general information only and should not be used as a legal advice.

Wednesday, August 17, 2011

How Strong is Your Trademark? – The Red Shoe Sole Design Saga

On August 10, 2011, the U.S. District Court for the Southern District of New York denied Christian Louboutin’s motion to stop Yves Saint Laurent’s (“YSL”) use of red soles on their shoes, claiming infringement of its trademark. However, the Court denied that preliminary injunction motion and stated instead that Louboutin’s red soles may not be entitled to trademark protection at all.

Louboutin shoes are known for their red soles. On January 1, 2008, the US Patent and Trademark Office granted Louboutin a corresponding trademark (Registration No. 3,361,597) for the women’s high fashion designer footwear with lacquered red soles. In January 2011, Louboutin claimed that YSL was using the same or confusingly similar shade of red on the soles of its shoes in its Cruise 2011 collection. In fact, YSL’s shoes were either all red, including the soles, or blue, or yellow. An all-red version had previously appeared in YSL’s Cruise 2008 collection. Louboutin filed a lawsuit against YSL claiming trademark infringement, among other claims. YSL counterclaimed seeking cancellation of the Red Sole Mark because it is functional, ornamental, not distinctive, and was secured by fraud on the USPTO.

To succeed in its claim of trademark infringement, Louboutin has to show that its Red Sole Mark merits protection and YSL’s use of the same or similar mark is likely to confuse the consumers as to the origin of the shoes. Typically, in the fashion industry, courts have upheld the trademark registration for colors that appear in distinct patterns or combinations of shades that “manifest a conscious effort to design a uniquely identifiable mark embedded in the goods.” See Opinion at p. 12. For example, Louis Vitton has trademarked an LV monogram combined in a pattern of rows with 33 bright colors, and Burberry registered its check pattern. On the other hand, use of a single color has been held by the courts to be functional (functionality is defined by courts as a feature that would put the competitor at a disadvantage because it is “essential to the use or purpose of the article” or “affects its cost or quality.”) Looking at the use of red on Louboutin’s shoe soles, the Court noted Louboutin’s own words that his shoe styles give “energy”, they are “engaging”, red is “sexy” and it “attracts men to women who wear my shoes.” Also, red lacquered sole adds to the cost of the shoes. Further, the Court noted that granting one designer monopoly on the color red would hinder competition especially in the fashion industry that is so dependent on colors.

The Court concluded that it has “serious doubts that Louboutin possesses a protectable mark” and that it was unlikely to success in its infringement case.

This is just the beginning of the battle, as the decision of the Court can (and most likely will) be appealed to the U.S. Court of Appeals for the Second Circuit. However, it seems that the battle launched by Louboutin against YSL for trademark infringement is turning into the battle for Louboutin to keep its red sole trademark.

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.

Wednesday, August 3, 2011

Intellectual Property Protection for Fashion Designs

So far, the U.S. laws offer little IP protection to fashion designers. As a result, fashion designs are copied freely by many. The U.S. copyright law does not extend protection to the overall design of clothing (the “useful” articles are not protected). There is a limited exception for certain elements of a useful article, which are physically separable from the article itself (such as images that appear on the front of T-shirts, distinctive fabric designs, features of buckles).

Trademark law protects the designer’s use of logos, symbols on fashion items and names (for example, Louis Vuitton’s “LV” monogram or Lacoste’s alligator logo). However, trademark law protection only extends to these particular elements, and not to the clothing’s overall design.

Trade dress law protects the product’s overall look and feel, so theoretically, could be used to protect the overall clothing design. However, in 2000, the United States Supreme Court severely limited the extent of protection under trade dress law. In Wal-Mart Stores, Inc. v. Samara Brothers, Inc., 529 U.S. 205 (2000), the Court held that the trade dress protection is only available to those who can prove that the design “has acquired distinctiveness by the consuming public or has developed secondary meaning”, - in other words, that an average consumer would identify the designer just by looking at particular fashion design of the clothes. This is difficult to show, and therefore, the trade dress protection has not be effective in protecting the IP rights of the designers either.

Patent law provides for design patents, but the designs have to be “novel” and “non-obvious”, which is a high bar to meet. Also, the expense of patent prosecution and the time delays involved in the patent review process often make this an unlikely choice.

The fashion industry has been fighting for decades to amend the copyright law to obtain the necessary protection. In fact, approximately 80 amendments have been proposed since 1910, but none have been successful. In the European Union, designers were given protection in 2002, when the EU adopted Council Regulation (EC) No. 6/2002 that gives a 3-year protection for unregistered designs and up to 25 years of protection for registered designs.

The current proposal, the Design Piracy Prohibition Act (H.R. 2196) calls for designers to register their designs within six months of creation. The bill, if passed, would extend copyright law protection to clothing, including underwear, gloves, shoes, coats, as well as accessories, such as handbags, belts and eyeglass frames. The protection would be limited to three years, which in case of fashion designs, should be enough to cover the latest fashion trends. However, the fate of this bill does not look very optimistic. It has been in the House Committee on the Judiciary since April 30, 2009 and no action has yet been taken.

The Senate has its own version of the bill, called Innovative Design Protection and Piracy Prevention Act (S.3728), introduced by NY Senator Schumer. On December 6, 2010, it was placed on the Senate Legislative Calendar. Further fate of this bill is also unclear.

It remains to be seen whether either of these bills will ever turn into law.

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.

Thursday, July 21, 2011

Incubators, Accelerators and More: Start-Up Working Space in New York City

I find that New York City is an extremely friendly city for start-ups. It is impressive how New York City has managed to provide start-ups with multiple solutions to its biggest problem: pricey real estate.

In my view, there are essentially three options available for entrepreneurs or young companies with limited financial resources: incubators, accelerators and more or less traditional shared office space.

Incubators:

Incubators are typically programs sponsored by government entities, development organizations, or academic institutions. Most (about 94%, according to www.nbia.org) are run as nonprofit organizations. These programs assist multiple companies at a time by offering various business support resources, such as technical and administrative support, low or no-cost office space, and free or low-cost advice from affiliated partners. Incubators may accept equity in their tenant companies. However, mostly they are subsidized by the governmental or other grants and sponsorships. The primary value of incubators is in targeted business and other advice directed at start-up companies who are selected to be their tenants. There is an application and selection process that can be quite rigorous.

New York City has tens of incubators. Three examples are below:

1. The NYU-Poly incubator, located at 160 Varick Street, (www.poly.edu/business/incubators) was launched in 2009, by NYU-Poly and the City of New York (with financial assistance by the New York City Economic Development Corporation). As of now, it boasts that its tenant-clients have raised $26 million in new capital. Costs to on-site tenants vary depending on whether or not companies are based on NYU-Poly owned IP. Those that are not may give NYU-Poly equity in exchange for space and services. Companies get to stay at the incubator until they have raised their first round of financing or have more than 15 employees.

2. NYC ACRE (Accelerator for a Clean and Renewable Economy) (www.nycacre.com) is a clean-energy incubator of NYU-Poly sponsored by NYSERDA (New York State Energy and Research Development Authority) with a four-year, $1.5 million grant. NYC ACRE provides resources to both physical and virtual tenants, all with a focus on alternative energy and clear technology or a product/service related to a more sustainable urban environment.

3. Pratt Design Incubator for Sustainable Innovation (www.incubator.pratt.edu) has supported the launch of 23 social/environmental companies and assisted 15 others. As of 2010, the incubator reported that its affiliated companies had annual revenue of over $4.2 million and employed over 50 people.

Accelerators:

Accelerators are typically run by a venture-capital firm to grow one or just several companies at a time. Accelerators require an equity share (3-8%) in exchange for their services and at times a small stipend, about $15,000 to $25,000. Unlike in an incubator, selected companies get to spend a very limited amount of time there: about 3-6 months. Like at incubators, accelerators have an application and selection process.

Two examples of NYC-based accelerators are below:

1. NYC Seed (www.nycseed.com) funds technology start-ups. NYC Seed is a partnership between ITAC, New York City Investment Fund, the New York State Foundation for Science, Technology and Innovation and NYU-Poly. NYC Seed invests up to $200,000 in selected companies, with a goal of enabling companies launch their product. NYC SeedStart Media 2011 is a 12-week summer program geared particularly to companies in advertising infrastructure, e-commerce, digital content and mobile technology space. This summer, 10 companies received $20,000 each, office space and time and advice of experienced mentors in exchange for 5% of their equity.

2. ER Accelerator (www.eranyc.com) is an accelerator of the founders of the Entrepreneurship Roundtable. The ER Accelerator typically provides eight companies per 3-month session with $25,000 each, extensive support and advice, free office space, free legal, accounting and other professional services in return for 8% of their equity. The next session is scheduled for winter 2011-12.

Co-working spaces:

Co-working spaces offer a place for entrepreneurs, freelancers and start-ups to collaborate with each other; their primary value is in networking opportunities. There is no application process, although some spaces have a waitlist. Several examples of co-working spaces are below:

1. We Work (wework.com) was listed as the best shared office space by New York Magazine in 2011. There are three locations. At $275 monthly fee, it is hard to beat the bargain. One of the co-founders of We Work is also a co-founder of We Work Labs listed below.

2. We Work Labs (www.weworklabs.com) is all about establishing relationships. The space provides a low-cost option to entrepreneurs to meet each other and collaborate. We Work Labs opened in April, and already there is a long waitlist to get in. For $250, lucky entrepreneurs who got in get a dedicated desk and other benefits of office space, like internet, printers, conference rooms, etc. Sponsors of We Work Labs provide free services to the tenants, including workshops and open office hours. Angels and VCs regularly come in to meet the start-ups.

3. New Work City (nwc.com) is open to everyone, including startups, freelancers, students, lawyers, designers, etc. It costs $300 for unlimited full membership. NWC is located at Broadway and Canal, and was the host of several past New York Startup Weekends.

4. Hive 55 (hiveat55.com) is a subscription-based low-cost work share space that is all about collaboration. Memberships range from a daily drop-in to unlimited access. There are about 110 members there, mostly media and tech professionals. It is not uncommon for members to hire each other or form teams. There is constant networking going on there, with 2-3 educational or networking events scheduled per week.

5. Select Office Suites (www.selectofficesuites.com) reminds of a city instead the one of the high floors of a building on 23rd street and 7th avenue. It rents offices (also has virtual office and conference room rental) and provides a variety of social events, free or low-cost educations talks and networking often organized by tenants themselves.

6. Sunshine Suites (www.sunshineny.com) provides two locations (Noho and Tribeca) and offers low-cost office or desk space in addition to networking opportunities. This is a great way for many companies to get started in New York City.

7. OfficeLinks (www.officelinks.com) provides more traditional office space to small business that ranges from shared space to different size offices. Five NYC locations offer various pricing. There is also an option to set up a virtual office to start with.

There seem to be many low-cost options available for start-ups in New York City. Coupled with various meetups and presentations directed at young companies, this makes it for a great place to be if you are starting or developing your own company.

Tuesday, July 5, 2011

New Internet Age is Around the Corner: Soon You May Be Able to Have Your Own Top Level Domain

On June 20, 2011, the Internet Corporation for Assigned Names and Numbers (“ICANN”) approved a new policy that would allow anyone to apply for a new generic Top Level Domain (gTLD). Currently, there are 22 gTLDs, like .com, .org, .net and others. Soon, there may be hundreds. The application period will last from January 12, 2012 through April 12, 2012.

Applications can be made by any business or organization. As an owner of the new gTLD, the applicant will be able to set rules regarding secondary level registrations, and can choose to open the domain to the public or limit it to intra-company use.

In the press release, ICANN’s Peter Dengate Thrush, Chairman of the Board of Directors, was quoted as saying “We have provided a platform for the next generation of creativity and inspiration.” http://www.icann.org/en/announcements/announcement-20jun11-en.htm

This “platform”, however, comes at a high cost. The evaluation fee is estimated at $185,000 per application. Additional fees may apply. Ongoing annual fee is projected to be $20,000. The exorbitant fees will undoubtedly deter many fortune seekers from profiting the way some were able to by registering popular domain names and then offering them for sale. However, such fees will deter small businesses or organizations as well.

The application evaluation process is designed to weed out the cyber squatters. The process will begin once the application acceptance window is closed. An application will need to pass the Administrative Check (2 months), Initial Evaluation (5 months), Pre-delegation (2 months) without any objections or concerns. If there are none, a new gTLD will be registered in nine months. In other cases, it may take up to 20 months to complete.

Brand owners need to be on the lookout for potential trademark infringement if the application is made for the same or confusingly similar name as their brand name. ICANN will publish all applications once the submission window is closed. Then is the time for trademark owners to review submitted applications and file a “legal rights” objection with one of the independent Dispute Resolutions Service Providers within the time period allocated by ICANN. Since ICANN will not send out any notifications, it is the brand owners’ responsibility to monitor the process and to timely file objections. Guidelines, deadlines and other useful information about the process can be found in the Applicant Guidebook, found here: http://www.icann.org/en/topics/new-gtlds/draft-rfp-clean-12nov10-en.pdf.

Additional information about the new gTLD policy and application procedures will be coming in the next six months. However, those interested in acquiring a new gTLD should already start preparing their applications.

Thursday, June 30, 2011

Corporate Policies Regarding Employees’ Social Media Activities

All companies need to have employee handbooks containing corporate policies, such as anti-discrimination policy, vacation/sick leave policy and others. Recently, employers started amending their employee handbooks to include a new policy: that governing the employees’ use of the Internet during work.

Concerns that gave rise to such policies include:

- Can employees spend time on the Internet during business hours?
- Can the company regulate what employees say about it online?
- Is there a danger that employees’ postings/blogs will be attributed to the company?
- Is there a risk that the employees disclose company confidential information through the social media?

In my opinion (and feel free to disagree) is that every company needs to set clear boundaries regarding its employees’ use of the Internet for personal purposes during business hours. However, this policy should not be too restrictive. Much of marketing is done nowadays online, through Facebook, twitter, and other social media sites. Preventing employees from going on these sites during work can take away a great marketing tool, if such (satisfied) employees have positive things to say about their employers and the products/services they offer. What a better marketing tool than let the employees “spread the word” through their informal social networks!

So, regulation rather than restriction, seems to be what is needed. For example, the social media policy can include these guidelines:

- Start with the warning that any violation of these rules can result in termination of employment;
- Say that employees may not post knowingly false information about the company, its employees and customers;
- Ask employees to limit use of the Internet during business hours to essentially business purposes (but employers need to understand that even blocked sites can be accessed by employees during business hours through their personal smart phones);
- Ask employees to put disclaimers on their personal blogs that views they express there are their own;
- Prohibit (here I use the strong word) any disclosure of proprietary confidential information of the employer;
- Say that employees cannot put anything on the Internet that would disparage, embarrass, insult, harass any of the other employees or damage the reputation of the company, its products or its customers.
- On the other hand, encourage employees to write about the company in the social media in a way that would benefit the company. This is a great way to fortify your brand and increase your company’s visibility.

Please keep in mind that views expressed here are my own personal views and do not constitute legal or any other advice. Each company is different, and should follow its own view on how its employees can/should use the Internet during business hours.

Thursday, June 23, 2011

Legal Aspects of Crowdfunding

Today, I would like to discuss regulatory aspects of crowdfunding. There are several proposals now that aim to change existing regulation to provide small businesses with easier access to capital markets.

One such proposal comes from the Sustainable Economies Law Center (SELC). In July 2010, SELC proposed to the SEC to exempt from registration requirements of Section 5 of the Securities Act securities offerings up to $100,000 in total amount raised with a $100 maximum investment limit per investor. Investors can be only individuals and must be either U.S. citizens or permanent residents. Investors cannot participate in multiple offerings at the same time. Petition is available at www.sec.gov/rules/petitions/2010/petn4-605.pdf.

In my opinion, the SELC proposal is not practical in limiting investment amount to only $100 per investor. A $10,000 limit is much more reasonable, and if lost, would unlikely lead to investor’s bankruptcy. Also, the rationale for limiting investors only to one offering at a time is unclear. After all, if they are choosing to participate in risky investments, then they have to be prepared to bear the risks (especially, if the investments are limited to $100).

Another proposal is called the “Startup Exemption”. The petition (that presently has 1,803 signatories) is based on an idea by a group of entrepreneurs led by Sherwood Neiss. It calls for creating a “funding window” to raise up to $1 million over the life of a business, to be used by small businesses with less than $5 million in revenues during the last three years. Each individual investment would be limited to a maximum of $10,000. Investors would be required to fill out a questionnaire demonstrating their willingness to accept risks related to the investment. The Startup Exemption also proposes to eliminate the 500-shareholder rule limitation and the broker-dealer licensing requirements and preempt state regulation of such offerings similarly to Rule 506. Finally, the petition calls to repeal the ban on general solicitation if the offering is conducted through one of registered platforms, where like on crowdfunding sites, ideas can be vetted, discussed, and peer reviewed. Such platforms would then report to the SEC regarding their customers and offerings. More information is available at www.startupexemption.com.

This seems to be a better proposal as it addresses important issues like state regulation, the 500 shareholder rule, and proposes a more reasonable $10,000 per investment limit. Also, reporting requirements by registered platforms that would be reviewed by the SEC, as well as review of companies and offerings by peers, provide some investor protection and transparency.

I identify two paramount issues in all the discussions about the need for new exemptions. First, there is an acute need to protect investors from scams and fraud that may be directed at them once/if general solicitation on the Internet is allowed. It seems inevitable that at some point in the future the SEC will relax the ban on solicitation and advertising given the proliferation of social media and the current state of technological progress. However, this also may open a floodgate of fraudulent offerings and schemes, and the SEC needs to put safeguards in place before it relaxes rules relating to solicitation and advertising.

Second, one of the main complaints regarding the current private placement exemptions is the onerous state regulation of private offerings. The only private offerings that are preempted from state regulation by the National Securities Markets Improvement Act of 1996 (the “1996 Act”) are the Rule 506 offerings. State regulation is based on the number of investors in each state. So, a private offering of securities to investors from ten or so states may fall under regulation of all ten states, thus leading to high legal fees which may make a small offering cost-prohibitive. There is a need to expand the reaching of the 1996 Act to other Regulation D offerings (Rule 504 and 505 offerings) as well as other private placement exemptions.

In the April 6, 2011 26-page long letter to the Chairman of the Committee on Oversight and Government Reform, Mary Shapiro, the Chairman of the SEC, expressed the understanding and the urgency for legal reform to enable small company investing. The SEC is currently reviewing the impact of the regulations on capital formation for small business, with the focus on (i) restrictions on communications in IPOs, (ii) adequacy of a ban on solicitation and advertising in light of current technologies and capital-raising trends, (iii) the 500 shareholder trigger for public reporting, and (iv) the questions presented by new capital raising strategies. The SEC staff is familiar with crowdfunding and the desire by many startups to use it to conduct securities offerings (i.e., offer equity or profit sharing or another arrangement to investors).

So, stay tuned, as the Congress and the SEC address issues relating to capital formation of small businesses.

Friday, June 10, 2011

Rules are Still Rules: Even with Novel Crowdfunding Approaches, the Current SEC Rules Have to be Respected

On June 8, 2011, the SEC entered a cease and desist order against two individuals, Michael Migliozzi II and Brian William Flatow, who launched a crowdfunding campaign at their website BuyaBeerCompany.com to raise $300 million to buy Pabst Brewing Company. Migliozzi and Flatow solicitated investors through Facebook and Twitter and actually received $200 million worth of pledges. The offering never closed because it did not reach the $300 million funding goal and because of the SEC action. The site was shut down in April 2011. The SEC press release is copied below.

Cases like this inevitably bring negative publicity to crowdfunding. The first question that comes to mind is whether these individuals ever consulted a securities attorney prior to starting their venture. There is a plethora of resources now available on the Internet (including this blog) that continuously discuss the issues relating to compliance with the securities laws and the SEC regulations. Unless a securities offering qualifies for one of the available exemptions, it must be registered with the SEC, regardless of whether this is an Internet offering and whether it comes under the aegis of a fashionable trend called “crowdfunding.”

My second reaction to this case was the astonishment with the amount of money that these individuals were able to raise (in pledges). Many seasoned companies have trouble raising a lot less. But in their case, there was not even a company, - just two people with an idea to buy a beer company. Was their “success” due clever online marketing and reaching out to the potential investors through their social networks? This approach, propagated by crowdfunding, seems to work. However, one still needs to balance the need to raise money with the necessity to remain compliant with the securities laws directed at protecting investors from fraud, deception and monetary loss.

SEC Enters Cease and Desist Order in Connection with Online Campaign to Buy Beer Company
FOR IMMEDIATE RELEASE
2011-122
Washington, D.C., June 8, 2011 — The Securities and Exchange Commission today announced a settlement with two advertising executives who launched a campaign to buy a beer company through a solicitation of investors on Facebook and Twitter without first registering with securities regulators and making the necessary disclosures.
________________________________________
Additional Materials
Administrative Proceeding
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Michael Migliozzi II and Brian William Flatow consented to a cease and desist order after directing investors to their website, BuyaBeerCompany.com, and soliciting pledges for a hoped-for $300 million purchase of the Pabst Brewing Company.

Under federal securities laws, the two men were required to register their offering before seeking to sell shares to the public. The registration requirements include publicly disclosing a company's financial condition and other information that could help investors determine whether to invest.

"All investors are entitled to know certain basic information about a company before being asked to invest," said Scott Friestad, Associate Director in the SEC's Division of Enforcement. "Just because would-be investors are being solicited online doesn't make them less deserving of the protections under our securities laws."
The SEC's order found that Migliozzi and Flatow intended to solicit funds in two stages. In the first stage, the two sought pledges and required that pledgors only supply an e-mail address, first name, last name, and pledge amount. If they received $300 million in pledges, the second stage would consist of collecting the pledges and undertaking to purchase Pabst.

According to the order, Migliozzi and Flatow also created a Facebook page and Twitter account in order to advertise their offering. Would-be investors visiting the website were told that each investor would receive a certificate of ownership as well as beer of a value equal to the amount invested.

The order further states that in February 2010, the two men said they had received more than $200 million in pledges from more than five million pledgors, and that Migliozzi and Flatow were searching for a firm to assist in the acquisition. The website, which the two men launched in November 2009, continued to solicit pledges until it was taken down in April 2010.

In the end, the two never received the $300 million in pledges, and never collected any money.

The SEC's order finds that Migliozzi and Flatow violated Section 5(c) of the Securities Act of 1933. As a result, it directs Migliozzi and Flatow to cease and desist from committing or causing any violations and from committing or causing any future violations of Section 5(c) of the Securities Act. Migliozzi and Flatow consented to the issuance of the order without admitting or denying any of the findings in the order except jurisdiction, which they admitted.

While federal laws require the registration of solicitations or "offerings," some offerings are exempt. Some of the most common exemptions from the registration requirements include private offerings to a limited number of accredited investors or institutions, as well as offerings of limited size. For information about the securities registration process and the types of information to be disclosed in offering documents, see the SEC's online publication Registration Under the Securities Act of 1933.

# # #
For more information about this enforcement action, contact:
Scott W. Friestad
Associate Director, SEC Division of Enforcement
(202) 551-4962
Nina B. Finston
Assistant Director, SEC Division of Enforcement
(202) 551-4961
http://www.sec.gov/news/press/2011/2011-122.htm

Friday, June 3, 2011

Small Company Capital Formation Act of 2011 – Much Needed but At What Cost?

There is a new bill in the House that aims to facilitate capital raising by private companies (H.R. 1070). The bill was introduced in March 2011 by Representative David Schweiker and is currently being considered by the House Committee on Financial Services.

The bill proposes to amend Section 3(b) of the Securities Act of 1933. Section 3(b) of the Act authorized the Securities and Exchange Commission (the “SEC”) to create Regulation A, an exemption for private companies to conduct public offerings of their securities in the amount not exceeding $5 million in a 12-month period. Companies relying on Regulation A need to file an offering statement with the SEC and get it approved. The securities are offered publicly, are not “restricted” (i.e., freely tradable), and solicitation and advertising (“testing the waters”) is allowed. Advantages of Regulation A (as opposed to the full-blown registration) include the following: simplified financial statements, which need not be audited, there are no Exchange Act reporting obligations after the offering is concluded unless the company has more than $10 million in total assets and more than 500 shareholders, and companies may file a simplified version of the offering statement. Disadvantages are: that the Regulation A offering is still very expensive in terms of legal and accounting costs, and such offerings are not exempt from state “blue sky” laws.

The new bill H.R. 1070 proposes to introduce an additional exemption under Section 3(b), allowing companies to raise between $5 million and $50 million. Similarly to the existing exemption for offerings under $5 million, the securities could be offered and sold publicly and would not be considered “restricted”. “Testing the waters” would be permitted. Companies would need to file with the SEC an offering statement. However, companies raising up to $50 million would be required to file audited financial statements with the SEC. The SEC could also require the company issuing such securities to make periodic disclosures available to the investors. According to the May 2nd amendment of the bill, such securities would not be exempt from state regulation unless offered through brokers and dealers.

The requirements for audited financial statements and the possibility of ongoing periodic disclosures make the exemption look more like an initial public offering. Continued state regulation may render it unpopular due to high compliance costs, just like the Regulation A offerings. But it is too early to judge, as the bill may be amended substantially before being voted on by both the House and the Senate.

Generally, if a bill is reported favorably by a committee to the House, it will be considered by the full House and then move to being considered in the Senate. However, most bills are never considered by the committees, and thus never move forward. Since its introduction in March 2011, bill H.R. 1070 was already reviewed by a subcommittee of the Committee on Financial Services and on May 4 was forwarded to the full Committee for consideration. Although only at the initial step in the legislative process, it already has 17 cosponsors (2 Democrats and 15 Republicans). It appears to be on the “fast track”, as the lack of access to capital is seen by many as a major impediment to growth in the U.S. economy.

Wednesday, May 25, 2011

Creating Alternative Financing – Crowdfunding & Crowdsourcing: Part IV: Who is an Ideal Candidate for Crowdfunding?

In this post, I would like to summarize the information I posted previously about crowdfunding and discuss the kind of company or individual that would benefit the most from this type of financing. In the donor-based model of crowdfunding, it would be a person or a team with a creative novel idea, something that would make people donate their money to support the idea. It is unlikely that a commercial product or service would get substantial financial backing from donors. After all, donors are not getting any interest in the company. Therefore, it is likely that the most popular projects will be those in the creative field (arts, film, books, etc.).

A start-up looking for seed funding can (and would be well advised to) reach out to their friends and family through an investment-based crowdfunding platform. The advantages include low cost of structuring the investment, the convenience of an internet-based platform to conduct the offering and the ability to raise sizable amounts of money. The disadvantages include (1) limited universe of potential investors (limited only to people with whom founders have pre-existing relationship); (2) legal risks (if founders do not hire attorneys to guide them through the blue sky and federal filings); and (3) limit on the type of investment possible (if the platform offers only one kind of investment structure).

Is crowdfunding a viable option of financing for an already existing business with a multi-million dollar revenue that needs capital for expansion? Platforms like Kickstarter or RockerHub will not be good sources of revenue, as the donors will lack the incentive to donate money to an existing and profitable business. A site like Profounder may not be a good option either, as such platforms tend to be focused on seed capital raises: for example, Profounder specializes in friends and family rounds of investing with an average amount of money raised per company of about $35,000 to $60,000. An established company with multi-million dollar revenue will probably need to raise more money than that, and from accredited or institutional investors. Also, a big company may need to consider the number of investors it wants to attract, if it does not want to trip the 500 shareholder rule. So, a crowdfunding model of investment, where many people contribute or invest small (or relatively small) amounts of cash, may not be the best option for it.


Full series: Part IPart II, Part III and Part IV.


Tuesday, May 24, 2011

Has “App Store” Become a Generic Name?

On March 22nd, Amazon.com launched Appstore for Android, where it offers for sale and download games and other applications available for Android smart phones. Apple Inc., the maker of iPhones, iPod media players and iPad tablet computers, sued Amazon.com Inc. over the use of the term “Appstore” claiming the exclusive right to the term. It is true, the term “App Store” has been in process of registration with the USPTO since 2008; Apple filed the original trademark application in 2008 in three separate classes: class 35 (retail online store), class 38 (transmission of data via Internet, etc.) and class 42 (a whole host of services relating to computer software). However, Amazon.com claims it is not required to obtain a license from Apple to use the term because the term “App Store” has become generic and Apple is not entitled to its exclusive use.

The general rule in trademark law is that a word cannot be trademarked if it serves as a generic term for the products or services offered by that company. A trademark must be unique. If it loses its distinctiveness, it can no longer be identified with the source of the goods or services being provided, which defeats the whole purpose of having a trademark. Over the years of popular use, many labels have become generic. Examples include words like aspirin, cellophane, cola, dry ice, lite beer, matchbox toys, monopoly game, superglue, thermos, and yo-yo. Is “App Sore” about to join the pack? Is the name also merely descriptive? For example, an “app store” can mean a store that is offering applications for smart phones. Do the first three letters “App” stand for the first letters of the word Apple, pointing to the company that invented the concept? Does the term “App Store” refer to a store that offers software applications or to a store that only offers app[le] applications (ie, apps for iPhone, iPod and iPad)?

Review of “App Store”” trademark application file, available at www.uspto.gov, shows that the examining attorney originally refused the application because each word was descriptive and because the mark App Store merely “combined descriptive terms without creating a new non-descriptive meaning”. Apple overcame this refusal by showing acquired distinctiveness. Currently, however, the mark is in publication, and is being opposed by Microsoft.

I look forward to following the progression of the lawsuit and the registration process of “App Store” mark with the US PTO. Stay tuned to find out.

The case is Apple Inc. v. Amazon.com Inc., 11-1327, U.S. District Court, Northern District of California (Oakland).

Thursday, May 19, 2011

Creating Alternative Financing – Part III: Advantages and Disadvantages of Crowdfunding

Crowdfunding is just one of many ways of financing a business venture or a project. Like all other methods, crowdfunding has its advantages and disadvantages. Below I discuss some pros and cons of raising money through a donation-based crowdfunding platform.

Pros

In my opinion, the main and unique advantage of crowdfunding is that people who are raising capital through crowdfunding (I will refer to them as entrepreneurs) can also use it as a marketing tool. Publishing information about a product or a project with a goal of raising capital on a well-read crowdfunding platform also raises product or brand awareness. Crowdfunding is not just limited to one single website. Supporters of the project disseminate the information using their social networks and encourage people in their networks to do the same.

Also, in addition to the money, entrepreneurs often get feedback. What can be better than “beta testing” your product and simultaneously raising capital for it? If the project does not reach the funding goal, this may be a signal to the entrepreneur that the market is not responding favorably to the offering and perhaps a change is in order. Of course, it is possible that the crowdfunding crowd is not the intended market for the product, hence the limited response. So, entrepreneurs should listen carefully to the market signals they receive through crowdfunding feedback and respond appropriately.

Another advantage of crowdfunding is that entrepreneurs can raise capital without giving away any equity. It is just like receiving a gift or a donation that you get to spend on your favorite project.

Finally, raising money through a donation-based crowdfunding platform is relatively inexpensive (especially given the fact that entrepreneurs do not need to give up equity). There is usually no need to engage lawyers or other advisors to assist in the process. Most sites charge a fee equal to about 5% fee of the money raised and another 3-5% in processing fees. Entrepreneurs also need to pay taxes on the raised capital (that would be income to the entrepreneur) and send out gifts or rewards that entrepreneurs are expected to give to their donors.

Cons

The main disadvantage of raising capital through crowdfunding is that entrepreneurs may be limited in the amount of money they can raise. An average raise amount is between $2,000 to $10,000. This may be enough money for a small project but not for a sizable venture. The reason is simple: people are reluctant to give money if they do not get any return on their investment. This is reasonable, and should be factored into the initial calculation.

Another disadvantage of using crowdfunding as a means of raising capital is the fact that your business idea would be exposed to the whole wide social network and there is no guarantee that someone will not decide to implement it. You cannot sign a confidentiality agreement with the internet.

There are risks for the donors as well. The crowdfunding sites may conduct a preliminary check to ensure the business is legitimate, but it is unlikely that they will be held responsible if it turns out otherwise. Also, the sites usually do not enforce allocation of the funds or that supporters receive their promised gifts. What happens to the project that is only partially funded? Some crowdfunding platforms would still release the money to the entrepreneurs. However, there may not be enough funds to launch the project originally contemplated, which begs a question of how and for what purpose this money would be used then. In my opinion, lack of accountability may present a serious problem as the number of participants on crowdfunding sites increases proportionately to the likelihood of occurrence of fraud. This may serve as a potential deterrent for donors as well as expose the crowdfunding platforms to liability.

In the next post, I will talk about the ideal candidates for using crowdfunding to finance their businesses or ideas.

Full series: Part IPart II, Part III and Part IV.

Tuesday, May 10, 2011

Creating Alternative Financing – Crowdfunding & Crowdsourcing: Part II. What is Crowdfunding and Three Crowdfunding Models

Crowdfunding is a method of raising funds for a business venture or a project by requesting a small amount of money from a large number of people (typically through the Internet). An average amount of money raised is between $2,000 and $10,000.

Crowdfunding is not a new phenomenon. We have seen it used by charities doing fundraisers, politicians, asking for contributions to their political campaigns (during his campaign for the US presidency, Barack Obama raised $137 million from small donors), and musicians accepting contributions from their fans for a new album.

We now see proliferation of crowdfunding because of the advance of social networks that have enabled people to reach out to their communities and networks more effectively. Over the past five years, users of websites like Kiva & Kickstarter have “donated” over $350M to crowd fund projects including art, films, software development and books.

In my opinion, there are several models or approaches to crowdfunding. First, platforms like www.Kickstarter.com offer the opportunity to raise money that is not directly repaid. Recipients instead may offer their contributors a specified item or service in exchange for contributions, such as a free sample of their product or an advance copy of their CD. Since investors do not expect a return on their investment, the contributions are not securities, and therefore no securities laws issues are raised. Examples of these platforms include www.rockethub.com, www.peerbackers.com, www.indieGoGo.com, www.crowdrise.com.

The second category consists of platforms that enable founders to solicit and receive funds in exchange for some expectation of return (profit sharing, equity). In this case, founders issue securities, and have to be very careful about compliance with applicable federal and state securities laws. A good example of such platforms is www.Profounder.com.

The third category includes companies that use internet platforms and crowdsourcing/crowdfunding methods to actually produce products. The example I want to use here is www.quirky.com, but there may be other similar sites out there.

Category One: Donation-Based Crowdfunding

Below is a brief overview of some of the platforms offered in the first category where contributors do not expect any return on their investments.

1. Kickstarter (www.kickstarter.com)

Kickstarter is a platform that prefers to get funding for ideas or projects rather than companies. They offer an “all or nothing” funding: in order to receive the funds, a project must reach or exceed its funding goal or no money changes hands. Once the project is announced, pledges can be made by credit card (through Amazon processing), but contributors only need to pay if the project meets the funding goal within the allocated time (1-90 days). Recipients are expected to offer rewards to the contributors. Kickstarter charges 5% of the amount received on successful raises and Amazon charges 3-5% credit card processing fee. Although typically people raise up to $10,000, I have also seen raises of over $900,000.

2. RocketHub (www.rockethub.com)

RocketHub is a platform that, similarly to Kickstarter, supports the community of “independent artists and entrepreneurs”. It is not limited to creative projects, but encourages them. The platform offers an opportunity to raise money as well as to “take creative products and endeavors to the next level”, referred to as “LaunchPad Opportunities” that allow community to discuss and vote on the presented ideas. I liked the language they use: all who initiate fundraising are called “creatives” and those who donate money are called “fuelers”. Participants also receive virtual badges for their contributions to the site. RocketHub charges 4% of the money raised if the financial goal is reached. If it is not, then the fee goes up to 8% of the total funds raised. This is done to encourage creatives to set realistic funding goals. There is also a 4% transaction fee. Successful investments typically range between $1,000 and $10,000.

3. Peerbackers (www.Peerbackers.com)

Peerbackers distinguishes itself by the fact that it enables businesses to easily reach out to their online communities and networks. This crowdfunding site is not limited to funding creative ideas. Anyone with an idea, project, business or invention can apply to post on the site from anywhere in the world. Businesses in need of funding create profiles, describe the business and the purpose of the fundraising, the target financial goal and the length of time to reach it (should be between 15-90 days). Businesses also upload a photo or video and information about the rewards they are offering in exchange for the contributions. Then, businesses campaign for support by reaching out to their networks on Facebook, Twitter, LinkedIn, etc. and ask everyone to send the campaign to their networks as well. Funding is released if the project reaches at least 80% of the funding goal. Fees are: 5% + 1.9-2.9% PayPal fee.

4. IndieGoGo (www.indiegogo.com)

According to the information on the website, www.IndieGoGO.com platform has helped raise millions of dollars for over 25,000 campaigns, across 177 countries. This site allows to raise capital for any type of venture, including a for-profit business venture, non-profit cause, or a creative project. Recipients can easily spread the work through one-click integration with Facebook, Twitter, and other social media platforms. Each campaign has real time analytics, including views, referrals, contributions and favorites, which allows teams to track closely their campaigns. There is definitely a preference for creative projects (funding for films, music projects), but I have also seen campaigns by small businesses, food, technology companies and even mobile apps companies. IndieGoGo releases funds regardless of whether the goal is met, and some 40% of projects receive at least $500, but only about 10% of projects hit their targets. IndieGoGo charges a 4% fee on the money raised when the funding goal is. The fee goes up to 9% if the funding goal is not met. Third party payment processors charge an additional fee of about 3%.

5. Crowdrise (www.Crowdrise.com)

Crowdrise is a platform used for fundraising for charities (i.e., existing non-profit organizations with tax-exempt status). Participants are encouraged to use their social networks to invite others to donate and help spread the word. Donations are tax deductible. Crowdrise deducts 5% on donations made through the site as well as a $1 transaction fee for donations under $25 or a $2.50 transaction fee for donations $25 and over. Crowdrise accepts tips.

Category Two: Investment-Based Crowdfunding

Crowdfunding in this category means using Internet platforms to conduct friends and family rounds of financing. One exampe of such platform is Profounder.com. I have previously written about Profounder, so this is a quick summary. Profounder is a software platform that facilitates a seed round of capital raising from investors with whom founders have pre-existing relationships. The average investment is about $1,500 and an average raise is anywhere between $35,000-$60,000. The platform is typically used by founders to raise start-up capital. The model currently in use is revenue sharing. A founder would create an account with the company description and a term sheet, send the term sheet to friends and family members and invite them to participate in the offering. If the goal is not reached within 30 days, the pledges are revoked. There is also a limit as to the number of investors who can participate in the offering, as per blue sky laws, that Profounder software helps founders to monitor. Once the deal is closed, the founder needs to file appropriate forms with the state and federal securities commissions. Even though the Profounder team provides the necessary information to do so, it is the founders’ responsibility. The cost is $100 to publish the term sheet, and a $1,000 flat fee to service the term sheet for the duration of the revenue sharing arrangement.

Category Three: Quirky (www.quirky.com)

This site focuses on developing physical consumer products that would retail for less than $150 and do not involve integrated software. It works the following way: investors submit their ideas to Quirky for consideration. If the idea is selected, it is then published for review and discussion by the community of “influencers”, who can support, revise, vote, make comments, or come up with branding, etc. for the idea. Following the review process, the Quirky team manufactures the product and sells it on their site. Quirky pays 30% of revenue by direct sales and 10% of revenue from indirect sales to each product’s influencers and 35% to the inventor.

Conclusion

In summary, there are several categories of crowdfunding each of which is suitable for a certain type of investment and project. Even though I listed only several platforms, there are many others out there that I did not get a chance to explore. In the next blogs, I will discuss the pros and cons of crowdfunding and what kind of companies and projects are likely to be successful candidates for crowdfunding financing. I will also discuss the legislative initiatives that are currently underway to facilitate capital raising using crowdfunding.

Full series: Part IPart II, Part III and Part IV.


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.