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.