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Should You Be Making Blue Sky Filings in New York?

March 9, 2015 / 3 minutes of reading / By Andrew Abramowitz

One of the oddities of New York securities law is that a core legal requirement imposed by the state was preempted by federal law almost 20 years ago, and yet the requirement remains on the books. The National Securities Markets Improvement Act, or NSMIA, enacted by Congress in 1996, expressly restricts the level of regulation that states can impose on private offerings done in reliance on Rule 506 of Regulation D or Section 4(a)(2) of the Securities Act of 1933. Following NSMIA’s enactment, most states amended their “blue sky” securities regulations accordingly and basically only require the filing with the state of a copy of the federal Form D and the payment of a filing fee, which NSMIA permits. New York, in contrast, still requires a relatively involved form to be filed with the state under the Martin Act, requesting more information than is permitted by NSMIA.

In 2002, the Committee on Securities Regulation of the New York State Bar Association issued a position paper flatly stating that the requirements imposed by the Martin Act for these offerings are preempted by NSMIA. In the following years, many of my fellow corporate and securities attorneys accordingly advised their clients that no New York filing need be made for Rule 506 or Section 4(a)(2) offerings, on the theory that an enforcement action by New York is unlikely and, even if there is one, there would be a solid defense of federal preemption.

However, I’ve had a recent experience with a new client that may call for a reassessment of this approach. I was asked to prepare blue sky filings for a New York real estate developer that was the subject of an enforcement action by the Attorney General for failure to make the filings as required by the Martin Act. (I was not involved with this client in connection with the securities offerings that triggered the action; I was brought in after the Attorney General demanded that the filings be made.) Now, this client could have taken an aggressive approach and challenged the action on preemption grounds, but the client took a practical, cost-benefit approach to the issue and decided it was better just to comply with the filing requirement as requested by the state.

I don’t know if this case is part of a new and concerted effort on the part of the Attorney General to enforce these laws. There are some facts specific to this case that may set it apart – for example, the client allegedly engaged in some active public solicitation and advertising that are not permitted for private offerings of this type, and it may be that these activities put the developer on the state’s radar. Nevertheless, those conducting private offerings in New York might want to consider complying with the Martin Act filing requirements to avoid the later cost and headache of an enforcement action.

Should You Be Making Blue Sky Filings in New York? Read More »

Interesting Reads of the Week

March 4, 2015 / 1 minute of reading / By Andrew Abramowitz

Some interesting legal reads for the week of March 2, 2015:

A speech from SEC Commissioner Michael S. Piwowar, which bemoans the length of the SEC’s rule adopting releases. I agree with his suggestions, including breaking them up into pieces.
From DealBook, Warren Buffett’s annual letter mocks investment bankers. I don’t disagree with any of his criticisms, but he’s in a fortunate position to not need their services because he can do his own assessment of acquisition targets. Your average corporate manager needs the expert advice that bankers provide, though everyone should be aware that bankers are incentivized to recommend that companies do stuff, which generates fees.
From WSJ’s Accelerators, the pros of the emerging freelance economy.
From WSJ’s LawBlog, increasing transparency in New York for attorneys’ disciplinary records. (I wouldn’t have highlighted this if I had any of my own issues, needless to say.)

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A Productivity Tip for Attorneys

February 27, 2015 / 3 minutes of reading / By Andrew Abramowitz

Law is a service business. Whether we like it or not, our clients tend to assess our performance based on our reliability in returning calls and emails and keeping tabs on how a project is proceeding, and less so on the actual quality of our work. Many highly intelligent and skilled attorneys are tripped up by, for example, failing to keep up with the barrage of incoming emails.

The popular professor and non-fiction writer Dan Ariely (Predictably Irrational) has devoted much of his professional attention to work productivity issues. He has helped to develop a time management app called Timeful, which I haven’t tried, but to the extent it implements his ideas, it’s surely helpful. I wanted to focus here on just one of his tips, described in this Reddit thread, which is to try to get important tasks done in the morning, pretty soon after getting up, which is when most people are by far the most productive.

I’ve tried to implement this idea in a manner that works with the demands of my practice. Here’s the basic challenge: corporate attorneys have a mix of tasks that can be done in a couple of minutes or so, e.g., responding to a straightforward email, and ones that take longer, e.g., reviewing or drafting a long agreement. If you try to do one of the longer tasks while monitoring incoming email, each time you interrupt what you’re doing to attend to the email, you’re taken out of the flow of the longer task. And before you know it, you’ve been in email-responding mode for three hours, and you haven’t made discernable progress on the big item.

I deal with this by setting attainable goals for the time-consuming tasks in advance for a particular day, and then seek to get them done before lunch. So when I start work at 8am, I just take a few minutes to scan emails received overnight to make sure nothing is urgent, but then I get right down to the big tasks (like this post, which I’m writing at 11am). I keep my email screen off most of the time, and while I do check periodically to make sure nothing urgent has come in, I try to avoid responding to them while I’m focusing on what I planned to do. Then, if all goes well, I can spend the rest of the day in “reactive” mode, responding to emails that are in my inbox and that continue to come in during the afternoon, with the satisfying feeling that I’ve plowed through my to do list.

Needless to say, I can’t impose complete control over client demands. Sometimes there are meetings or calls that take up the productive morning hours, sometimes I can’t get everything done in the morning that needs to get done, and sometimes things come up in the afternoon that need to get done that day or night. However, I’ve found that at least trying to organize my day in this manner has helped me both with productivity and my job satisfaction.

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Interesting Legal Reads of the Week

February 25, 2015 / 1 minute of reading / By Andrew Abramowitz

Some interesting legal reads for the week of February 23, 2015:

From WSJ Accelerators, some good advice from Ryan Holmes on when to capital raise and how much.
From WSJ’s Law Blog, the SEC allowed a registration statement for a marijuana dealer to go effective (though, unusually, it didn’t accelerate effectiveness).
From MoFo JumpStarter, a summary of the SEC’s speeches about its current initiatives at a PLI program.

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Streamlining of Blue Sky Filings

February 13, 2015 / 2 minutes of reading / By Andrew Abramowitz

Under U.S. law, every sale of securities must either be registered or fall under an exemption from registration. This determination must be made both with respect to federal law and the law of the particular state (the “blue sky” law) in which the securities are being offered. In the bad old days – pre-1990s – each state had its own unique set of exemptions and filing requirements, meaning that a securities offering in multiple states required a significant amount of research and form preparation. In 1996, Congress passed the National Securities Markets Improvements Act (NSMIA), which effectively pre-empted most state regulation of “covered securities,” including securities sold under Rule 506. Post-NSMIA, states can’t do much more in these transactions than require the issuer to send in a copy of a Form D (as filed with the SEC) and pay a filing fee.

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Streamlining of Blue Sky Filings Read More »

The Phantom Equity Alternative

February 6, 2015 / 3 minutes of reading / By Andrew Abramowitz

Companies looking to compensate their employees and other service providers in equity will often employ stock options or restricted stock (for corporations) or profits interests (for LLCs). An alternative approach that should be considered is to offer so-called “phantom” equity, which is essentially a deferred compensation plan, where the employee receives cash payments that are calculated as if the employee had received an equity grant. (A similar alternative is stock appreciation rights, or SARs, but I will focus on phantom equity here.)

For example, the recipient could receive a cash payment at the time the company is sold that’s equivalent to the distribution that would have gone to someone receiving 1% of the company’s common equity at the time of the grant. There can be other triggering events besides a sale, depending on the plan, including regular company distributions of earnings. Like true equity, the plan can have vesting, repurchase and similar provisions seeking to incentivize the recipient’s continued employment with the company for a lengthy time. So, the employee receives the benefits of equity without the parties having to go through the trouble of documenting an actual issuance of equity. Unfortunately, the term “phantom” seems to imply that it’s somehow fake equity, meaning employees can be skeptical of the concept, so it takes some explanation.

Like any employee compensation plan, phantom equity plans need to be carefully structured using the advice of a qualified tax professional, seeking among other things to avoid issues with Section 409A deferred compensation penalties. As I do not myself have such expertise, I’ll leave out discussion of tax consequences here, except to note that a disadvantage of phantom equity from the employee’s perspective is that the cash payments are taxed as ordinary income, not capital gain, though the tax is assessed only if and when the cash is paid, not when the phantom equity is granted.

One advantage of phantom over true equity is that it’s generally easier to document, saving on legal costs (wait, why am I writing this?). Recipients of phantom equity will not need to be directly accounted for in operating or stockholder agreements, making simpler the mechanics of drafting provisions such as share transfer restrictions, management, and distribution of company earnings. Outside investors may prefer the simpler capital structure, though of course they would take into account the company obligations inherent in the phantom equity when valuing the company and their investment.

From the company’s perspective, phantom equity also avoids creating new shareholders or members that have statutory rights under state law, such as the right to examine records, which as a practical matter are not valuable to the typical service provider.

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Using Self-Directed IRAs for Friends and Family Financings

January 29, 2015 / 2 minutes of reading / By Andrew Abramowitz

When startups are seeking to obtain seed capital through a friends and family financing, most of the time, those friends and family members make a direct cash investment either in their individual capacity or through a business entity that acts as an investment vehicle. Another option that is not widely known is for the investor to use tax-deferred retirement funds for the investment, via what’s known as a self-directed IRA. Essentially, IRA funds can be used for many investments other than the familiar publicly-traded stocks, bonds, mutual funds, ETFs, etc., and among the other permitted investments are private company securities. However, the investment must be made through a custodian who administers the process, executing transaction documents on behalf of the investor, etc. The custodians are not the familiar brokerages like Fidelity and Schwab, but others you probably haven’t heard of that specialize in this area. …

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Using Self-Directed IRAs for Friends and Family Financings Read More »

Interesting Legal Reads of the Week

January 26, 2015 / 1 minute of reading / By Andrew Abramowitz

Some interesting legal reads for the week of January 26, 2015:

From the WSJ, advice to finance your small business using cash from your customers, rather than obtaining debt or equity financing. Of course, this doesn’t work for businesses that require years of work before sales, like developing a new drug.
Also from the WSJ, thoughts on how much salary entrepreneurs should pay themselves.
California attorney Keith Paul Bishop, on how, in a recent enforcement case, the SEC has overstated the role of securities attorneys in their roles in issuing legal opinions.
From Joe Wallin’s Startup Law Blog, an interview with a provider of revenue loans, essentially a loan with a royalty-based payment mechanism, so the borrower pays back the loan at a rate determined by the amount of sales.

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“SAFE” Equity as an Alternative to Convertible Notes

January 22, 2015 / 2 minutes of reading / By Andrew Abramowitz

As much as I am always inclined to mock West Coast trends, there is a recent one that I grudgingly find intriguing: so-called “safe” equity (simple agreement for future equity), which is an alternative to convertible notes for startups seeking bridge financing to keep the lights on until they can raise substantial funds in a “real” equity round. Y Combinator offers open source safe equity forms with some background information. With a convertible note, the seed investor acts temporarily as a lender, with the note being converted to equity if and when the company has a qualifying equity financing. With safe equity, the investor simply receives the right to receive preferred equity when the financing is completed, without the need to temporarily treat it as a loan. There is no interest, maturity date, repayment terms or any other provisions that you’d associate with a debt instrument.

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“SAFE” Equity as an Alternative to Convertible Notes Read More »

Interesting Reads for the Week of Jan 19

January 20, 2015 / 1 minute of reading / By Andrew Abramowitz

Some interesting legal reads for the week of January 19, 2015:

From the WSJ’s Law Blog, a report that law school enrollment continues to decline. Given the improved economy, I would be very surprised if the brave souls who enroll now find a weak job market by the time they apply to firms.
From the WSJ’s Accelerators Blog, some good general advice for start-ups from a couple of attorneys.
A blog post from Gary J. Ross, another former Big Law attorney who hung out a shingle, on outsourcing tasks.

Interesting Reads for the Week of Jan 19 Read More »

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