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The SEC’s Crowdfunding Proposal

The SEC has, at long last, issued its proposed rules on crowdfunding as mandated by the JOBS Act.  It is a massive, 585-page behemoth.  If you’re pressed for time, here is the SEC’s press release with a handy fact sheet.

I wrote about the SEC and crowdfunding a few weeks ago, noting the SEC’s apparent hostility to the concept and the paternalistic attitude toward non-accredited investors underlying it.  Now we have the proposal, and the SEC has apparently held its nose and essentially proposed the framework as contemplated by the JOBS Act.  Nothing is final until the SEC receives comments and issues a final rules release, but it appears that crowdfunding will get its chance to prove the doubters right or wrong.

The Arian Foster IPO

The most buzz-inducing SEC filing last week (this is a relative statement, of course) was this Form S-1 filed by Fantex, Inc., seeking to register what has become known as the “Arian Foster IPO.”  Foster is an accomplished running back for the NFL’s Houston Texans.  The deal, in essence, is that investors will (through Fantex) be paying Foster $10 million now in exchange for 20% of his NFL-related earnings, including endorsements, coaching and broadcasting, going forward for his lifetime.  So, based on those numbers, if and when Foster’s aggregate earnings from now on exceed $50 million, investors will make a profit on the investment.  Fantex views this as the first of several athlete-related offerings.  There has been some ridicule about the concept in the popular press, with much focus on the risks (not helped by Foster’s hamstring pull in the first game after the S-1 filing), though like most investments in individual stocks, it’s a high risk, high reward proposition.

Big vs. Small Law Firms

In choosing which law firm to engage for your transactional matter, one threshold determination to make is whether to use a large or small firm, or something in between.  Needless to say, I’m not disinterested on this point.  The way I market my firm to potential clients inevitably portrays larger firms as not worth the cost – at least with respect to the types of matters I handle.  But I spent most of my career in big firms, and there are absolutely transactions that lend themselves to the resources that a “name” firm can bring to the table.

Series LLCs

Businesses organized as LLCs, just like with corporations, often find it advisable to form multiple LLCs to cover different lines of business to keep liabilities associated with one business isolated from the others.  However, the formation of multiple entities increases the business’s administrative costs.  For each new entity, there are filing fees and then ongoing franchise taxes with the state of organization and other states in which the company does business, separate tax returns, etc., so the business has to weigh these costs against the benefits of asset protection before making the decision to form new entities.

Crowdfunding and SEC Paternalism

One of the provisions of the JOBS Act that has many in the investment community excited is the new crowdfunding exemption to the registration requirements.  When effective, these offerings will permit sales of securities to anyone – not just accredited investors – for up to $1 million in the aggregate in each 12 month period.  This represents a radical democratization of private offerings, which currently are, for the most part, marketed just to the wealthy.  The SEC, however, does not share the private sector’s enthusiasm and has seemingly been slow-walking its efforts to enact rules that are required before these offerings can be introduced.

Crowdfunding SEC Paternalism | Andrew Abramowitz

Email Triage

In my post on emailing vs. phone calls, which laid out some advantages of communicating by email, I didn’t address one thing that many people hate about email, which is that it can at times seem impossible to keep up with the volume of incoming messages.  Unfortunately from an attorney’s perspective, if you miss a deadline because you lose track of an email, it won’t fly to complain to your client that you get 500 (or whatever) emails a day.  Regardless of whether law school lasts for three years or two, as President Obama would have it, there is little to no attention paid there to such mundane issues as email management, though this ends up being crucial to being a reliable attorney, which is a prerequisite to being a successful attorney. …

Verification of Accredited Investor Status

In my earlier post on the liberalization of general solicitation and advertising in Rule 506 offerings (to be effective September 23, 2013), I briefly mentioned the more stringent requirement, when general solicitation or advertising is used, for verifying each investor’s status as an “accredited investor.”  I’d like to get into more detail about what that entails.

Trust... but verify | Andrew Abramowitz

Current practice is for companies conducting Rule 506 offerings to have prospective investors check a box on a simple accredited investor questionnaire, and that is generally sufficient to establish the investor’s accredited investor status without further investigation by the company.  Going forward, Rule 506 offerings that are not accompanied by general solicitation or advertising will continue to operate in the same manner.  However, when general solicitation or advertising is used, the company must take “reasonable steps” to verify each investor’s accredited investor status.  This is a “principles-based” standard that is dependent on the facts and circumstances of the investors and the offering, but clearly a checked box on a questionnaire will not suffice.

Email vs. Phone/Meeting

A near-constant theme in my interactions with clients and other attorneys is the relative merits of various modes of communication — email, phone or in-person meetings.  After a long email chain, someone will get frustrated and say, “Why don’t we just get on the phone and figure this out?”  But those same people will, on another occasion, dial into a conference call, quickly get bored, and hone their skills at computer Solitaire.

Share Transfer Provisions for Startups

In preparing a stockholder agreement or operating agreement for a startup (for a corporation or LLC, respectively) with multiple owners, the section of the agreement that generally requires the most thought and discussion with the client relates to share transfers.  While it’s possible to punt on all of these questions by having the agreement simply say that no transfers are permitted except as may be agreed by the owners, it’s advisable to at least consider the various scenarios and include appropriate provisions in the agreement.  The following are some common ones:

  • Permitted Transferees – Share transfers may be made to related persons (like a trust for the benefit of a family member) without consent of the company or other owners.
  • Right of First Refusal/Offer – With a right of first refusal (ROFR), if an owner receives an offer from a third party to purchase the owner’s shares, the owner must first offer to sell the shares to the company or existing owners on the same terms.  A right of first offer (ROFO) requires the owner to first solicit offers from the company or existing owners, and then the owner can sell to a third party if a deal is not reached. …

How to Be a Good Client

The best attorney mentors I had in my early years of practice emphasized that law is a service business. Attending to the basics like responding promptly to emails and calls is at least as important, to this way of thinking, as being able to come up with an ingeniously complicated transaction structure. While I therefore have a “the customer is always right” orientation, I’d be lying if I said that it doesn’t matter whether the client was similarly responsive, organized, etc. With that in mind, here are a few tips for how clients can make the attorney-client relationship run smoothly: