Optima Law Group Blog

2016 SEC Crackdown

2016 proved to be a busy year for the U.S. Securities and Exchange Commission (SEC) – breaking records for filed enforcement actions in many areas and allocating the most money to whistleblowers in a single year. Accordingly, it is more important than ever to ensure compliance with applicable securities laws when raising capital and engaging in other securities related transactions. 
The results can be attributed to former SEC Chair Mary Jo White’s promise to make big companies and executives as well as minor violators accountable for illegal actions, coupled with new data analytics implemented in 2016 used to uncover fraud.
2016 was also a year of firsts for the SEC as the following violations were never charged before then:
a firm solely for failing to file Suspicious Activity Reports when appropriate 
an audit firm for auditor independence failures predicated on close personal relationships with audit clients 
municipal advisors for violating the fiduciary duty for municipal advisors created by the 2010 Dodd-Frank Act and the municipal advisor antifraud provisions of the Dodd-Frank Act
a private equity adviser for acting as an unregistered broker; and an issuer of retail structured notes for misstatements and omissions
Other areas the SEC focused on in 2016 include:
Combating Financial Fraud and Enhancing Issuer Disclosure
Holding Gatekeepers Accountable
Ensuring Fairness Among Market Participants
Rooting Out Insider Trading Schemes Through Innovative Uses of Data and Analytics
Uncovering Misconduct by Investment Advisers and Investment Companies
Fighting Market Manipulation and Microcap Fraud
Halting International and Affinity-Based Investment Frauds
Policing the Public Finance Markets
Cracking Down on Misconduct Involving Complex Financial Instruments
Combating Foreign Corrupt Practices
Standing Up for Whistleblowers
Demanding Admissions in Important Cases Enhancing Public Accountability
Successful Litigation
With the SEC’s compliance enforcement practices increasing and rigorous prosecution of violators, it is imperative that businesses stay compliant with the ever-changing standards.  
For more information please visit the SEC’s website: https://www.sec.gov/news/pressrelease/2016-212.html

The Dangers of Waiting Too Long to File Your Patent Application

You are an inventor, and you think you have developed the NEXT BIG THINGTM. You are sure that your product will be popular, and so you think you will want to file a patent to protect it eventually, but you are less sure that you want to file for a patent right now. You have spoken with friends and poked around online and you think you have a pretty good idea of when you would like to file your application. While lot of the “advice” in this area isn’t inherently wrong, it does tend to gloss over or ignore many of the dangers that are associated with waiting too long to file a patent application. Below, we attempt to clearly articulate the biggest problems that can arise if you wait too long to file your application.

1.       Getting scooped.

  • Under the new “first inventor to file” system in the United States, if someone independently comes up with your invention, or some critical part of it, they will be free to file for a patent of their own. If they do so, not only will it prevent you from patenting your idea, it will prevent you from profiting from it AT ALL. This is obviously the worst case scenario, so you need to ask yourself, what are the odds that no one else IN THE WORLD is trying to solve the same problem that you are?

2.       The Ticking Clock.

  • If you want to earn an enforceable patent in the United States, you must file your application within one year of the day you publically disclose your invention. The problem is that it is very easy to accidentally disclose your idea.
  • Have you described it in a printed publication, used it in public, or offered to sell it? All of these will likely start the 1-year clock. The important thing to remember is that whether or not something counts as a disclosure is very “fact dependent.” Did your Kickstarter campaign count as a sale or offer to sell? What about the market research you did using your prototype? Or what about your discussions with a potential manufacturing partner? Depending on the facts, any or all of these scenarios can start the clock. For this reason, it is always a good idea to call a patent attorney before you tell anyone new about your invention.

3.       Global rights.

  • Unlike the United States, most foreign countries do not have a one-year grace period following a public disclosure. If you disclose your idea, even accidentally, before you file a patent application, you will NEVER be able to protect that invention in those countries. While you can certainly still try to sell your invention in those foreign markets, there will be nothing to stop your local competition from swooping in and knocking off your product.

While there are certainly good reasons to wait before filing a patent application, it can be helpful to know the risks involved in doing so. The good news is that there are a number of options available, beyond a standard Utility Patent Application, which can help you avoid these problems without a substantial upfront cost. A good patent attorney will be happy to walk through your options and help you avoid the potential pitfalls described above. While it may still be in your best interest to delay in filing your patent application, it is never too early to fully explore your options.


(Employee) Stock Option Plan



A stock option is a benefit awarded by a company in the form of an option to another party, typically an employee or consultant, to buy stock in the company at a stated fixed price within the predetermined terms and schedule of the plan or upon meeting certain corporate goals.

Simplified example: An employee is given 100 options to purchase 100 shares at $10 per share for a period of one year starting in three years. If after three years the stock price has risen, say to $15, the employee can exercise the options and purchase the shares at the exercise price and realize a gain of $500 upon sale of stock, or can choose to hold the stock for larger potential future gains.


Basic terminology to know:

  • Exercise: is the payment of the Exercise price of an option and the subsequent issue of the share(s) subject to the option
  • Exercise price (strike price): the specified contract price at which the holder can buy the share(s)
  • Spread: difference between exercise price and market value at the time of exercise
  • Option term: the period or duration of time the employee can hold the option before its expiration or exercise of the option
  • Vesting period: the required time that a holder must wait before a holder can exercise an option


  • Attracts talented employees for the long term: Stock options can be gifted or granted with employment packages to attract talented individuals and incentivize them to perform well while also ensuring that they share a common interest with shareholders in boosting the company’s stock value and staying with the company at least until such time that they are able to exercise the option. Offering stock options can be especially appealing to startups who do not have the financial means to offer large salaries at the beginning of employment as it allows them to be competitive with established companies. Stock options are not just for employees – they can be used to compensate service providers, contractors and attract talented board members.


  • Choosing shares and options: There is some flexibility when it comes to deciding how many shares and options you want to offer employees. Typically, 5% to 20 % of outstanding shares are set aside for employee stock options, but it is ultimately up to the company’s board and / or equity holders to determine the percentage. There are two kinds of stock options: incentive stock options (ISOs – reserved for employees) and nonqualified stock options (NSOs – used for all others).  The difference between the two is the tax benefit of ISOs in which taxation can be deferred and may potentially qualify for capital gains rates rather than normal income tax rates. A stock option plan can contain other tools as well that the board may use instead of stock options, such as Stock Appreciation Rights and Restricted Stock and outright stock grants. A good stock option plan will provide the board with tools to fit any situation.


  • Determine particulars: A party or parties should be assigned the responsibility of overseeing the deployment of the stock option plan, and the vesting schedule should also be determined as well as the amount of the exercise price and transferability specifics, typically by the Board.


  • Dilution: The main disadvantage of offering stock option plans to employees is the possibility of dilution of existing shareholders. This can happen when employees exercise their options causing the number of existing shares to increase which thus, decreases the percentage ownership provided by each share.


  • Address end of employment: A good stock option plan will clearly address what happens to the options in the event the employee is terminated, voluntarily leaves, passes away, and like situations. You don’t want options continuing to vest after an employee leaves or is terminated.


  • Compliance: The issuance of options and underlying shares requires compliance with federal and state corporate and securities laws; therefore experienced corporate legal counsel should be consulted throughout the entire process.


  • Transferability: Most stock option plans do not allow for the transfer of options during the life of the employee. The transferability of the stock resulting from the exercise of the stock option will depend upon factors including whether the company is public or private. Experienced legal counsel will be helpful with these issues. 


For more detailed information on the taxation of stock options click on this link: http://www.sdbizadv.com/blog/taxation-of-employee-stock-options/41795



California to Allow Finders

A finder is an individual or small entity, controlled by both state and federal regulations, who acts as an intermediary to promote the sale of securities; in other words, they help you find money. However, these individuals or small entities are required to be licensed broker-dealers, registered by the federal government and often states. It is acknowledged that many individuals and small businesses act as finders in California even without being licensed and registered with the state. This poses liability for all involved and violators can be subject to administrative, civil and criminal penalties. Additionally, use of a finder can negatively impact current and future fundraising efforts in other ways. 

The current landscape can back companies, who need capital and who have had no luck raising capital on their own, into a corner: “Do I break the law and risk its consequences by working with a finder or do I do nothing and try and get by without additional capital?”

The Corporations Committee (State Bar of CA Business Law Section) whose purpose is to examine and then advocate needed changes to the California Corporations Code to promote efficiency, has found that the services finders provide are extremely beneficial in providing assistance to small to mid-sized businesses, which would otherwise be unable to obtain sufficient capital to operate. Unfortunately, it can also be costly for both parties – the finder to become a licensed broker-dealer, and for the individual or business to hire a licensed broker-dealer. This can contribute to one of the many reasons finders do not comply with state regulations. California and federal law agree that a finder’s activity may be lawful or unlawful depending on the degree of involvement or compensation received, yet there is no clear distinction as to what degree constitutes illegal activity, which leaves much to interpretation in the Code for finders or persons acting outside the narrow scope of the definition of a “broker-dealer”. For these reasons, the Committee would like to amend portions of the Corporate Securities Law of 1968 Section 25004(a), which defines a broker-dealer, to:

(1) Provide transparency among issuers, finders and investors which would help to mitigate liability and;

(2) Recognize the benefits finders provide.

This is a very interesting development that could change the fundraising landscape. If enacted, the amendment would help to improve efficiency and effectiveness in practice by establishing requirements based upon the current legal framework for persons acting as finders in connection with securities transactions who fall outside of the definition of a broker-dealer. The Proposal would create a safe harbor, which would exempt from the definition of a broker-dealer persons acting in compliance with the Proposal’s requirements, thereby exempting such persons from the certification and other requirements of Code section 25210 which states it is unlawful for a broker-dealer to conduct business in California without a certificate from the California Department of Corporations. Finally, it would provide a mechanism to furnish individuals and small business entities with capital, offer investor protection, and contribute to a financially stable ecosystem.

Until this proposed amendment is enacted, it remains illegal to work with finders in California. If you are considering using a finder or have any questions about this nuanced subject, please give us a call at 858-964-4697 or shoot us an email at info@optimalawgroup.com. We would love to hear from you. There will be more developments in the future and we will keep you updated.

The proposed text of the amendment can be found here: 


Business Owner’s Guide to the Defend Trade Secrets Act of 2016

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act (“DTSA”), an amendment to the Federal Economic Espionage Act of 1996, which created a federal civil cause of action for trade secret misappropriation. Federal jurisdiction carries with it many benefits, not least of which is establishing a nationally applicable body of law regarding trade secrets. Individual states have long enforced their versions of the Uniform Trade Secrets Act (“UTSA”), but significant variations exist among the jurisdictions. DTSA has been touted as a way to introduce more predictability into trade secret law. It is still too soon to know whether this hope will be born out. Importantly, DTSA does not preempt existing state-based trade secret law. To the extent that differences between the state and federal law persist, protections afforded by the laws will also differ. As such, it is likely that state trade secret law and DTSA will evolve as parallel laws. So, what do you need to know as a business owner to protect your trade secrets in light of this new law? Read on.


The Basics

For a more thorough look at what a trade secret is, check out our blog from October 2016: http://www.optimalawgroup.com/blog/trade-secrets. What follows is a quick, high-level look at trade secrets. Trade secrets are legally protectable information and can include a formula, pattern, compilation, program, device, method, technique, or process. The common definition of a trade secret has three parts: (1) information; (2) reasonable measures taken to protect the information; and (3) which derives independent economic value from not being generally known. Misappropriation of a trade secret commonly occurs in one of two ways: (1) an individual personally acquires a trade secret by improper means; or (2) an individual publishes a trade secret and he knows that the person who gave him the information acquired it through improper means or under circumstances giving rise to a duty to maintain its secrecy or limit its use. "Improper means" include theft, fraud, bribery, industrial espionage, breaching a contractual duty to keep something confidential, or inducing others to breach that duty.



Much of DTSA protections are on track with UTSA. For example, DTSA provides for injunctive relief for actual or threatened misappropriation, monetary damages for actual losses and unjust enrichment, and exemplary damages for willful and malicious misappropriation – similar to UTSA. One marked departure, however, is the creation of an ex parte seizure provision allowing courts to seize property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” This relief is only available in extraordinary situations and is guarded by steep penalties for any plaintiff willing to abuse it. But, it provides a mechanism to prevent the destruction or concealment of trade secrets due to advanced notice to the defendant.



As a business owner, you need to know that DTSA has placed an affirmative obligation on companies like yours. Namely, you will need to include an advisement to employees about whistleblower protections afforded by DTSA in documents governing the use of trade secrets or other confidential information. Failure to provide this required disclosure limits the plaintiff’s ability to recover exemplary damages and attorney’s fees in instances of wrongful disclosure. We recommend that you review all your contracts, but pay special attention to employment agreements, consulting agreements, non-disclosure agreements, and proprietary rights agreements. These are the most likely places you will need to include the disclosures discussed above and will likely require modifications. We have already drafted the language required to comply with the law and we would love to work with you to bring your agreements into compliance.