Sunday, September 30, 2012

VC Investment Trends

According to an article in Crain’s NY, most of VC investments made during the second quarter of 2012 went to California companies. Out of $2.1 billion in total, only $30 million was invested in New York startups, whereas California companies received $1.45 billion. The total amount is an increase of 16% over a year ago.

$30 million in investments that went to New York was a decline of 87% as compared to the same period last year (out of that amount, one-third was invested in Adaptly). This decline can be explained by the fact that New York attracts early tech startups that do not typically receive big investments. As the attention of VCs shifts to more early stage companies, the amount of money received by New York companies will increase. Actually, the number of seed level deals in New York is on the rise: it increased by 14% over the previous quarter. Let’s hope that this trend continues and that New York-based companies will not be compelled to migrate to California just to attract VC capital.

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.

Saturday, September 29, 2012

Marketing Mobile Apps - the FTC Guidance

Recently, the Federal Trade Commission issued a report titled “Marketing Your Mobile App: Get It Right From the Start”. Importantly, the FTC explained that once developers start distributing their apps, they become advertisers, so the truth-in-advertising laws apply: anything that developers tell prospective users (on their website or in the app description page) must be truthful. There cannot be false or misleading claims or omissions of important information. If developers make an objective claim about the apps, they need to have “competent and reliable evidence” to back up their claims. For example, if an app claims to provide benefits related to health, safety or performance, there needs to be competent and reliable scientific evidence to support such claims.

The other principles include:
  • "Disclose Key Information Clearly and Conspicuously. –“If you need to disclose information to make what you say accurate, your disclosures have to be clear and conspicuous.”
  • Build Privacy Considerations in From the Start. – Incorporate privacy protections into your practices, limit the information you collect, securely store what you hold on to, and safely dispose of what you no longer need. “For any collection or sharing of information that’s not apparent, get users’ express agreement. That way your customers aren’t unwittingly disclosing information they didn’t mean to share.” 
  • Offer Choices that are Easy to Find and Easy to Use. – “Make it easy for people to find the tools you offer, design them so they’re simple to use, and follow through by honoring the choices users have made.” 
  • Honor Your Privacy Promises. – “Chances are you make assurances to users about the security standards you apply or what you do with their personal information. App developers – like all other marketers – have to live up to those promises.” 
  • Protect Kids’ Privacy. – “If your app is designed for children or if you know that you are collecting personal information from kids, you may have additional requirements under the Children’s Online Privacy Protection Act.” 
  • Collect Sensitive Information Only with Consent. – Even when you’re not dealing with kids’ information, it’s important to get users’ affirmative OK before you collect any sensitive data from them, like medical, financial, or precise geolocation information. 
  • Keep User Data Secure. – Statutes like the Graham-Leach-Bliley Act, the Fair Credit Reporting Act, and the Federal Trade Commission Act may require you to provide reasonable security for sensitive information. The FTC has free resources to help you develop a security plan appropriate for your business." 
A full copy of the Guidance is found here.

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, September 9, 2012

The SEC Issues Proposed Rules to Eliminate the Prohibition Against General Solicitation in Rule 506 Offerings


On August 29, 2012, the Securities and Exchange Commission (the SEC) issued proposed amendments to Rule 506 of Regulation D and Rule 144A to implement Section 201(a) of the JOBS Act.  The SEC is soliciting comments on the proposed rules.  The comment period ends on September 28th

In its release, the SEC acknowledged that it received numerous other suggestions on how to revise Rule 506, the definition of the accredited investor, and the Form D.  However, currently the SEC is only concerned with amendments required by the JOBS Act.  In particular, the SEC proposed new Rule 506(c), which would permit the use of general solicitation in Rule 506 offerings provided that (1) the issuer must take reasonable steps to verify that the purchasers of the securities are accredited investors and (2) all purchasers of securities must be accredited either because they satisfy the accredited investor definition or the issuer reasonably believes that they do, at the time of the sale of the securities. 

The new Rule’s main uncertainty comes from the requirement that the issuer must take “reasonable steps” to verify that the purchasers are accredited investors. 

Instead of a bright-line test, a specified list or a methodology that would provide issuers with greater certainty that they have satisfied the “reasonable steps” requirement, the SEC decided not to require issuers to follow uniform verification methods.  Instead, the SEC suggested a number of factors that issuers should take into consideration.  Whether the factors are “reasonable” becomes an objective determination based on particular facts and circumstances of each transaction.  Examples of the factors include: (1) nature of the purchaser; (2) information that the issuer has about the purchaser; and (3) nature and terms of the offering. 
With respect to the first factor (the nature of purchaser), the SEC noted that reasonable steps would be different depending on which of the eight categories of the accredited investor definition the investor satisfies.  Checking that the investor is a broker-dealer is easy (through the FINRA website), whereas checking that a natural person has over $1 million in assets may be much more difficult due to privacy concerns.  Perhaps, a way to go here is to ask for a letter from the investor’s accountant verifying the accredited status of the individual.

With respect to second factor (the information that the issuer has about the purchaser), the SEC provided examples such as Form W-2s, public company filings, and third-party information.  This factor puts a burden on the issuer to seek such information and it is unclear how much and what kind of information would be sufficient. 

Finally, with respect to third factor (the nature and terms of the offering), the SEC noted that a high minimum investment could be a relevant factor, as well as whether the issuer is soliciting investors through a generally accessible website or a social media platform as opposed to a re-screened accredited investors database maintained by a broker-dealer. 

In conclusion, the burden is on the issuer claiming the exemption that it is entitled to that exemption.  And due to the uncertainty as to the exact nature of reasonable steps the issuer must take to verify the accredited investor status of its investors, this burden may be heavy enough to deter some issuers from resorting to the new Rule 506(c) when conducting private placements. 

I look forward to reading the final rules.  

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 5, 2012

Important Update Regarding Section 83(b) Election

On June 25, 2012, the Internal Revenue Service issued a new Revenue Procedure 2012-29, which provides sample language that should be used to make a Section 83(b) election as well as examples of the income tax consequences of making a Section 83(b) election in various circumstances.

The new Revenue Procedure will be useful for startup founders and other restricted stock recipients who hold stock subject to vesting.  It is highly advisable to consult an accountant when making this election to ensure that it is done properly.  Remember that you only have 30 days from the moment of the stock grant to make the Section 83(b) election.  Missing the deadline can result in expensive and unintended tax consequences.

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.