Optima Law Group Blog

Equity Crowdfunding

What do you need to know about the SEC’s recently enacted Equity Crowdfunding rules?


Crowdfunding is an exciting innovation of our internet age. By using the internet as a medium to reach the masses, a company can launch an idea and ask many people to contribute money to fund their idea. The theory is that many hands make light work. Websites like Kickstarter.com and Indiegogo.com are excellent examples of the fundraising type of crowdfunding where the purchaser is essentially giving money to the company. This blog, however, is focused solely on what is termed “Equity Crowdfunding.” Equity Crowdfunding is when a company (“issuer”) asks many people (“purchasers” or “investors”) to contribute an amount of money toward their goal, and in return, the purchasers receive equity in the company. Under direction of the JOBS Act, Title III, the SEC has recently finalized a regulatory structure for this type of funding effective May 16, 2016. The final rules are over 600 pages, however, we have listed some of the highlights below. Note that this is only a small portion of the rules and we recommend contacting an attorney to safely navigate the SEC’s Equity Crowdfunding rules.


Who is eligible to Equity Crowdfund?


In issuing its final rules, the SEC outlined who is NOT eligible to use the Equity Crowdfunding rules:

·         Companies organized outside the U.S.;

·         Companies required to report to the SEC;

·         Investment companies;

·         Disqualified companies;

·         Companies that have failed to comply with the annual reporting requirement during the two years preceding the filing of a Equity Crowdfunding offering; and

·         Companies with no specific business plan or whose business plan is to engage in a merger or acquisition with an unidentified company.


How much can a company raise?


The SEC stated that an eligible company can raise up to $1 million of securities through Equity Crowdfunding. When a company is also issuing securities using other registration exemptions, the company must comply with the separate requirements of the exemption and the separate limits will apply. Companies will need to be especially careful during simultaneous offerings under Equity Crowdfunding rules and another Securities Act registration requirement. For example, issuing securities under a “quiet” Rule 506(c) offering prohibits solicitations and a company taking advantage of 506(c) and Equity Crowdfunding would have to ensure 506(c) purchasers were not solicited by the Equity Crowdfunding offer.


How much can an investor give?


An individual investor can only purchase, from ALL Equity Crowdfunding issuers, during a 12-month period:

·         The greater of $2,000 or 5 percent of the lesser of the investor’s annual income or net worth if       either annual income or net worth is less than $100,000; or

·         10 percent of the lesser of the investor’s annual income or net worth, not to exceed $100,000, if both annual income and net worth are equal to or exceed $100,000.


Are there any required disclosures?


The SEC requires that prior to launching an Equity Crowdfunding offering, the company must file with the SEC and provide to investor (and the intermediary) an offering statement. The offering statement has a whole host of required information with varying requirements based on the target offering amount.


What are the mechanics of Equity Crowdfunding?


Equity Crowdfunding must be conducted:

·         though a single intermediary that is an SEC-registered broker-dealer or an SEC-registered funding portal that is also a FINRA member; and

·         exclusively through the intermediary’s platform.

Investors are entitled to cancel their investment commitments at any time and for any reason until 48 hours prior to the offering deadline. Any material change in offering terms will require a reaffirmation of the investor’s commitment.


While Equity Crowdfunding has its advantages, it also has drawbacks and is not a fit for every company. 

Tips for Using Contracts like a Savvy Pro

Growing companies have many tools at their disposal. Contracts are one of those tools and mastering their use is another competitive advantage that will pay dividends in the long run. Here are our best practices for using contracts like a savvy pro:


1.Ensure that the contract is enforceable

·         Parties must be capable of contracting.

·         Parties must consent to the agreement.

·         Contract must have a valid legal object.

·         Contract must be supported by sufficient consideration (not necessarily money).

2.Always have it in writing

·         Oral contracts are sometimes unenforceable by their nature.

·         Oral contracts are difficult to prove and costly to enforce.

3.Avoid using agreements found on the internet

·         Contracts are not one size fits all – they need to be customized, as most are for specific business situations, facts, and jurisdictions.

4.Read and understand your contracts

·         If you are uncertain, have them reviewed!

·         “I did not know what was in it” is no excuse under the law.

5.Have clear deliverables and scope so that all parties are on the same page so there is little left to chance and interpretation

·         This will help avoid “scope creep”, in a services contract, for example, where the other party expands the scope of services they want over time for the agreed upon payment terms.

6.Using contracts with other parties helps weed out the bad apples

·         If they are not comfortable committing to terms in writing and being held accountable then that could be a red flag.

·         Working out a contract can also give you an insight into how easy or perhaps frustrating they are to work with.

7.Make sure the contract covers all key aspects/responsibilities specific to the situation

·         If important sections are left out, then you could be left in no man’s land with no agreement as to what is to happen between the parties in certain situations.

8.Don’t be bullied by take it or leave it ultimatums

·         If you are uncomfortable with the terms of a contract, and the other party will not compromise, then it may be best to walk away than to sign a contract that may keep you up at night for its duration.

9.Just because it looks like boilerplate does not mean it is not important – it can hurt you and your business

·         Sometimes key provisions can be snuck into the most unexpected places of the contract.

10.Track your contracts and know when they expire so you can take necessary and timely actions

·         You may need to re-execute another contract for your benefit and protection or maybe it is time to explore options with new parties to fill that need.

11.Re-evaluate your contracts when a material change occurs on your end

12.Safeguard your contracts

·         Store executed physical and electronic copies in a few different safe places so you will always have access to a copy in the event one is lost or destroyed.

13.Know who you are contracting with

·         Contracts are important to protect you, AND it is important that the other party will honor and respect them. Make sure they are someone you want to do business with.



The Basics of Trademark Protection

A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others. A service mark is the same, but for services (not goods). All points made in reference to trademarks in this article are also applicable to service marks.

Trademark laws are primarily concerned with preventing marketplace confusion. Companies invest capital into marketing their products and services, and trademarking those marketing devices protects them from infringement. By obtaining trademark registrations, these companies add to their intellectual property portfolio and increase the company’s valuation. Two main concerns with marketplace confusion are that a consumer will mistakenly purchase a good or service, and that a company will use another’s mark and wrongfully benefit from the good will that the mark enjoys. 

Aside from the increase in company value, the main benefit of registering a trademark is the ability to prevent others from using the mark in a manner likely to create marketplace confusion. This provides protection against another company spoiling the good will that has been created in the mark, and prevents another company from taking part of the market share by wrongfully using the mark. A registered trademark creates a presumption of ownership in the registered owner of the mark, it places all other companies within the United States on constructive notice of the mark, after a period of time it makes the mark incontestable, and it may increase payment in a willful infringement case.

Ideally, registering a trademark would be enough to prevent infringement. In many cases it is, however, trademark owners must remain vigilant in enforcing their rights.  It is important for the owner of the mark to routinely check USPTO records and the marketplace for anyone who may be infringing their mark and take appropriate measures. Where some question exists about who has rights to a mark, the mark will be registered to the applicant who is able to show the earliest use in commerce. Additionally, in enforcing a mark, the owner must be aware of the class or classes in which their mark is registered. Remember, the ability to stop another from using a mark is dependent on the use of the mark being potentially confusing to consumers. Therefore, a mark registered and used in the apparel class will not likely prevent the same mark being used in the food and beverage class. Some marks, however, are so strong that they occupy the field in many classes. Consider Coca-Cola, for example. While typically associated with a beverage, the mark is so strong that the same mark would not likely be registered to a clothing company. 

Generally, in order to register a trademark the USPTO requires that the mark be used in commerce, the mark is not generic/descriptive, and not so close to another existing mark as to cause a likelihood of customer confusion in the marketplace. When an applicant intends to use the mark in commerce, but has not yet, the applicant can apply to reserve the mark. The more unusual a mark is, the more likely it is to be eligible for trademark. A mark that is merely descriptive or generic will be considered weak and might not be eligible for registration. A computer company would not likely succeed in trying to register “computer” as a trademark for one of their products since that merely describes the actual product, however “MacBook” is sufficiently unique and non-descriptive to allow the mark to be registered.

We will be diving deeper in specific aspects of trademark protection in the near future. Stay tuned!

Ten Things to Consider When Selecting an Entity

When starting a business, you must decide what form of business entity to establish. Depending on a number of factors, some of which hold greater weight than others, your choices might include: C-corporation, S-corporation, B-corporation, LLC, partnership, sole proprietorship, etc.

Entities are not one size fits all, so it is essential that you conduct a thorough analysis to identify which entity matches best with the ongoing needs and goals of your business.

Here are several key things to consider when selecting an entity for your business:

  1. What is the long-term exit strategy for the founders?
    • Will the business be acquired in five or 10 years?  
    • Will you pass the business on to children?
    • Will the business continue a noble cause indefinitely? (not-for-profit entity) 
  2. How will this venture be funded?
    • Will you self fund the venture? 
    • Will you target VCs, angel investors, or friends and family to invest funding?
    • Will you apply for grants/donations/public funding?  
  3. Does the entity need limited liability protection?
    • This depends on the type of business. Limited liability protection is essential for most businesses even if you aren’t selling sharp, dangerous objects. It does not hurt to have an extra layer of protection and other stakeholders (including investors) will insist upon it. 
    • It is useful so your personal assets will not be taken to pay debts of the company. Any kind of business can fall on hard financial times and into debt.  
  4. What is the expected financial performance the first 1-2 years?
    • Will the business be immediately profitable? 
    • Will it run at a loss for a period of time? 
  5. Do the founders need a unique arrangement between one another?
    • If profits will be divided according to ownership, then your entity choices are open. If not, then an LLC that allows for customization might be best.  
  6. Will all founders be active or will they be passive?
    • LLCs allow for some passive structures.
    • Corporations can have SOPs to reward and incentivize active founders. 
  7. How many owners will the business have and will any be non-US citizens?
    • S corps have restrictions on who can be a shareholder. 
  8. How much record keeping do the founders want to do/want to pay for?
    • Smaller consideration obviously, but sometimes people really care about this. They know they are going to have a tough time remembering to maintain the formalities of a corporation so they opt for an LLC. 
    • Record keeping can increase each year.  
  9. If the founders’ goals/plans for the venture change after a few years, can the chosen entity be converted or adjusted to align with these changes?
    • Perhaps you originally wanted to self-fund and now you want to raise capital from outside investors. Or vice versa. 
  10. Which state should be chosen for formation?
    • We usually look at either the state where the principal place of business will be, or a state like Delaware or Nevada with other advantages. 
    • Don’t just follow the crowd.

As you can see, you must take the time to analyze your business’ needs to determine the correct entity for it. 

Facing a Merger or Acquisition?

Optima Law Group specializes in assisting our clients with all legal aspects of their mergers and acquisitions. A merger occurs when two companies combine into one entity while an acquisition takes place when a company purchases another company. We’ve seen many different outcomes, successes and obstacles throughout theses processes and would like to offer the following advice to a company considering a merger or an acquisition.

  • Make sure your corporate records, contracts, and other documents are in order prior to due diligence: If your company is being acquired or merged, all this will be disclosed during due diligence. Best to make sure all is in order ahead of time so you do not have to scramble to fix problem areas during the transaction and risk looking unprepared, unprofessional, or overvalued to the other party.
  • Identify the optimal structure for the deal: There are many ways to structure a transaction. Work with your legal and tax advisors to identify the optimal structure possible for maximum financial benefit and minimal risk. The earlier the better.
  • Perform thorough due diligence on the other party: Due diligence is your chance to gather all necessary information about the other party not only for practical purposes in carrying out the transaction, but also to make sure you are comfortable with the other party and there are no skeletons hiding in their closet.
  • Make sure your management team maintains its focus through the entire process: During a merger or an acquisition, it is essential that management does not lose focus on the company’s day-to day operations. A manager’s time is often stretched thin during the process but it is essential to not let the current company’s operations slide.
  • Recognize geographic challenges: If the two companies’ headquarters are located in two different countries, this could result in language barriers, along with varying performance motivators and legal differences. It is important to recognize these obstacles so strategies can be put into place to deal with them.
  • Identify cultural differences: If two companies have varying cultures, such as flexible work schedules, communication policies, dress code polices, etc., this can create problems during a merger or acquisition. Again, it is important to distinguish these differences so they can be dealt with early in the process.
  • Involve key personnel from the early stages: It is important to involve key personnel early in the process, including human professionals who are tuned into the companies’ cultures and talent pools. However, timing is critical and will depend on the circumstances. It is also a mistake for a company being acquired to let the cat out of the bag too early in the process.
  • Take an intellectual property inventory: The seller needs to provide the acquirer with complete list of its IP property, including patents, trademarks, licenses, software, third party contacts, domain names, social media accounts, etc. since these are some of the most valuable assets and can drive much of the valuation of the deal.
  • Hire proper consultants and an experienced legal team: it is essential to hire the proper consultants and legal team during a merger or acquisition since a company’s business leaders may not possess the specialized knowledge or skills necessary to successfully guide the company through the process. A merger or acquisition can also feel like a second job due to the time required. Allow your team to shoulder some of the load. Involve them early before a Letter of Intent (LOI), Term Sheet or other preliminary document is in place so all the necessary issues are addressed for as smooth a transaction as possible.
  • Make sure the final deal documents are on point: Excellent deal documents will carry out the parties’ intent and agreement on all key issues, but also serve as a roadmap for the future.A year after the transaction is complete and a dispute arises as to a liability, milestone payment, or the like, the deal documents should clearly spell out to the parties what is supposed to happen. Clear deal documents will help prevent litigation and hard feelings down the road.