Optima Law Group Blog

Colorado: The Highly Underrated State of Incorporation

When choosing a state to incorporate in there are several things to consider. Formation fees, taxes, annual fees and filings vary significantly from state to state. Although it may make the most sense to form your corporation in your home state, it may prove beneficial to incorporate somewhere else. The most popular states to incorporate in are referred to as “business friendly” states such as Delaware, Wyoming, and Nevada. A state that doesn’t seem to be on many radars is the underrated State of Colorado, so we thought it was about time we gave it a nod and the respect it deserves. There are 44 states in the US that charge a corporate income tax – of those 44, six have rates at or below 5 percent – Colorado being one of those states at 4.63 percent. Iowa is at the other end of the spectrum at a whopping 12 percent! Not only that, we have compiled a list of other perks of forming a corporation in Colorado:

a.       Filing fee for incorporation: $50

This is only a one-time fee, but considerably more affordable than the cost to incorporate in Connecticut which will set you back a minimum $400, so the potential savings here should not be completely disregarded.  

    

b.         Annual requirements/cost: $10

A Periodic Report needs to be filed with the Colorado SOS and is only $10. Other states, which have done an excellent job branding themselves as being “business friendly”, have significantly higher fees and more reporting requirements.

 

c.       Privacy:

Neither the Articles of Incorporation nor the Colorado Periodic Report ask for information about officers, directors, or shareholders. According to the Colorado Secretary of State’s website, “Entities are not required to file officers’, owners’, or directors’ names and addresses with the Secretary of State's office. This information should be managed through your internal records” (https://www.sos.state.co.us/pubs/business/FAQs/regAgent.html). Colorado does not even require you to list who operates a business, so it provides a lot of privacy and asset protection. That kind of privacy usually costs a lot of extra money in other business friendly states like Nevada and Wyoming by allowing a nominee service.

 

It is important to remember that you will still need to register in the state of your principal place of business, at a minimum. If that happens to be in Colorado then you are in a great position to take advantage of Colorado’s beneficial incorporation structure. There are a lot of factors that go into determining where you should incorporate, but it pays to do the research and find the state that would be most advantageous to your business based upon your specific circumstances. 

Protecting Your Trade Secrets

Although there is federal and state legislation (Defend Trade Secrets Act and the Uniform Trade Secrets Act) in place that allows companies to take action against trade secret misappropriation, a great deal of it is the responsibility of the company and its staff to adopt and vigilantly adhere to business practices that keep trade secret information private.

 

Here are some steps you can take to effectively lessen the likelihood that your trade secrets will become public knowledge:

1. Identify and determine what information needs protection.

Many business owners do not even realize they have trade secrets that need protecting. Trade secrets can be as simple as information that gives you an edge over your competitor. Things like customer or supplier lists, marketing techniques, etc. are all trade secrets and should be protected.

2. Utilize business procedures that support confidentiality of the company.

Once you figure out the information within your company that needs protection, set up a process to identify and protect such information going forward. This can include practices like stamping, marking, or labeling confidential information in some way to separate it from other information. Minimize the circulation of trade secrets within your company (only on a need to know basis) and keep a log that requires a date, name, and time to be recorded when sensitive information is accessed. Be exclusive with whom you share your trade secrets with outside of the company as well, and if possible, do not reveal the entire picture of your trade secret(s) to third parties, etc. (example: use different vendors for different pieces of the whole, rather than using one entity to execute the entire process and revealing the whole picture).

3. Use Agreements.

In addition to adopting and employing practices that support company confidentiality, use nondisclosure, noncompletion, strong employment agreements and proprietary rights agreements that have clauses that limit an employee’s right to access and use a company’s sensitive information. Be sure to include language in the agreement(s) that outlines the use of trade secrets for not only the period in which the party is employed or contractually obligated to fulfill, but also in the event that the party is terminated or is no longer with the company. From a legal standpoint, using agreements may be the most important step you take in protecting your valuable trade secrets.

4. Take Security Measures.

For physical files, store confidential information in locked file cabinets. Offices should also have an alarm or security system to safeguard information from theft. Keep electronic devices secured at all times (i.e. smart phones, tablets, laptops, computers, etc.). This means minimizing the time that your devices are left unattended and utilizing strong passwords on all devices, including updating them regularly. In addition to using passwords, you can use encrypted folders and most importantly, make sure your internet security is sufficient.

5. Train Employees.

Believe it or not, most trade secret misappropriation cases involve an employee or business partner misusing sensitive information, rather than a computer hack or security breach. With this in mind, it is imperative that employees know how to identify sensitive information and the correct process and handling of such information.

 

We have shared several ways to help you get started on protecting your valuable assets, granted, it is a continual process that should improve and evolve over time. We would love to facilitate the preservation of your trade secrets by reviewing your confidentiality agreements with you and performing a comprehensive analysis to ensure they are sound and will effectively help protect your business!

 

Resources:

http://smallbusiness.findlaw.com/intellectual-property/protecting-trade-secrets.html

http://www.ipwatchdog.com/2012/04/07/identifying-and-protecting-trade-secrets/id=23873/

http://www.wipo.int/wipo_magazine/en/2016/01/article_0006.html

Raising Private Funding From Those You Know Got Easier This Year!

A recent amendment to Federal Rule 504 of Regulation D that went into effect in January of this year allows companies to offer up to $5,000,000 in securities in a 12-month period, a big increase from the previous $1,000,000 limitation. The new amendment also subjects the issuers (the company seeking investment) of the offering to the bad actor disqualifications of Federal Rule 506.

 

Rule 504 has many benefits which include:

- Requiring less disclosures about the company to the purchaser, which can be costly and burdensome for a small business. Companies are still required to comply with antifraud regulations of federal securities laws.

- Investors do not need to be accredited (i.e. wealthy). This is important because often times start-ups acquire initial funding from friends and family.

- No limit on the number of investors, which enables many people to contribute only a relatively small amount. Let’s face it, most of our friends and family want to be able to help but they often do not have large disposable sums of money to invest, which is why this is so beneficial.

- Generally, the offering will be exempt from registration with the U.S. Securities and Exchange Commission (SEC) as long as the issuer is not a “blank check” company, does not advertise or solicit the offering to the public, the amount of the securities sold in the offering does not exceed the $5,000,000 cap, and the issuer is not disqualified pursuant to the bad actor disqualifications of Rule 506.

Although Rule 504 has many benefits such as a less rigorous disclosure requirements and the ability to source non-accredited investors, it has been very limiting in the past due to the $1,000,000 offering cap, and thus, it is often overlooked by companies who favor another exemption such as Rule 506 which has no dollar maximum. This new amendment should prove to be a valuable resource and enable start-ups and small business to have more flexibility when it comes to raising capital, while also offering increased protection to non-accredited investors due to the change in legislation which forces issuers to be subjected to the bad actor disqualifications of Rule 506.

For more information on the SEC amended Rule 504 of Regulation D under the Securities Act of 1933 please visit this website:

https://www.sec.gov/divisions/corpfin/guidance/rule504-issuer-small-entity-compliance.html

In addition to Rule 504 which is federal law, be mindful that each state involved will have its own laws and regulations that will also apply. We assist ventures comply with all applicable securities laws – on the federal and state level.

 

 

So You Want To Raise Private Funding? Dos and Don’ts

DO…

1. Your research (on your customers, types of private funding, investors, etc.).

2. Get to know your target audience first and get feedback from them. Be prepared for and open to criticism. Listen, then revise and improve your product again and again. Learn to anticipate what questions your target audience will ask you and proactively address them to remove the roadblocks keeping them from investing, one by one.

3. Make a complete business plan including an over-estimate of the capital you will need, hypothetical problems that can arise and how you have anticipated them and will resolve them.

4. Invest in yourself. Investors will want to see that you believe in yourself and your product – if not, why should they take a chance on you?

5. Make sure you are complying with state and federal securities laws as to not put your company in jeopardy and not scare off investors (look like you have been here before).

6. Solicit friends, family & coworkers and consider nontraditional techniques such as crowdfunding, but beware of disclosing too much information with this latter option which can put your product/idea at risk (other sources include banks, grants, venture capital, and angel investors). Consult with your attorney about the funding avenues available to you based on your specific situation and needs.

 

DON’T…

7. Be unorganized – recruit a great Board, have a structured team and make sure your corporate documents and minutes are orderly.

8. Begin with fully developing your product before you know what your target audience wants. You don’t want to financially strap your company before it’s even up and running.

9. Forget to hire an experienced attorney. There are a lot of rules and regulations that must be complied with during the startup and fund raising process, by consulting an attorney, you can avoid legal issues and focus on other business logistics.

10. Enter into agreements you do not understand or engage in “handshake deals” (oral agreements). Another reason it is especially important to hire an attorney and discuss with them, as agreements can be very complex.

11. Ask for investment from people you do not have an existing relationship with or use the internet to solicit investment, unless your attorney says it is okay.

12. Fail to raise enough money, understand your burn rate (how quickly you burn through cash), or move quickly enough to raise your next round of funding.  If you wait too long for the next round, you will be at a serious disadvantage with the next group of investors.

 

 

A Dynamic Patent System

The patent system is continually evolving both in the US and internationally. There have been a few notable Supreme Court cases as well as proposed legislation this year which have changed or may influence the dynamic patent system landscape:

1. TC Heartland v. Kraft Foods – In this case, the Supreme Court upended a rule enforced for 27 years which enabled plaintiffs (with an emphasis on patent trolls) to pick court venues that favor them.  In the case of patent trolls, this is the court in an Eastern district of Texas. Now plaintiffs are required to file patent suits in the city where the defendant is incorporated or “where it has committed acts of infringement and has a regular and established place of business”. This new reform should help to keep patent trolls and their bullying at bay or will it? What exactly is a “regular and established place of business”? In the past it would have probably meant a city where the company owns property and runs business operations, but today’s definition isn’t so clear – what about online retailers like Amazon who have a global presence and operate all over?

http://www.reuters.com/article/us-usa-court-kraft-heinz-idUSKBN18I1SZ

2. Impression Products, Inc. v. Lexmark International, Inc. – Lexmark sued Impression Products for infringing on their patent rights by providing a toner refill service for customers of Lexmark patented toner cartridges and offering a cheaper price than Lexmark, which requires its customers to buy new toner cartridge replacements. The Supreme Court in this case, held that once a product is sold, the seller exhausts all patent rights that they may have had in that product. Although this ruling is consistent with past patent practice, it does raise questions regarding ever evolving technology and blurs the line for deciding what constitutes patent and copyright infringement. Once a consumer purchases a product, it is up to the owner to decide if he or she wants to modify it, sell it, etc., but what happens when you purchase patented products with copyrighted material such as apps or software? Is it patent or copyright infringement to resell the product? These types of scenarios will only become more numerous and complex with the advancement of technology.

https://www.abqjournal.com/1030568/ruling-limits-patents-reach.html

3. AstraZeneca AB v. Apotex Corp. – Just recently Apotex Corp, in a patent litigation battle with AstraZeneca, argued that AstraZeneca’s Nexium product should be invalidated due to Canadian patent law and the Promise Doctrine, which allows for the utility of an invention to be challenged should any of the claims that the initial patent discloses fail to be demonstrated in the actual invention. The Canadian Supreme Court ruled that the Promise Doctrine goes too far. The ruling has had mixed reactions. Proponents of enforcing the Promise Doctrine are angry that inventors can patent inventions whether they adhere to the claims they make or not. They argue that it is good for global pharmaceutical and technology companies who are already patent holders, but not so great for innovation and small startups, especially those located in Canada. A Canadian survey (http://www.crai.com/sites/default/files/publications/The-impact-of-IP-and-the-promise-doctrine-on-pharmaceutical-RD-activity.pdf?utm_campaign=Subscribe) done last year, shows that lower levels of research and development investment in Canada can be attributed to the Promise Doctrine. Opponents of the Canadian Supreme Court’s ruling contend that this decision will boost Canada’s economy and should attract foreign investors, who prior to the ruling, weren’t confident in investing in companies that could potentially be subjected to the country’s Promise Doctrine.

https://www.bloomberg.com/news/articles/2017-06-30/canada-bombshell-patent-ruling-seen-favoring-foreign-companies

4. Stronger Patents Act of 2017 (read about the bill here: http://www.ipwatchdog.com/wp-content/uploads/2017/06/STRONGER-Patents-2017.pdf) – A bill proposed to Congress this year that, if enacted, will mostly amend both inter partes review and post grant review proceedings at the Patent Trial and Appeal Board. Advocates of the bill assert that our current patent system is steadily weakening and is set up to favor large corporations and foreign companies. They claim that the bill will promote and reward innovation which will create more jobs and keep investments in the U. S., protect smaller companies and entrepreneurs, and boost the economy. According to the U.S. Chamber of Commerce, the U. S. fell to the 10th spot on a list that ranked the strength of patent systems around the globe. On the flip side, others claim that this bill would perpetuate the validity of bad patents by stripping inter partes review of its ability to invalidate patents that don’t do what they claim, allow patent trolls to keep bullying companies, and move research and development overseas.

This is but a small sample from the ever-changing patent universe.  It is critical that patent applicants and holders stay on top of these changes.  Today’s strategies may need major revisions based on tomorrow’s legislative changes and court rulings.  The complexity is ratcheted up for those clients who file internationally. 

 

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