Saro's bLAWg

A space to share my insights and musings on legal, business and political developments impacting startups, small businesses and investors. And some random thoughts too.

How Will the JOBS Act help you raise capital for your small business?

Thursday’s signing of the JOBS Act (more formally known as the Jumpstart our Business Startups Act) by President Obama marks the most significant milestone in the brief history of the crowdfunding movement, but how will the new law make it easier for small businesses to raise capital? 

Does the crowdfunding exemption apply to me? 
- If you (the issuer of the securities) are a U.S. company;
- If you raise up to $1 million in a 12-month period;
- During that period, you raise up to $2,000 from each investor or 5% of that investor’s annual income or net worth (if it’s less than $100,000), or 10% of the investor’s annual income or net worth (if it’s more than $100,000).

If you are able to meet all of these criteria, congratulations, the crowdfunding exemption applies to you!

How do I go about raising the money?  Can I collect it on my own?

- No, you must use a crowdfunding website that is registered with the SEC to conduct your company’s crowdfunding offering.  This is a niche that will fill rapidly now that this bill has been signed into law.

What information do I have to disclose to my investors?
- Your company’s
 name, legal status, physical address, and website address.
- The names of the directors and officers and each person holding more than 20% of the shares of your company.
- A description of your business and the anticipated business plan of your company.
- A description of the purpose and intended use of the proceeds of the offering.
- The amount you plan to raise, the deadline to reach that amount, and regular updates on the progress of reaching your goal.
- The price of the securities you are selling to the public.
- A description of the ownership/capital structure of the company.
- After the offering, you must file annual reports with the SEC and provide investors with reports of the results of your operations and financial statements.

Is there anything I am specifically not permitted to do during my company’s crowdfunding offering?
- You cannot advertise the terms of your offering, other than referring potential investors to your crowdfunding website.
- You cannot pay anyone to promote your campaign without taking the steps required by the SEC to ensure that this person discloses their compensation.

What if I am not open or am dishonest to my investors?
- Your investors can sue you for any material misstatements or ommissions in your disclosure and try to recover the amount they paid for their securities plus interest (less any income they received from the securities), or, if they sold the securities, they can sue you for damages.

When can my investors sell their shares in my company? 
- Investors must wait to sell their shares until one year from the date of purchase except if they are selling the shares 1) to the company; 2) to an accredited investor; 3) to a family member of the purchaser; 4) in a registered offering (e.g., an IPO); or 5) in connection with the death or divorce of the purchaser.


Everything you wanted to know about NDAs (but were afraid to ask)

Whether you are entering into negotiations with a developer or courting an investor interested in your business, one of the first documents you’ll need to put together to sign is a non-disclosure agreement (NDA).  Simply put, an NDA describes the confidential information (CI) that the parties wish to share with each other and provides that the parties cannot disclose this CI to third parties (with certain exceptions).

The following is a laundry list of certain material terms that are typically included in an NDA, with my commentary in square brackets.  Keep in mind that an NDA can be used in a variety of situations, and its material terms can vary depending on the sensitivity of the CI and the circumstances under which it is being disclosed (i.e., is the receiving party (RP) a potential investor? developer? consultant?).  Note, that this should not be considered an exhaustive list of all the material terms and is not meant to cover NDAs for all circumstances.

  • Term (length of confidentiality period) [typically 12 to 24 months]
  • Definition of CI [should be defined broadly to cover all non-public information]

  •  Exceptions to CI definition [includes information: in the possession of the RP; independently developed by the RP; in the public domain; rightfully obtained by a third party] 
  •  Permitted disclosure [RP should be allowed to disclose the CI to its attorneys, accountants and other advisors]
  • Disclosure required by law or to a governmental authority [RP should be allowed to disclose CI if required by law]
  • Non-solicitation of employees [non-solicitation period should not be longer than the term of the NDA; the non-solicit should not apply to the hiring of a person who responds to a non-targeted general solicitation (e.g., a newspaper ad)]
  • No representations and warranties by the disclosing party (DP) [DP is excluded from any liability and is not responsible for any inaccuracies in the CI. This is fairly standard.]

Whether you are the DP or the RP, you should keep in mind that the most effective NDAs properly balance the competing interests of both parties by ensuring that the CI is properly protected while providing the RP with the flexibility it needs to do what it needs to do, whether performing due diligence, developing software or providing consulting services.  


The Potential Perils of Crowdfunding

Whether you are just launching your business or are a small business looking to grow, raising capital in our current economic climate is a difficult task.  It’s no wonder that some companies have looked to crowdfunding, a financial model where capital is raised through small donations made by many people, usually over the Internet, as a viable way to raise capital for their business.  Certain small businesses (such as this Pittsburgh restaurant) have successfully raised capital through crowdfunding.  Because these contributions are donations from friends, family members, enthusiasts or loyal customers looking to help you fund your next project, rather than investments in your business, they aren’t subject to regulatory oversight.

However, some companies are attempting to capitalize on the populist appeal of the crowdfunding movement by offering a platform for small businesses to raise actual equity capital through crowdfunding, and are learning the hard way that the crowdfunding model isn’t so easily transferable to raising equity.

Just ask ProFounder, which recently caught the attention of California securities regulators and was forced to abandon its original business model of helping small businesses raise capital by selling shares in those businesses to interested online investors.  According to the regulator, ProFounder was improperly acting as a securities broker without a license to do so.  As a result, the regulator required ProFounder to cease its securities transactions in California unless it obtained a broker/dealer license.  

And what if you’re a small business that knowingly or unknowingly raised capital through an unlicensed broker dealer? Congratulations, you may have violated federal and state securities laws! The regulators have some lovely parting gifts for you backstage, including a rescission right for investors (i.e., they get their money back), injunctive relief, fines and penalties, and possible criminal prosecution.  

Although crowdfunding is an appropriate and effective fundraising tool for certain individuals and businesses (it seems to work particularly well for artists, musicians and designers), it raises a number of red flags for start-ups and small businesses trying to raise equity capital.  But, as I discussed in this previous post, a bill has been working its way through Congress that could provide a real chance for crowdfunding as a means for businesses to raise limited amounts of equity capital.  Times, they may be a-changin’.  Until then, we’ll all have to stick to raising equity the old-fashioned way.

Startup 101 - Mirror Mirror on the Wall, Who’s the Fairest Business Entity Of All?

One of the first critical decisions that a business owner must make when starting a business venture is to choose a form of  entity that best fits their business.  Should you form a c-corporation? s-corporation? limited liability company?  This is a decision that should not be taken lightly, as there are a number of tax, liability, governance, administrative, fundraising and business implications that should be considered when forming a business entity.   In this post I’ll discuss some of the advantages and disadvantages of using c-corporations, s-corporations and limited liability companies as the legal entity for your business.  But, you can also take a look at this handy chart that compares various business entities, and for those of you in New York, here is an informative description of each of the business entities available in the Empire State.


- easy and inexpensive to form
- flexible capital structure and equity compensation
- stockholder liability is generally limited to the amount they paid for their stock

- corporate formalities: need to hold scheduled meetings or obtain written consents for major actions, e.g. entering into a new lease or other major contract, obtaining funding, issuing equity, etc.
- double taxation: corporations are taxed on the taxable income they earn and shareholders are taxed when they receive dividends (i.e., distribution of profits)


- has all the advantages of a c-corporation
- s-corp is a “pass-through entity” and does not pay federal tax on income it generates; tax liability is passed through to shareholders
- favorable tax advantages (compared to an LLC) when compensating employees

- limits on ownership (must have 100 shareholders or less, must be U.S. citizen or resident, exempt organization and certain trusts)
- limited capital structure - only one class of stock (no preferred stock)
- corporate formalities (same as c-corp)
- s-corp. income may be subject to local or state tax

Limited Liability Company

- informal and flexible governance (LLC statute generally defers to the LLC agreement)
- can have multiple classes of equity
- is a pass-through entity for federal tax purposes- it can be treated as a corporation or as a partnership
- if a single member LLC, it can be treated as a sole proprietorship but with the benefit of limited liability protection
- if a multiple member LLC, it can be taxed as a partnership or as a corporation
- a member has no liability except to the extent of their investment, even if they actively participate in or control the LLC’s management
- both members and managers may be indemnified by the LLC

- expensive formation costs - certain states, such as NY, have a publication requirement (i.e., must place a notice in two publications which can cost well over $1,000)
- operating agreements are complicated documents that should be drafted by an attorney
- certain tax disadvantages if you have employees
- venture firms and institutional investors generally don’t like to invest in LLCs

There are many factors to consider when forming your business entity.  So, before you make your decision think about the tax, liability and governance considerations mentioned above as well as your budgetary constraints.

A step forward for crowdfunding (cont’d)

Here is a handy little chart from John Tozzi at BloombergBusinessweek highlighting the differences between current securities laws as they apply to crowdfunding vs. the proposed rules in the bill that the U.S. House recently passed (see my previous post for more info on the bill).

A step forward for crowdfunding

The crowdfunding movement took another step forward last week with the U.S. House of Representatives passing the Entrepreneur Access to Capital Act.  This bill proposes modest changes to securities laws and will ease many restrictions that have prevented small businesses from raising capital. 

Specifically, the bill will permit businesses to raise up to $1 million annually (or $2 million for those providing audited financials) without registering their securities with the SEC.   Investors will be permitted to annually invest up to $10,000 or 10% of the investor’s annual income, whichever is less.  In addition, these crowdfunders will be excluded from the 500 shareholder cap that, once reached, requires private companies to register their securities with the SEC.

How will this bill effect small businesses?  Currently, crowdfunding is effectively a donation-based resource where individuals provide cash to a business and, in return, get a token gift, priority access to the company’s product or simply warm, fuzzy feeling of having helped out a company you like or believe in. By permitting companies to issue securities to its crowdfunding investors, businesses will be able to raise equity without the expense and hassle associated with public offerings and will have access to a larger pool of investors, rather than just those that are deemed “accredited” by the SEC.

 Despite the current partisan political climate this bill was passed overwhelmingly with a vote of 407 – 17, a telling sign that the government is taking crowdfunding seriously as a means of raising capital and helping small business grow and succeed.  It’s now up to the Senate.  Fingers firmly crossed and stay tuned…

Startup 101 - Who You Gonna Call? (Hint: Not Ghostbusters)

Running a successful business requires more than just a compelling product or service, some serious business savvy and healthy doses of patience and persistence.  You may know the ins and outs of your business and industry, but how much do you know about the laws and regulations that may impact your business and govern its activities? 

There is no shortage of legal resources available to business owners online and elsewhere.  Services like Legal Zoom will help you whip up basic legal documents in no time.  While this works for some components of some businesses, many companies miss out on and overlook legal and business considerations that end up costing them both significant money and real opportunities in the long run.

Hiring an experienced attorney who understands the unique needs and goals of your business enables a more nuanced and personalized approach to forming, building and growing your business.  The right attorney will help you determine the type of business entity that is best suited for you and your business, whether a C-corporation, an S-corporation, a limited liability company, or otherwise.  He or she will also help you establish all governing agreements, will serve as your advocate in all negotiations, will make sure that you comply with all legal and regulatory requirements and prevent your business from making any legal oversights or mistakes early on that will cost you in the long run.

But where do you find a reliable attorney you can trust and who is right for you and your business? An obvious starting point is within your own network.  Odds are you have a friend, colleague or family member who is an attorney or knows one to recommend. 

Beyond your own network, small business and entrepreneurial networking events are great places to meet potential legal advisors as well as prospective partners and investors and are also great opportunities to learn about the exciting things other entrepreneurs and business owners in your area are working on.  Many industry groups have their own networking groups and events while other events cater to small business owners and startups across all industries.  Still other events bring people together around other shared topics of interest through lectures, panels and pitch presentations. 

Legal and other service professionals attend these events looking to attract new clients and they provide excellent opportunities to meet potential attorneys in person to get a feel for who they are, how they work and whether they’d be a good fit for you and your business.   Smart service professionals understand that being brought into the fold as a member of the team at a small business or start-up requires both legal expertise and a personal connection that builds trust and creates the right fit for the company and the service provider. 

Once you’ve met or been put in touch with an attorney you feel could be a match for you and your business, you can learn more about them, their practice and their track record by visiting their website, asking to speak to one of their current clients as a reference and checking out their profiles on websites such as or

Finding an attorney to work with isn’t all that different than dating; In both cases you’re looking for the same thing - a good match and the right fit.  Although the internet can be a useful tool to find potential match, it can’t be a substitute for meeting someone in person to see if they meet your needs and are the right fit.

Startup 101 - Class is in Session

One of my clients made a wise suggestion that I use this space to provide clients and readers with answers to some common questions that startups and small businesses encounter when they’re starting their business.  Well, as the old saying goes, the client is always right.  Well, almost always, but that’s another post.  So this week I’m starting a series of posts that will answer some common, yet vexing, questions facing small business owners and startups, such as: where do I find an attorney? what kind of business entity should I form? what type of agreements should I enter into with my co-founders? how could it possibly snow in New York in October?

The first post should be up in a day or so.  Don’t touch that dial!

What is good for startups is good for America

Last week’s Economist discusses the role of startups as employment generators within the U.S. economy.  Since the financial crisis of 2008, the number of new startups has dropped significantly, and with it the rate of job creation.  In its effort to get the country’s entrepreneurial mojo back, President Obama’s advisory Jobs Council presented a number of recommendations specifically designed to help startups grow and flourish, including:

- ease regulations that make it difficult for startups to raise capital;

- permit small investors to use crowdfunding to invest in startups (as opposed to only donate to them);

- lower the barriers to, and the costs of, IPOs; and

- streamline the Small Business Administration’s application process.

The full list of recommendations can be found here

The challenges entrepreneurs face in the current economic climate are many and tellingly many of them are linked to access (or lack thereof) to capital.  Success in the new economy is most frequently paired with creative and innovative thought that is part and parcel to entrepreneurs and the businesses they create.  The easier it becomes for entrepreneurs to raise the capital they need to get their promising enterprises off the ground and thriving, the more compelling and powerful an employment driver they will become and the better equipped they will be to do their part in pulling the country out of its stubborn economic slump.

The Myth of the “Student-Athlete”

There’s a fantastic article by Taylor Branch in the Atlantic on the NCAA and its shameful treatment of “student-athletes.”  Taylor makes a compelling argument that student-athletes should be paid by the institutions for which they generate billions of dollars.  

Interestingly, the term “student-athlete” wasn’t coined to describe scholars who juggle their studies with their athletic achievements, instead it was created as a legal defense by the NCAA to avoid workers’ compensation insurance claims for injured football players.

You can read the article in its entirety here.