Category: Business & Corporate Law

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Business & Corporate Law

We Can See Your Priva…cy Policy

We Can See Your Priva…cy Policy

JARED STIPELMAN
JARED STIPELMAN

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Just about every business client that we counsel maintains an active website. These help drive user engagement, deliver news and updates on interesting products, and drive significant new business. Depending on how the website is curated, however, that extra business may end up being for us greedy lawyers and not for our well-intentioned client. Some of the most common issues we see are:

  • ADA Compliance – As you may know from your brick-and-mortar locations, the American with Disabilities Act (the “ADA”) requires all “places of public accommodation” to be accessible to those with physical limitations. What you may not know is that websites are generally viewed as “public accommodations.” This means that your website needs to make reasonable allowances for people with physical limitations, most notably those suffering from visual impairment (so make sure that your website contains text-reading functionality) and hearing impairment (make sure that your website contains subtitles for audio elements). Initial ADA violations can carry penalties of $75,000, and there is a growing cottage industry of attorneys that fish small business websites for notice of potential violations and quick settlements.

  • Privacy Laws – The years-long rollout of the European Union’s General Data Protection Regulation (the “GDPR”) is largely complete. While you may think that, for instance, as a small retail business based in the United States, your website would be exempt from the GDPR, you might be in for an unfortunate surprise. The GDPR applies to the website of any company that potentially (i) offers goods and services to an EU citizen, or (ii) monitors the behavior (that is, collects data) of any EU citizen (which is to say, nearly every company). The GDPR imposes several specific obligations on businesses that host websites, largely centering on transparency with the use of visitor data. The penalties for violations are measured as a percentage of your business profits and can be intimidating. Be sure that your privacy policies and terms and conditions contain the proper disclosures and opt-outs. Further complicating matters, California and Virginia have recently implemented their own privacy laws, and Colorado’s version will follow suit in July. Although these laws are not identical, similar strategies can keep you on the right side of each.

  • Copyright Trolls – While copyright law is over three hundred years old, and copyright trolls (entities that file lawsuits based on weak rights and questionable claims) only a few days younger, the widespread adoption of image-searching software has turbocharged copyright trolling directed towards throw-away images on websites—truly the world is their bridge. The incentives of copyright infringement are such that even innocent acts of infringement will set you back several thousand dollars, so make sure everything you display on your website is original work or subject to a valid license.

As always, we at Milgrom Law are happy to review your website to ensure full compliance with the law. While nobody (except my colleagues) enjoys looking at terms of service, an hour of prevention is worth ten hours of cure.

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ABOUT THE AUTHOR

JARED STIPELMAN
JARED STIPELMAN

OF COUNSEL

Jared is a New York corporate attorney specializing in regulatory compliance. While active in several fields, Jared focuses his practice on employee benefits, trademark prosecution, and business acquisitions, particularly in the fields of e-commerce and health and beauty. He also provides pro bono counsel to charities devoted to animal welfare and responsible land use and has published writings on matters ranging from anti-counterfeiting operations to the trademark doctrine of foreign equivalents.

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Uncategorized

Depositing Cryptocurrency Assets: A Cautionary Tale on Clickwrap Agreements

Earlier this year, a bankruptcy court in the Southern District of New York issued a startling ruling in the bankruptcy case of In re Celsius Network LLC, et al., Case No. 22-10964 (MG). The dispute involved cryptocurrency owners who deposited their assets (such as stablecoins, non-fungible tokens (NFTs), central bank currencies, and security tokens) into Celsius’s “Earn Accounts” that allowed Celsius to use those funds to generate yields across various “on-chain” and “off-chain” investment strategies. At the time Celsius filed bankruptcy, there were more than 600,000 Earn Account holders affected. Their assets totaled approximately $4.2 billion.

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Mike Richardson May 25, 2023
Artificial Intelligence

Will Artificial Intelligence Kill All the Lawyers?

A recent article in the New York Times reminded me that more than ten years ago, lawyers were considered an endangered occupational species as our livelihoods were the most at risk from advances in artificial intelligence (AI).
Has AI been reading Shakespeare’s Henry VI, Part 2, Act IV, Scene 2 and trying to kill us?
Maybe. But I confidently predict that many of us will survive.

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Charles Knight May 8, 2023
Business & Corporate Law

We Can See Your Priva…cy Policy

Just about every business client that we counsel maintains an active website. These help drive user engagement, deliver news and updates on interesting products, and drive significant new business. Depending on how the website is curated, however, that extra business may end up being for us greedy lawyers and not for our well-intentioned client.

Read More »
Jared Stipelman April 24, 2023
Categories
Business & Corporate Law

Recent Crypto Enforcement Actions and the Brewing Battle Between Regulators for Jurisdiction Over Digital Assets

Recent Crypto Enforcement Actions and the Brewing Battle Between Regulators for Jurisdiction Over Digital Assets

Rachel Yeates

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Readers of my last, irresistibly juicy blog post, “First-Ever Court Ruling Means Your Utility Token May Be an Unregistered Security,” know that the Securities and Exchange Commission (“SEC”) recently landed a blow against blockchain-based media company LBRY when a district court in New Hampshire held that LBRY’s native “utility token,” LBC, was an unregistered security.  

 Finally, we had a clear answer. [1] Hurray! Digital assets are securities, and now we can all get ice cream and start suing people for securities fraud.  

Sadly, things turned out not to be that clean after all. Read on to find out what the regulators have been up to in the crypto space and about the ongoing fog that surrounds what is and is not a security.  

Recent CFTC Enforcement Actions

The Commodity Futures Trading Commission (“CFTC”) has recently filed charges against FTX’s Nishad Singh for fraud and has sued an individual who manipulated digital asset exchange Mango Markets to artificially inflate leveraged positions in swap contracts on the platform.[2] [3] The agency also filed charges in California related to bitcoin (BTC)- and ether (ETH)-related fraud. [4] More on that later.  

Recent SEC Enforcement Actions 

The SEC’s enforcement activities of late have ramped up significantly. In the last three months, the SEC has: 

  • Sued digital asset exchange Kraken for selling unregistered securities (Kraken’s staking-as-a-service program); [5] 
  • Sued crypto-lender Genesis and crypto-exchange Gemini for the same thing; [6] 
  • Charged NBA star Paul Pierce for making misleading statements about EthereumMax assets; [7] and
  • Initiated fraud actions against Terraform Labs (best known for its stablecoin), FTX principal Nishad Singh, and BKCoin (an investment adviser). [8] [9] [10]  

One crypto enthusiast has described this recent campaign as an “SEC blitzkrieg,” a choice of words that enlivens the drabness of federal bureaucracy in a way that I, for one, appreciate and will attempt to emulate herein.  

But while these knight-errant agencies roam the land of crypto righting wrongs to maintain the integrity of the financial markets and protect retail consumers, recent signals from both the SEC and the CFTC indicate that all may not be well in government Camelot. 

ETH and Stablecoins Are Definitely Securities… 

Enter SEC Chair Gary Gensler. In a February 23, 2023, interview with New York Magazine, Gensler asserted that “[e]verything other than bitcoin” is a security.[11] The interviewer elaborated Gensler’s position, characterizing it this way: “pretty much every sort of crypto transaction already falls under the SEC’s jurisdiction except spot transactions in bitcoin itself and the actual purchase or sale of goods or services with cryptocurrencies.” And, in late February news broke that the SEC was in talks with the company behind Binance’s stablecoin regarding potential securities violations.[12] The CEO has vowed to defend its position that stablecoins are not commodities in court if necessary. Sounds like the SEC may be about to take the field. 

…No, Wait, ETH and Stablecoins Are Definitely Commodities 

And over here on the left we have CFTC Chair Rostin Behnam, weighing in at, honestly, I’m not going to venture a guess, but he could definitely take me in a fight. [13]

At a March 8, 2023, hearing before the Senate Agriculture Committee, Behnam stated that the CFTC considered BTC, ETH, and all stablecoins to be commodities, thereby placing them within its jurisdiction and outside the purview of the SEC. This isn’t, in fact, a new position for the CFTC, just a more vocal one. Back in 2021, the CFTC charged Tether on the basis that its stablecoin, USDt, was a commodity. [14] Similarly, in its December 2022 suit against FTX founder Sam Bankman-Fried, the CFTC took the position that BTC, ETH, and USDt were commodities under the Commodity Exchange Act. [15] The CFTC reiterated its position on BTC and ETH in its most recent digital asset suit, filed last month, in which it charged a California-based company and its CEO for allegedly running a Ponzi scheme. [16] 

A Splintered Landscape 

The public wrangling between the two agencies creates an uncertain regulatory framework. The issue could be resolved through legislation, but the likelihood of such a bill passing in the near future is slim. At this time, the most likely outcome looks like a patchwork of court decisions across the country, which may in time trend toward a case law consensus that settles the issue.

[1] Or did we? Stay tuned for SEC vs. Ripple Labs, now pending before a court in the Southern District of New York. Summary judgment motions on the issue of whether Ripple’s native token, XRP, is a security were fully briefed as of the end of last year, and observers, including yours truly, wait with bated breath for that decision.

[13] If you are wondering how many mixed metaphors one lawyer can cram into a single blog post, the answer is a boatload, a boatload of mixed metaphors.  

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ABOUT THE AUTHOR

RACHEL YEATES
RACHEL YEATES

PARTNER

Rachel is an experienced trial lawyer, having litigated jury trials and bench trials, and represented clients in private arbitrations. She has worked with U.S. and international clients and with businesses of all sizes, from early-stage ventures to publicly traded companies.

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Intellectual Property

Intellectual Property Ownership Issues and Considerations 

Intellectual property ownership issues are quite common. Such ownership issues often arise when proper agreements are not in place from the very beginning of a business engagement. Without a written agreement, a third-party contractor or an individual hired to perform certain services may own intellectual property rights in any resulting work product. For this reason, it is important to have such agreements in place when engaging others to perform services on your behalf. The discussion below highlights common ownership issues and considerations for the various forms of intellectual property.

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Laura Marmulstein March 27, 2023
Business & Corporate Law

Recent Crypto Enforcement Actions and the Brewing Battle Between Regulators for Jurisdiction Over Digital Assets

Readers of my last, irresistibly juicy blog post, “First-Ever Court Ruling Means Your Utility Token May Be an Unregistered Security,” know that the Securities and Exchange Commission (“SEC”) recently landed a blow against blockchain-based media company LBRY when a district court in New Hampshire held that LBRY’s native “utility token,” LBC, was an unregistered security.

Read More »
Rachel Yeates March 13, 2023
Entrepreneur & Startup

Entity Selection: How QSBS Could Save You Millions in Taxes

I often work with entrepreneurs starting new ventures. While there are multiple considerations for new businesses, the first important item to address is entity formation, governance, and finance/ownership. This is the starting point to get your venture headed in the right direction.

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Jonathan Milgrom March 2, 2023
Categories
Business & Corporate Law Contracts

Do Colorado Courts Still Enforce Liquidated Damages Provisions?

Do Colorado Courts Still Enforce Liquidated Damages Provisions?

Amanda Milgrom

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Do Colorado courts still enforce liquidated damages provisions? When are such provisions enforceable? As a litigator, I notice this is a frequent topic of conversation among my transactional attorney friends when they are drafting contracts with no real consensus. So, what does Colorado law say?

The quick answer is yes, liquidated damages provisions are enforceable in Colorado so long as they do not constitute a “penalty.” The Court in Board of County Com’rs of Adams County v. City and County of Denver laid out the following test to determine if and when a liquidated damages clause is enforceable (i.e., when they do not constitute a penalty): (1) were the anticipated damages difficult to ascertain when the contract was entered into?; (2) did the parties mutually intend to liquidate them in advance?; and (3) was the amount of liquidated damages, at the time the contract was made, a reasonable estimate of the potential actual damages the breach would cause?[1] If the answer to all three questions is yes, then the clause is enforceable.[2]

The second question may be difficult to answer – how does a court know whether the parties intended, mutually, to liquidate the damages in advance? A court will look at a number of factors, including the contract’s subject matter and the purposes and objects it seeks to accomplish. A court may also look at the circumstances surrounding the creation.[3] Thus, it is critical that a contract that contains a liquidated damages clause be drafted to shed light on these three questions.

Another question arises when a contract offers the non-breaching party the choice between actual and liquidated damages. Colorado courts will uphold the enforceability of the liquidated damages clause [4] even in this scenario. While states are split on this question, Colorado falls on the side of enforceability. This does not mean such a provision will always be upheld – it must  still satisfy the three factors. But the choice between two types of damages will not automatically void the liquidated damages clause.

Last but not least, beware – not all states will enforce a liquidated damages clause, so be cautious when advising clients entering into contracts outside of Colorado.

[1] 40 P.3d 25, 29 (Colo. App. 2001) (citing Perino v. Jarvis, 312 P.3d 108 (Colo. 1957)).

[2] See also Ravenstar LLC v. One Ski Hill Place LLC, 405 P.3d 298 (Colo. App. 2016).

[3] Powder Horn Constructors, Inc. v. City of Florence, 754 P.2d 356 (Colo. 1988).

[4] Ravenstar LLC v. One Ski Hill Place LLC, 405 P.3d 298, 303 (Colo. App. 2016), aff’d by 401 P.3d 552 (Colo. 2017).

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ABOUT THE AUTHOR

AMANDA MILGROM
AMANDA MILGROM

PARTNER

Amanda Milgrom represents individuals and businesses of all sizes in various litigation matters regarding employment, intellectual property, and business disputes. She practices employment law, representing employees in discrimination lawsuits and counseling employers on best practices, drafting employee handbooks, and putting together suites of employment contracts.

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Business & Corporate Law

Do Colorado Courts Still Enforce Liquidated Damages Provisions?

Do Colorado courts still enforce liquidated damages provisions? When are such provisions enforceable? As a litigator, I notice this is a frequent topic of conversation among my transactional attorney friends when they are drafting contracts with no real consensus. So, what does Colorado law say?

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Amanda Milgrom February 21, 2023
Business & Corporate Law

The Importance of Morality Clauses in Contracts with Public Figures

In the age of social media and the 24-hour news cycle, opportunities for public figures to be called to the mat and canceled over their statements and behavior are plentiful. Whether looking at Kanye West, aka Ye, with his antisemitic statements on Twitter, “White Lives Matter” t-shirt at Paris Fashion Week, and a myriad of other public offenses, T.J. Holmes and Amy Robach’s affair, or Try Guys’ Ned Fulmer’s affair with an employee, when the transgressions become public, so do the calls from the public for the brands and companies they work with to cut them loose.

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Madison Shaner January 30, 2023
Employment Law

U.S. Supreme Court Hears Oral Arguments on Colorado Business’s First Amendment Speech Rights

The U.S. Supreme Court heard oral arguments last month in a case challenging the Colorado Anti-Discrimination Act (CADA) in a scenario similar to the Masterpiece Cakeshop decision of 2018. 303 Creative LLC, a Colorado based graphic design service is seeking to provide wedding website design services but only for opposite-sex weddings due to the owner’s religious beliefs that preclude her from providing the same services for same-sex couples.

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Jason Fisher January 17, 2023
Categories
Business & Corporate Law Contracts

The Importance of Morality Clauses in Contracts with Public Figures

The Importance of Morality Clauses in Contracts with Public Figures

Madison Shaner

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In the age of social media and the 24-hour news cycle, opportunities for public figures to be called to the mat and canceled over their statements and behavior are plentiful. Whether looking at Kanye West, aka Ye, with his antisemitic statements on Twitter, “White Lives Matter” t-shirt at Paris Fashion Week, and a myriad of other public offenses, T.J. Holmes and Amy Robach’s affair, or Try Guys’ Ned Fulmer’s affair with an employee, when the transgressions become public, so do the calls from the public for the brands and companies they work with to cut them loose.

The question then becomes how, and how quickly, can those contracts be terminated and what the consequences for termination are. A company’s failure to act swiftly when a public figure it works with can result in calls for boycott and damage both to the brand and its image. For instance, the calls to boycott Adidas in the weeks following Ye’s antisemitic comments on Twitter in October 2022 were rampant, with many wondering what was taking the brand so long to denounce the tweets and distance itself from Ye, and Adidas spending weeks with the relationship “under review.” The terms of the contract between the parties would have been a critical portion of that review, as was the potential economic consequence of the reported $246 million profit loss to Adidas per year in discontinuing the Yeezy line, which was contracted to last through 2026.  

As we’ve previously discussed in this Blog,  having a well-thought-out contract between a brand and the social media content creators is paramount to the success of that relationship – and whether your company is engaging with a content creator who has gained renown on social media, or a much more prominent partner, it is important to consider whether a morality clause is worth including in that contract. Ideally, a company would partner with a celebrity or creator whose conduct and values align with the brand, and where there is little concern about skeletons in the closet because the partner has been appropriately vetted, including a review of old tweets and other social media posts. It goes without saying that all parties to these contracts hope that a morality clause never comes into play, and that the end to any business relationship can be drama-free. The protection afforded by a carefully drafted morality clause can be useful in the worst-case scenario.

So, what is a morality clause? A morality clause, or a morals clause, is a provision in the contract that gives a company a unilateral right to terminate a contract or take other, defined, remedial action, if the other party to the contract causes a breach by engaging in conduct that is considered to be immoral, scandalous, or might otherwise injure or tarnish the reputation of the company. Essentially, it is a special provision that allows for swift action to terminate a contract to help the company avoid scandal and damage to a company’s public image. When a morality clause is triggered, it is typically considered a material and uncurable breach of the contract, which comes with a significantly reduced timeline on which the company can operate to quickly terminate the contract, to the company’s benefit.

How the parties define the actions that fall under the terms of a morality clause depends on the parties, how heavily negotiated the provision is, and what the parties believe the possible realm of actions might be. Historically, morality clauses were intended to address potential criminal conduct of employees and other contracting parties, but the scope of what is covered by these clauses has significantly broadened over the years, particularly following cultural phenomena like the #MeToo movement. A creator or public figure who is subject to a morality clause ideally prefers a more specific, narrowly defined universe of actions—with limited discretion from the partnering company—that would allow the company they’re under contract with to terminate the relationship. Companies, on the other hand, often prefer language that is broader and more ambiguous, with sole and unqualified discretion of what constitutes a violation by their counterparty. A creator or public figure may also seek to include intentional action on their part, rather than merely recklessness, while companies are often disinclined to consider the intentions in favor of focusing on the outcome. The question of provable offenses and allegations is another critical point of negotiation between the parties – is an allegation of misconduct enough to terminate the contract or is it required that the misconduct be proved? If so, who determines whether it has been sufficiently proved?

Ultimately, a well-drafted and carefully considered and negotiated morality clause is important to protect both parties in a contract between a company and any public figure it associates with. The corporate and business team at Milgrom & Daskam has significant experience drafting and negotiating these clauses and would be happy to discuss your options as you move forward in your contracts.

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ABOUT THE AUTHOR

MADISON SHANER
MADISON SHANER

SENIOR ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients.

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Should I Consider an Ethical Will?

A Last Will and Testament seems to be on most people’s radar, especially individuals with young children, individuals who have lost a loved one, or just individuals who consider themselves to be “Type A” planners. But what about an ethical will? What is an ethical will and why might you consider executing one as part of your legacy planning?

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Kim Raemdonck December 19, 2022
Data Privacy

Navigating and Complying with Colorado’s New Consumer Privacy Act

On July, 7, 2021, Colorado Governor Jared Polis signed the Colorado Privacy Act (CPA or “the Act”) into law. With that pen stroke, Colorado joined California and Virginia as the third state to enact comprehensive consumer privacy legislation. While the law does not take effect until July 1, 2023, Colorado businesses would do well to study up on the new law to ensure compliance when it does become active.

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Michael Callahan December 5, 2022
Categories
Business & Corporate Law

First-Ever Court Ruling Means Your Utility Token May Be an Unregistered Security

First-Ever Court Ruling Means Your Utility Token May Be an Unregistered Security

RACHEL YEATES
RACHEL YEATES

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The First-Ever Court Ruling Means Your Utility Token May Be an Unregistered Security 

Which could be bad news for you. Here’s what happened and why you should care. 

What Happened? 

Last month a federal judge in New Hampshire ruled that LBRY’s utility token was an unregistered security.[1]

LBRY is a decentralized file-sharing platform designed to be “YouTube on blockchain.” LBRY created a native digital token called LBRY Credits, known as “LBC,” which users can buy with U.S. dollars. To view any content on LBRY other than free content, users must pay with LBC. Users can also use LBC to publish content, create channels, and tip other content creators, among other things.

The problem for LBRY came when the Securities and Exchange Commission (“SEC”) sued it for selling unregistered securities. The SEC argued that while users could use the LBC within the LBRY ecosystem, in reality the token was acting more like a security, a financial asset which comes with regulatory requirements LBRY didn’t comply with when it sold LBC to purchasers.

In agreeing with the SEC, the court relied on the three-part Howey test, which originated from a famous case the Supreme Court decided in 1946. Under Howey, to prove something is a security, there must be 1) an investment of money, 2) in a common enterprise, 3) with an expectation of profits to be derived solely from the efforts of the promoter or a third party. The only element in doubt in this case was the last one: “whether the economic realities surrounding LBRY’s offerings of LBC led investors to have ‘a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.’”

In holding that LBC satisfied the third element of the Howey test, the court relied on statements LBRY representatives made to potential LBC purchasers that essentially touted LBC as a good investment and the fact that LBRY’s business model depended on LBC increasing in value, meaning purchasers would expect LBC to increase in value based on the efforts of LBRY employees.

LBRY has appealed, but as things stand today, the utility token LBC is a security.

Why Should I Care? 

What you may have thought was a currency or a commodity may actually be a highly regulated financial product. This is going to be a paradigm shift for anyone who wasn’t previously aware that utility tokens could be considered securities.

  • If You Issued Tokens: You may have sold an investment product subject to federal and state securities laws. If you did not comply with those laws when you advertised or sold the tokens, you could be liable to the SEC or to your state securities regulator for statutory violations, and you could also be liable if a purchaser sues you.
  • If You Purchased Tokens: You have rights as an investor if the company that sold the tokens to you did not comply with the law. There are federal and state laws specific to financial wrongdoing that you may be able to use to recover money you lost in connection with purchasing a token.

Bottom Line

Don’t ever let anyone tell you that “there are no crypto laws.” There are many laws that apply to digital assets, even if they do not specifically say “crypto” or “token” or use other blockchain-specific terminology.

If you have questions as a token issuer or as a purchaser, feel free to contact us. Technology changes, but the law still applies. We’re here to help.

[1] The case is Sec. & Exch. Comm’n v. LBRY, Inc., No. 21-CV-260-PB, 2022 WL 16744741 (D.N.H. Nov. 7, 2022).

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ABOUT THE AUTHOR

RACHEL YEATES
RACHEL YEATES

PARTNER

Rachel is an experienced trial lawyer, having litigated jury trials and bench trials, and represented clients in private arbitrations. She has worked with U.S. and international clients and with businesses of all sizes, from early-stage ventures to publicly traded companies.

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Business & Corporate Law

The Small Business Reorganization Act and Its Prolonged Adoption Through June of 2024

Chapter 11 bankruptcy code generally provides businesses with avenues and protections to reorganize and restructure obligations. This form of bankruptcy is very often more favorable than chapter 7 bankruptcy because it allows business owners to stay in the driver’s seat while attempting to negotiate a plan that complies with the bankruptcy code. In contrast, filing a chapter 7 petition results in full relinquishment of control of the business and the appointment of a third-party trustee whose primary obligation to is to liquidate estate assets for the benefit of unsecured creditors.

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Mike Richardson November 23, 2022
Business & Corporate Law

Beneficial Ownership Disclosure: New Reporting Requirements for Small Businesses

On September 30, 2022, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued its highly anticipated Final Rule establishing a beneficial ownership information (BOI) reporting requirement under the Corporate Transparency Act (CTA) of 2019. These rules significantly change the obligations of business entities to disclose previously private information regarding the ownership and control of these entities. The primary purpose of the CTA, enacted as part of the Anti-Money Laundering Act of 2020 is to protect the US financial system from being used for illicit purposes, including preventing corrupt actors, terrorists, and criminals from hiding assets in anonymous shell companies. Background for this rule was addressed in prior blog posts including The Corporate Transparency Act (1/31/22) and FinCEN and Real Estate (8/2/22).

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Charles Knight October 24, 2022
Miscellaneous

When Shares are Not Cares

As attorneys representing startups, Milgrom & Daskam knows that early-stage businesses often have many needs and not much capital to meet them. This often results in startups bartering for services using whatever currency they have. Sometimes this results in interesting exchanges (two hundred pounds of Valencia oranges in exchange for a logo design being our personal benchmark); more often it results in founders giving away the most freely available form of credit they have—equity in their company.

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Jared Stipelman October 13, 2022
Categories
Business & Corporate Law

The Small Business Reorganization Act and Its Prolonged Adoption Through June of 2024

The Small Business Reorganization Act and Its Prolonged Adoption Through June of 2024

Mike Richardson

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Chapter 11 bankruptcy code generally provides businesses with avenues and protections to reorganize and restructure obligations.  This form of bankruptcy is very often more favorable than Chapter 7 bankruptcy because it allows business owners to stay in the driver’s seat while attempting to negotiate a plan that complies with the bankruptcy code.  In contrast, filing a Chapter 7 petition results in full relinquishment of control of the business and the appointment of a third-party trustee whose primary obligation is to liquidate estate assets for the benefit of unsecured creditors.

Historically, Chapter 11’s benefits have been far out of reach for small-to-mid-size businesses due to the costs and complexities of a typical Chapter 11 case.  For example, to confirm a plan of reorganization, post-petition claims (often amounting to hundreds of thousands of dollars) must be paid in full by the date the plan or reorganization is confirmed.  In addition, in a typical chapter 11, equity owners of a business will lose their interests if any non-consenting class of creditors do not receive full payment of their claims.    

As a response to these costly obstacles small-to-mid-size business owners face when considering bankruptcy protection, Congress enacted the Small Business Reorganization Act (the “SBRA”).  The SBRA falls under Chapter 11 as “Subchapter V.”  Congress signed the SBRA in 2019 and the law went active in February 2020.  When first enacted, the debt limit under the SBRA for total non-contingent, liquidated debt was $2,725,625, meaning that if a business held more debt than that amount, it could not qualify for SBRA protection.  However, the onset of Covid-19 quickly caused Congress to raise the debt ceiling eligibility to $7,500,000 as part of the CARES Act.    

In creating Subchapter V, Congress made clear that it intended to provide a faster, easier, and cheaper version of Chapter 11 bankruptcy to small-and mid-size businesses.  The SBRA eliminates the requirement of establishing an unsecured creditors committee, eliminates the obligation to pay quarterly U.S. Trustee fees, eliminates the requirement of filing a disclosure statement, and provides a reduced period of time for a debtor to file a plan.  The SBRA also permits a debtor to confirm a plan that “crams” down creditors’ claims without the approval of any impaired, consenting class of creditors.  A trustee is also assigned to each estate to facilitate the development of a consensual plan.

Perhaps the most significant benefit afforded to a Subchapter V debtor is the elimination (or relaxation) of the absolute priority rule.  Outside of the SBRA, a debtor’s equity holders cannot retain their ownership in the debtor unless non-consenting creditors receive full payment of their claims, or unless equity holders infuse new capital into the estate.  This requirement – which provides a fundamental level of protection to creditors – can be quite difficult to meet and, as a result, equity owners lose their interests as a result of the bankruptcy.  Under the SBRA, equity owners can retain their interests as long as a proposed plan commits the debtor’s projected, disposable income toward the plan, and as long as the plan “does not discriminate unfairly.”

The SBRA also allowed debtors to pay post-petition claims over the course of a 3–5-year plan.  Outside of the SBRA, a debtor is required to pay such claims (which include administrative expense claims like legal fees, rent, utilities, and other necessary goods and services supplied to a debtor) in full as of the date of plan confirmation.  By permitting such claims to be paid over time, a debtor can infuse more estate funds into the early phase of a plan, theoretically increasing the likelihood of plan confirmation (while also, inversely, increasing the risk that post-petition creditors will be paid in full).  

Since enactment, SBRA filings account for the vast majority of bankruptcy filings in the United States.  More than 3,000 debtors have elected to file under Subchapter V.  Proponents of the law point to higher plan confirmation rates, speedier plan confirmation, more consensual plans, and improved cost-effectiveness than if those cases had been filed as a traditional Chapter 11.

As mentioned above, Congress quickly increased the SBRA’s debt ceiling to $7,500,000 at the onset of Covid-19 in 2020.  On June 21, 2022, President Biden signed the Bankruptcy Threshold Adjustment and Technical Corrections Act, which freezes the debt limit of the SBRA at $7,500,000 through June 21, 2024.  Given mounting concerns over near-term economic woes, the prolonged adoption of the SBRA’s debt ceiling could provide necessary relief for small-to-mid-sized businesses

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ABOUT THE AUTHOR

MIKE RICHARDSON
MIKE RICHARDSON

PARTNER

Mike Richardson joined Milgrom & Daskam as a Partner in May 2022.  His practice focuses on litigation and bankruptcy matters.  He has represented parties on either side of real estate disputes, breach of contract actions, oil and gas disputes, fraudulent transfer claims, and breach of fiduciary duty claims.  Mike has also represented debtors, chapter 7 bankruptcy trustees, and other matters involving financially distressed parties reorganizing under chapter 11 of the U.S. Bankruptcy Code.

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Should You Seek Foreign Intellectual Property Protection?

If you plan to conduct business abroad or have an online business that reaches customers abroad, you should consider seeking international intellectual property protection. Intellectual property protection is often limited to the country where you conduct business and/or where you file for protection with the respective foreign intellectual property office. For example, a U.S. trademark registration will not protect you against trademark disputes that arise in other countries. As another example, a U.S. patent prevents others from making, using, selling, offering for sale, and importing your patented invention in the U.S., but does not prevent others from doing the same in other countries.

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Laura Marmulstein September 12, 2022
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Business & Corporate Law

Beneficial Ownership Disclosure: New Reporting Requirements for Small Businesses

Beneficial Ownership Disclosure: New Reporting Requirements for Small Businesses

Charles Knight

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On September 30, 2022, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued its highly anticipated Final Rule establishing a beneficial ownership information (BOI) reporting requirement under the Corporate Transparency Act (CTA)  of 2019.  These rules significantly change the obligations of business entities to disclose previously private information regarding the ownership and control of these entities.  The primary purpose of the CTA, enacted as part of the Anti-Money Laundering Act of 2020 is to protect the US financial system from being used for illicit purposes, including preventing corrupt actors, terrorists, and criminals from hiding assets in anonymous shell companies. Background for this rule was addressed in prior blog posts including The Corporate Transparancy Act  (1/31/22) and FinCEN and Real Estate (8/2/22).

The Final Rule[1]

The Final Rule incorporates public comments to the Notice of Proposed Rulemaking published in December 2021 and becomes effective on January 1, 2024.  Reporting companies created or registered prior to this date have until January 1, 2025, to file their initial reports.  Reporting companies created or registered on or after January 1, 2024, will have 30 days to file their initial report. This final rule is one of three rulemakings planned to implement the CTA. Future rules are expected to establish rules for who may access BOI, for what purposes and what safeguards must be in place to secure the information and another revising FinCEN’s customer due diligence rule.

Who Must Report

The Final Rule applies to any foreign or domestic (a) corporation; (b) limited liability company; or (c) other entity that is created or registers to do business by the filing of a document with the secretary of state or any similar office under the law of a State or Indian Tribe.

There are 23 exemptions to the definition of a Reporting Company, including SEC reporting issuers, banks, credit unions, broker-dealers, businesses registered with FinCEN, tax-exempt entities, U.S. governmental authorities and large operating companies with more than 20 full-time employees in the U.S and more than $5 million in gross receipts or sales annually. Other exemptions are available for inactive entities, pooled investment vehicles operated by a qualifying sponsor, controlled subsidiaries, registered investment advisors and venture capital fund advisors that have filed required reports with the SEC.

The Final Rule specifically targets smaller entities for this additional disclosure.

What Must Be Reported.

In addition to certain identifying information, the Final Rule requires the reporting of information concerning both (1) beneficial owners; and (2) company applicants.

For each Reporting Company, the following information is required:

  • Full legal name of reporting company
  • Any trade or DBA name
  • Business address
  • Initial registration location; and
  • Taxpayer or Employer Identification Number

For each Beneficial Owner or Company Applicant (see definitions below), the following information is required:

  • Full legal name
  • Birth date
  • Current business address of Applicant
  • Current residential address of Beneficial Owner
  • Unique identifying number, issuing jurisdiction and image from:
    • Non-expired US or Foreign Passport
    • Non-expired government or tribal ID; or
    • Non-expired driver’s license.

This information will be reported to and stored within the Beneficial Ownership Secure System (BOSS), a non-public database developed by FinCen.  The information will be available to federal agencies in support of national security, intelligence, and federal, state, local and foreign law enforcement agencies in certain circumstances.

All reported information must be updated in a timely manner. Reporting companies and individuals may also apply to FinCEN for a “FinCEN Identifier,” a unique number that may be submitted to FinCEN in lieu of the above-described information. This will be particularly helpful to frequent filers, including Company Applicants.

Definitions.

The term “Company Applicant” means the individual who directly files the document that first creates or registers the Reporting Company and includes service providers and registered agent firms.

The term “Beneficial Owner” is defined as any individual (i.e., natural person) who, directly or indirectly (1) exercises substantial control over a reporting company; or (2) owns or controls at least 25% of the ownership interests of a reporting company.

The Final Rule’s definition of “substantial control” includes any individual who: (1) serves as a senior officer of a reporting company[2]; (2) has authority over the appointment or removal of any senior officer or a majority of the board; (3) directs, determines, or has substantial influence over important decisions made by a reporting company; or (4) has any other form of substantial control over a reporting company.

The Final Rule’s definition of “ownership interest” includes equity interests, capital or profits interests, convertible interests, options and “any other instrument, contract, arrangement, understanding, or mechanism used to establish ownership.” Ownership includes control through joint ownership with other persons, through a nominee, intermediary, custodian or agent and certain trust arrangements.

The Final Rule requires beneficial ownership reporting for every individual deemed to exercise substantial control over a reporting company and notes that substantial control may be exercised directly or indirectly, including as a trustee of a trust, membership on a board, rights associated with any financing arrangement, control over one or more intermediaries or financial, business, or other arrangements or understandings. The “substantial control” standard for beneficial ownership requires that even those who do not actually possess an ownership interest in a reporting entity will still be required to submit their information to FinCEN. Additionally, the inclusion of the “indirect” standard for substantial control denotes that all layers of beneficial ownership must be disclosed, if, for example, parent entities are used for ownership and management purposes.

Violations

The CTA provides that any willful violation of the reporting requirements can lead to civil penalties of up to $500 per day a violation has not been corrected; and criminal penalties of up to $10,000 and/or imprisonment of up to two years.

Recommendations.

Although existing entities have an almost two-year grace period to report, entities formed after January 1, 2024, will have to report immediately.  Clients considering new entities should understand the new reporting requirements and start identifying all reporting companies in their structures and gathering beneficial ownership information from Beneficial Owners and persons who exercise Substantial Control.  Investors whose personal information will have to be disclosed should be notified about the new rule and complex ownership structures, including family trusts and financing agreements, should be analyzed in order to determine the new reporting obligations.

If you would like more information, you can reach out to one of the attorneys at Milgrom & Daskam to review your business and ownership legal structures and help you prepare for the new reporting requirements.

 

 

[1] This post has discussed some, but not all of the provisions of the final rule.  Interested persons should review the rule which can be accessed at the link above or at 31 CFR 1010, Sec 1010.380 and in the Federal Register, 87 FT 59498.

[2] “Senior Officer” means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer or any other officer, regardless of official title, who performs a similar function. Does not include ministerial roles with little control including “corporate secretary” or “treasurer.”

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ABOUT THE AUTHOR

CHARLES KNIGHT
CHARLES KNIGHT

OF COUNSEL

Charles joined Milgrom & Daskam in June 2020 and focuses on serving entrepreneurs, nonprofits and growth companies from ideation and formation to early and later stage capitalization and through mergers and acquisitions. His expertise includes companies focused on technology, renewable energy, and real estate, including affordable housing and new market tax credit development and financing.

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FinCEN and Real Estate: Additional Disclosure Requirements May Be On the Horizon for Real Estate Transactions

As part of the anti-money laundering regime under the Bank Secrecy Act of 1970 (the “BSA”), in late 2021, the Financial Crimes Enforcement Network (“FinCEN”) division of the Department of the Treasury issued an advanced notice of proposed rulemaking (“ANPRM”) seeking to address potential money laundering through real estate transactions. The comment period for the ANPRM closed on February 21, 2022. This ANPRM comes closely after the notice of proposed rulemaking related to the implementation of the Corporate Transparency Act (the “CTA”), which you can read more about here. Both the CTA and the proposed regulations under the ANPRM would require significant levels of disclosure regarding the beneficial ownership of companies and real estate in non-financed real estate transactions. These measures aim to reduce money laundering, and assets held by undisclosed foreign investors. It is estimated that between 2015 and 2020, at least $2.3 billion was laundered through U.S. real estate, though the actual figure is likely much higher Accordingly, both FinCEN and Congress are trying to limit the number of real estate transactions used to launder money.

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The Corporate Transparency Act: What It Is and What It Means for Your Small Business

The Corporate Transparency Act: What It Is and What It Means for Your Small Business

Madison Shaner

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On January 1, 2021, as part of the federal Anti-Money Laundering Act (the “AMLA”), Congress enacted the Corporate Transparency Act (the “CTA”) in an effort to increase corporate transparency. The CTA requires certain companies to file information on their businesses, including “beneficial ownership” information, with the Financial Crimes Enforcement Network (“FinCEN”). The impact of the CTA on companies and those who would be required to report information has not been clear. However, on December 7, 2021, FinCEN issued a Notice of Proposed Rulemaking to establish the regulations that would implement the CTA, and provide additional clarity on which businesses would be considered “reporting companies” under the CTA.

Which companies are subject to reporting requirements?

Almost all types of domestic and foreign business entities are included in the CTA’s definition of “reporting companies”. This includes limited liability companies and corporations. That being said, the CTA allows for a number of exemptions for companies that will not be required to make CTA filings. However, these exemptions apply only to large entities and entities that are already subject to various reporting requirements due to size or industry regulations.

Companies that are considered “large operating companies” are not required to make filings under the CTA. The proposed rules clarify that “large operating companies” are those that: (1) employ more than 20 employees on a full-time basis in the United States; (2) filed Federal income tax returns in the prior year demonstrating more than $5,000,000 in gross receipts or sales in the aggregate (including receipts or sales from entities owned by the entity and through which the entity operates); and (3) has an operating presence at a physical office within the United States. The CTA additionally does not require filings for subsidiaries of exempted entities, meaning entities whose ownership interests are entirely owned or controlled by an exempt entity. Subsidiary entities that are partially-owned by exempt entities, are, however, not exempted.

What does a reporting company have to report?

Reporting entities will be required to disclose basic information regarding the entity itself, including the company’s full name, any trade name (or D/B/A), business street address(es), the jurisdiction of formation, and taxpayer identification information (EIN). In addition to entity information, reporting entities are required to report information on their beneficial owners. Meaning that each reporting entity will be required to report the name, birthdate, address, and unique identifying number from an acceptable identification document (such as a passport or driver’s license) with an image of the document. The beneficial owner information must be provided for each company applicant and beneficial owner of the entity. Beneficial owners are defined by the CTA as “any individual who, directly or indirectly” exercises “substantial control” over the reporting company or “owns or controls” at least 25% of the “ownership interests” of the reporting company.” 

While the CTA doesn’t define “substantial control” or “ownership interests,” the proposed regulation clarifies that “substantial control” is viewed through the lens of three specific indicators: (1) service as a senior officer of a reporting company; (2) authority over the appointment or removal of any officer or dominant majority of the board of directors of a reporting company; (3) direction, determination or decision of, or substantial influence over important matters of a reporting company (e.g. sale, lease or transfer of principal assets of the company, entry into or termination of major contracts, major expenditures and investments, compensation of senior officers). The proposed regulations also take an expansive view of what constitutes an “ownership interest” to include both equity in the reporting company and other types of interests, such as capital or profits interests, convertible instruments, warrants or rights, or other options to acquire equity, capital, or other interests in a reporting company.

When do reporting companies have to report their information?

When reporting companies are required to comply with the CTA depends on the date of the company formation. After FinCEN’s regulations become final, new reporting companies will be required to report the information about their beneficial owners upon formation or within fourteen days thereof. Any existing company formed prior to the effectiveness of the FinCEN regulations will be required to report its information within two years of the promulgation of the new regulations. Reporting companies will also need to update their information within a year of any change of beneficial ownership.

Who will be able to see and access information regarding beneficial ownership?

The beneficial owners of consumer facing companies may be concerned about the accessibility of their personal information given the reporting requirements. This concern is largely unfounded, however. The reporting information will be kept in a secure, private, database maintained by FinCEN. The database of reporting information will not be publicly available, and ownership information will be available upon requests only from federal law enforcement agencies; state, local, or tribal law enforcement agencies authorized by court order; a federal agency on behalf of a foreign country if such request is pursuant to an international agreement; or a financial institution for customer due diligence purposes authorized by the reporting company.

The current proposed rulemaking is one of three to implement the CTA. Companies should begin evaluating whether they will fall within the reporting requirements and who within their entity structure may be considered a beneficial owner based on this initial proposed rulemaking.

 

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ABOUT THE AUTHOR

MADISON SHANER
MADISON SHANER

ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients

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