The updated terms of service included a controversial provision stating, “To help us deliver interesting paid or sponsored content or promotions, you agree that a business or other entity may pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you.” Further, “You acknowledge that we may not always identify paid services, sponsored content, or commercial communications as such.”
In contrast, the old terms only included a statement that the service could display advertising and promotions and that by assenting to the terms, users “agree that Instagram may place such advertising and promotions on the Instagram Services or on, about, or in conjunction with your Content.”
Interpretations of What the Changes Mean
The main concerned raised is that terms seem to give Instagram an unrestricted right to license all public photos to other organizations for advertising purposes. In other words, by uploading a photo to the site, users consent to Instagram’s ability to sell the photo for commercial purposes on any medium, and without any compensation. This also implicates that Instagram could profit from users’ photos and that advertisers could use the photos without users’ knowledge or consent. Electronic Frontier Foundation senior staff attorney Kurt Opsahl commented that the terms are “asking people to agree to unspecified future commercial use of their photos. That makes it challenging for someone to give informed consent to that deal.”
However, the terms could also be interpreted more narrowly, with less cause for alarm. The new policy may only give Instagram the power to link user’s photos to advertisements used solely in the Instagram service. In other words, users would not have to worry that their photos could show up on advertisements on billboards or the sides of buses; rather, photos could only be linked to advertisements within the Instagram service.
While the actual effect of the changed terms is not clear, the Instagram user community was certainly alarmed. Another concern is the fact that Instagram is open to anyone over thirteen years old. By accepting the terms, users under eighteen consent to the fact that their parent or guardian is aware that their image, username, and photos can be used in an ad. However, the service simply assumes parental consent. Plus Instagram assumes that underage users have not fabricated their age. Further, the terms do not provide an “opt out” process, so if you do not want to accept the new terms, your only option is to delete your account.
The co-founder of Instagram responded to the uproar in a blog post on Tuesday. Kevin Systrom stated that the purpose of updating the terms was to help with advertising on Instagram. He acknowledged that, “it was interpreted by many that we were going to sell your photos to others without any compensation.” However, he clarified that, “This is not true and it is our mistake that this language is confusing. To be clear: it is not our intention to sell your photos.”
Additionally, Mr. Systrom stated that the Instagram users own their own content and Instagram does not claim any ownership rights over the photos. He further noted that users remain in control over who can see their photos. If a user’s privacy settings are set to private, their photos can still only be shared with people they have approved to follow them.
More specifically, Mr. Systrom commented on what the terms would allow Instagram to do. “Let’s say a business wanted to promote their account to gain more followers and Instagram was able to feature them in some way. In order to help make a more relevant and useful promotion, it would be helpful to see which of the people you follow also follow this business. In this way, some of the data you produce — like the actions you take (e.g., following the account) and your profile photo — might show up if you are following this business.” This remark seems to imply that Instagram may be adopting a plan similar to Facebook’s. Facebook currently uses sponsored pages that link to friend’s accounts in order to promote advertising.
In sum, Instagram’s updated terms reflect its interest in experimenting with new ways of advertising in order to fund the app. Acquiring Instagram cost Facebook over a billion dollars and it needs to see a return. Instagram’s updated terms are not effective until January 16th, and we may see some new changes in the policy before then.
Lesson for Website/App Owners and Users
With news reports over policy changes becoming commonplace and because changes to such policies now require clear notification to users, users are becoming more aware and more concerned about the terms of policies they are subject to. Even though the uproar over these Instagram changes may have been exaggerated, it should remind website and app owners to carefully craft the terms and policies of their social media accounts for not only legal compliance, but to also consider how users may react to any changes.
For users, including businesses with social media accounts, it is important to remember that social media can be a powerful promotional tool but there is a possibility that your material may be used or viewed in unexpected ways. In order to be certain of what apps or websites may do with your content, you should endeavor to keep up to date with the policies of any social media accounts you use.
26 Nov / 2012
This year, Ohio made important updates to both its corporate and LLC codes. Overall, the changes to the corporate code were well warranted and should be seen as an improvement over the previous iteration of the code. However, the updates to the LLC code, especially in the area of fiduciary duty, may prove to be too broad and might have the effect of causing Ohio businesses to more frequently organize LLCs in alternate jurisdictions such as Delaware. Importantly, these changes apply not only to new entities, but entities that have already been formed in Ohio.
Revisions to the Corporate Code.
The revisions to both the general corporate code and the limited liability code went into effect in Ohio on May 4, 2012. The revisions to the corporate code add flexibility and certainty to the code, making Ohio a slightly more attractive jurisdiction in which to organize a corporation than before.
Board of Directors
First, bringing the Ohio code in line with Delaware, ORC 1705.56 now allows for a board of directors to have only one member no matter how many shareholders there are. Under the previous rule, a one-member board was not allowed if the company had more than one shareholder.
Voluntary Dissolution and Creditors Claims
Next, the corporate code saw changes to the laws pertaining to voluntary dissolution of a corporation. Now, a resolution to dissolve can set out the future dissolution date as well as provide for authorization for the directors or officers to abandon the proposed dissolution before filing the certificate of dissolution. This gives companies greater flexibility when planning for dissolution.
Next, the statute sets out a procedure for notifying creditors and any party holding a potential claim against the company about the impending dissolution and allows the company to set a deadline to make a claim before such claim is statutorily barred. This notice procedure, which is now similar to that used by Delaware, will add some procedural complication to the dissolution process; however, it will give dissolving corporations greater certainty in the dissolution process – which is ultimately good for both the corporation and for legitimate creditors of the corporation.
The corporate code also now provides that indemnification provisions for directors and officers cannot be eliminated after a claim has arisen. This provides certainty for directors and officers serving Ohio corporations.
Revisions to the Limited Liability Company Code.
Overall, the changes to the LLC code are troubling – working to make the LLC both less flexible and less certain than before. It is also important to note that these changes apply to already existing Ohio LLCs, not just to LLCs formed after the effective date of the changes.
Fiduciary Duties of Members and Managers
The LLC Code now clarifies many of the fiduciary duties of members and managers and limits how these duties can be adjusted in the operating agreement. These changes make Ohio LLC law divert pointedly from Delaware law.
First, the duty of loyalty is now defined in 1705.281(B):
(B) A member’s duty of loyalty to the limited liability company and the other members is limited to the following:
(1) To account to the limited liability company and hold as trustee for the limited liability company any property, profit, or benefit derived by the member in the conduct and winding up of the limited liability company’s business or derived from a use by the member of the limited liability company’s property, including the appropriation of a limited liability company opportunity;
(2) To refrain from dealing with the limited liability company in the conduct or winding up of the limited liability company’s business as or on behalf of a party having an interest adverse to the limited liability company;
(3) To refrain from competing with the limited liability company in the conduct of the limited liability company’s business before the dissolution of the limited liability company.
Importantly, unlike in Delaware, these duties of loyalty may no longer be eliminated from the operating agreement. However, these duties may be limited by “identifying specific types or categories of activities that do not violate the duty of loyalty if not manifestly unreasonable, and all of the members of a percentage specified in OA authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty.”
This is important for any member of an LLC who also participates in or even plans to participate in a possibly competing company. In the tech and startup community, these “competitive” practices are very common and will now need to be expressly set out and agreed to by the other members. Furthermore, it may prove difficult to adequately set out just what the competitive practices may be since nothing can be eliminated that is “manifestly unreasonable,” a term that is by its nature, not entirely defined. It will be up to a court to decide what is or is not “manifestly unreasonable,” which will lead to uncertainty for owners and potential litigation costs in the event of a dispute.
Delaware, the likely alternative candidate for a company considering LLC formation in Ohio, allows the duty of loyalty to be entirely eliminated, and because of this, some companies may elect to choose Delaware over Ohio for organization.
Next, the statutory duty of care for members under 1705.281(C) is now limited to “refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.” Under 1705.81 this duty cannot be “unreasonably” reduced. Similarly for the duty of good faith and fair dealing, 1705.081(B)(5) states that the duty cannot be eliminated, but the operating agreement may “prescribe in writing the standards by which performance is to be measured or specify types or categories of activities that do not violate the duties in each case if not manifestly unreasonable (emphasis added). Along those same lines, under 1705.081(B)(6) the duty of a manager to act in good faith may not be eliminated from the operating agreement, but it may “prescribe in writing the standards by which performance is to be measured or specify types or categories of activities that do not violate the duties in each case if not manifestly unreasonable.”
Again, Delaware allows for the full elimination of these duties in LLC operating agreements. Entrepreneurs should consider whether the elimination of flexibility and the potential for greater risk for managers or investors merits forming a Delaware rather than Ohio LLC, or possibly even whether it would be prudent to convert an existing Ohio LLC to a Delaware LLC.
While the changes to the corporate code are welcome and work to make Ohio a better jurisdiction in which to incorporate, the changes to the LLC code will likely make business owners less confident in choosing to organize an LLC in Ohio. The new statutes have reduced some of the flexibility associated with LLCs and reduced the certainty of a court’s treatment of the operating agreement.
19 Nov / 2012
A trademark attorney can help to guide your overall brand growth as well as help you in the selection and marketing of your trademarks. If your business involves any aspects of building or maintaining a brand, then the resource of a knowledgeable trademark attorney should be utilized throughout this process. Proper branding will improve the public’s recognition of ones product and aid the brand-producer in the promotion and sales of other products.
Trademarks and Branding
With the economic incentives of creating a strong and growing brand, there are dangers. This is where trademark law comes in. Say you start a business making a new type of golf ball called “Spartan Golf Balls.” Sales start to go up, investors are calling, and golfers everywhere are excited about your product. But then you get a call from a small golf club manufacturer on the other side of the country selling a product called “Spartan Golf Clubs.” Worse yet, this company owns a federal trademark and is demanding that you to stop using the word “Spartan.” Under trademark law and the likelihood of confusion test, you will have to stop using “Spartan” and start all over with a new brand. The lesson here is clear: even if you aren’t ready yet to register a trademark, it is important to evaluate your branding from a trademark perspective.
A Warning About Online Trademark Registration Services
It may be tempting to use an online legal services provider such as Legal Zoom to register a trademark; however, trademark registration is nuanced and many of these providers will take your money without first telling you whether it is even possible to obtain registration for your trademark. Furthermore, each trademark registration includes the trademark you want to register (whether it is a word mark, image mark, or mix of both) selecting the international class that will the mark will be protected in, a description of the product or services that the mark will be utilized with, and a specimen of the trademark as it will be used in commerce. Each of these requires careful selection and presentation and mistakes or unclear aspects of your filing will cost you more money down the line or worse yet, may leave you with no federal registration at all.
Using an online registration service will work for a small amount of registrants, but few trademark registrations are so simple as to require no specialized attention. Essentially, each trademark is unique and requires a trained eye to understand and craft the proper registration.
A trademark attorney will do the following for you:
- Search for other companies already using your brand terms. The search for existing trademarks can be a complex and painstaking process – one that requires skill and experience. A trademark attorney will be able to find brands that might conflict with yours that you might not find on a Google search. If you start to build your brand only to find that someone else is using it, you could be out money and time – both wasted on building a brand you can’t keep!
- Evaluate your brand terms to determine whether they can be protected. Trademark law is nuanced and not all terms will qualify for trademark protection. An unprotectable brand will be both a waste of time and money.
- Guide you in selecting brand terms and style based on what is available and protectable. If you discover that your brand ideas are either already being used or are not protectable, a trademark attorney will be able to guide you in the selection of protectable branding concepts.
Every brand is different and so are the trademark implications. Often, a clever idea or a Google search alone is not enough to know if your trademark can be protected. The resource of a good trademark attorney will save you time and money in the long run, and may even save you from having to start over with a new brand.
19 Oct / 2012
In today’s roller coaster of a housing market, more homeowners are turning to short sales as an alternative to avoiding foreclosure. A common misconception though among some homeowners is that they might not be as free and clear from further financial liability as they think they are after their short sale is completed. In reality, they could still be liable for thousands of dollars owed on the deficiency balance equal to the total principal balance of the homeowners existing loan minus the net proceeds paid to the lender at the closing of their home. News stories about shocked homeowners who receive demand letters from lenders that are seeking additional amounts from homeowners after they have completed a short sale are certainly on the rise. One of the main reasons for confusion among homeowners regarding their liability is the difference among state laws on short sales.
What is a short sale
An alternative to foreclosure, a short sale is when you sell your home to pay off the remaining balance on your mortgage. However, if the amount received for the home is less than the remaining balance, the homeowner may still owe the mortgage lender. Say for example, a home sells for $150,000, but the remaining balance on the mortgage is $200,000. After paying realtor fees and other closing costs, the net proceeds from the sale that are paid to lender are roughly $136,000. The seller is left with a loan balance of $64,000. This balance is what we refer to as a deficiency. The obvious issue then becomes whether a homeowner is still on the hook for that amount.
Pros and cons of a short sale
Some lenders recommend a short sale for a few reasons. Perhaps the biggest reason is that a short sale is a way to eliminate a large chunk of mortgage debt while avoiding the process and emotional impact of foreclosure. With a short sale, some homeowners can take a measure of pride in the fact that they themselves sold their home. Certain banks also claim that a short sale will have less of a negative impact on your credit score compared to going through foreclosure, but this is contingent on the homeowner’s short sale agreement with its bank and whether the bank pursues the deficiency.
Short sales are not without their drawbacks though. One of the primary disadvantages is that unlike loan modifications or mortgage refinances, the homeowner does not get to keep the home. Further, if a lender does actually agree not to pursue a deficiency, the lender still may be liable to the IRS and may have to report the forgiven deficiency amount as taxable income. Also, as touched on above, if lenders do not expressly agree to doing so, they can report the short sale as a mortgage account “not paid as agreed,” which can negatively impact your credit score just as much as foreclosure. Another drawback is that short sales can take months to complete and can make for an extremely long and slow process because most buyer offers are contingent on lender approval.
Difference in state laws
Perhaps one of the biggest potential disadvantages of a short sale lies in the state in which you reside. Some states, called deficiency judgment states, allow lenders to pursue the full deficiency amount after a short sale has been completed. Referencing the example above, a lender in a deficiency judgment state can sue a homeowner for the $64,000 deficiency remaining after the short sale.
Ohio is a deficiency judgment state. Not only are lenders here allowed to sue for the deficiency, but they can also sue for costs associated with pursuing the deficiency. The only way in Ohio to avoid being sued for a deficiency is to get your bank to waive its right to pursue the deficiency judgment or agree in writing not to pursue it. Never assume in a deficiency judgment state that a short sale releases you from the mortgage balance; you must get your lender to specifically agree to release you from the deficiency judgment.
In contract though to deficiency judgment states, certain states called non-recourse states have laws that expressly prohibit lenders and banks from pursuing a deficiency judgment. Returning to the example above, if the homeowner lived in California or Arizona, if a bank forecloses, and once the process is complete, the homeowner would not be liable for the deficiency following a sheriff’s sale. Currently, there are 12 non-resources states, with the others (in addition to California and Arizona) being Alaska, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington.
Just how popular are short sales in non-recourse states? According to the Office of Mortgage Settlement Oversight, from March 1, 2012 to June 30, 2012, there were $8.669 billion in short sales. This number does not reflect the sale amount of a home but is actually the total for all the remaining deficiencies for every short sale completed during this time period. California accounted for the most in deficiency amounts forgiven, coming in at $3.9 billion alone. Arizona is second with $522 million. Ohio had about $47 million in short sale deficiencies forgiven.
In my practice, we deal with a lot of commercial leases on a regular basis, especially long-term leases. One problem that some landlords and tenants can run into with multiple year leases is that they are unaware of Ohio’s signature and notarization requirements. Ohio Revised Code 5301.01 (the Statute of Conveyances) requires that all leases three years or longer be signed and notarized. 5301.08 exempts leases not exceeding three years from notarization requirements, so if a lease is less than three years exactly, it does not have to be notarized.
However, any lease (or any other instrument conveying real property) three years or longer needs to be notarized or the lease could be held by a court to be invalid or in the alternative could be held to be a month-to-month lease. For example, in Burger v. Buck, 2008 Ohio 6061 (Ohio Ct. App., Portage County Nov. 21, 2008), the lessees argued that the lack of notarization required by 5301.01 did not invalidate the lease. The appellate court held that, because the 15-year lease agreement between the lessees and the decedent (the lessor) was not notarized as mandated by the Statute of Conveyances, the trial court properly held that the lease was invalid and a month-to-month tenancy was created. It was undisputed that the lease agreement between the parties was not acknowledged before a notary as required by 5301.01. Therefore, the lease was invalid, and, as the lease provided for a monthly rent payment, the trial court correctly concluded that the lessees’ leasehold became a month-to-month tenancy. 5301.08 exempted leases not exceeding three years from the formalities required by R.C. 5301.01. See also Delfino v. Paul Davies Chevrolet, Inc., 2 Ohio St. 2d 282 (Ohio 1965).
Parties to a lease also need to look for leases that have automatic extensions, even if the initial lease term is less than three years. Under Ohio law, a one-year lease that provides for automatic extensions is a lease for more than three years for purpose of R.C. 5301.01 and 5301.08. Zunshine v. Wallace F. Ackley Co., 2000 Ohio App. LEXIS 1302 (Ohio Ct. App., Franklin County Mar. 30, 2000).
Determining the length of a lease is not just limited to factoring in automatic extensions though. Ohio courts will also count option periods with the initial lease period in examining 5301 compliance issues. 380 East Town Assoc. v. Mangus, 1991 Ohio App. LEXIS 2924 (Ohio Ct. App., Franklin County June 20, 1991). Thus, if two parties sign a one-year lease but the lease provides for two options where tenant can renew the lease for one-year periods, then the lease will be considered a three-year lease and must be notarized and signed.
Lease modifications can also require 5301 compliance. Ohio courts have found that when a modification to a lease alters the fundamental possessory interest of the property, then the lease must comply with 5301. Translated to plain english, when the physical space of the lease premises or the duration of lease is changed, the lease parties may have to sign off on the changes and have them notarized. For example, if lease parties originally enter into a month-to-month tenancy but then later agree to change it to a term of years, the parties must ensure that the lease adheres to 5301 if the new term is longer than three years. Regency Plaza, LLC v. Morantz, 2007 Ohio 2594, P39 (Ohio Ct. App., Franklin County May 29, 2007).
In the past, 5301.01 required that leases longer than three years both be notarized and that they be signed in the presence of two witnesses. The witness requirement was changed though when House Bill 279 went into effect on February 1, 2002. The bill eliminated the requirement that two witnesses execute certain real property documents including leases and mortgages of three years or longer.
11 May / 2012
Two Michigan court decisions issued in December 2011 exposed drafting weaknesses that were exploited by lenders to impose full recourse liability for guarantors of CMBS loans based upon breaches of loan covenants. Every CMBS loan contains a covenant requiring that the borrower maintain itself as a single-purpose entity (SPE) for the term of the loan. Standard & Poor’s definition of an SPE is an entity “that is unlikely to become insolvent as a result of its own activities and that is adequately insulated from the consequences of any related party’s insolvency.” The purpose of the SPE requirement is to reduce the risk that the borrowing entity will either file for bankruptcy (or be owned by a company that files for bankruptcy), and isolate the asset used as collateral from all other endeavors, creditors, and liens. In other words, lenders don’t want the property tied up in a bankruptcy or other litigation in the event it desires to foreclose on the mortgage.
In Wells Fargo v. Cherryland Mall Limited Partnership (Mich. Ct. App. Dec. 27, 2011, 2011 WL 6785393) the borrower obtained a non-recourse CMBS loan in 2002 using real property it owned as collateral. The borrower eventually defaulted on its mortgage payments. The lender foreclosed and bought back the real property at a sheriff’s sale resulting in a deficiency of approximately $2.1M. The day after the sheriff’s sale, the lender amended its complaint to recover the $2.1M deficiency from the borrower and its guarantors.
The lender claimed that the insolvency of the borrower (evidenced by its failure to make its mortgage payments) was a violation of the carve-out provision of the loan guaranty stating that the debt becomes fully recourse as to the guarantor in the event the borrower “fails to maintain its status as a single purpose entity as required by, and in accordance with the terms and provisions of the Mortgage.” However, the loan documents did not define the term “single purpose entity.” The term could only be found in a section heading titled “Single Purpose Entity/Separateness” containing a covenant (among others) that the “Mortgagor is and will remain solvent and Mortgagor will pay its debts and liabilities * * * from its assets as the same shall become due.”
The court in Cherryland determined that the loan documents were unambiguous on their face and would not consider CMBS industry practices to determine what constituted an SPE. Instead, the court concluded that the parties intended for every covenant contained in the section titled “Single Purpose Entity/Separateness” to be a condition of maintaining SPE status. Since the borrower violated a provision in that section of the mortgage (failure to remain solvent), the court held that the borrower violated the carve-out provision of the guaranty and held the guarantor liable for the $2.1M deficiency. Essentially, the court’s decision destroyed the non-recourse nature of the loan based on a covenant that has never been a condition of maintaining SPE status according to standard CMBS industry practice.
A similar result occurred in 51382 Gratiot Avenue Holdings, LLC v. Chesterfield Development Co., LLC (2011 U.S. Dist. LEXIS 142404 (E.D. Mich. 2011). In Chesterfield, the borrower stopped making payments four and half years after obtaining a commercial mortgage loan in the amount of $17 million. The loan was secured by a shopping mall owned by the borrower. The loan contained a recourse carve-out stating that, “* * * Lender shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in this Note or the Security Instrument by any action or proceeding wherein a money judgment or any deficiency judgment or other judgment establishing any personal liability shall be sought against Borrower * * * shall not, except as otherwise provided in this Article 11, sue for, seek or demand any deficiency judgment against Borrower.” Article 11 of the note enumerated several covenants that would expose the borrower to full recourse liability including the failure of the borrower to “fail to pay its debts and liabilities from its assets as they [became] due.” The court, finding no ambiguity in the loan documents, interpreted and enforced the documents as written despite the fact that the effect was to completely eviscerate the non-recourse nature of the loan.
The consequences of the Cherryland and Chesterfield decisions are potentially far reaching. Cherryland has been appealed to the Michigan Supreme Court. The Michigan Legislature has already enacted legislation providing that “a post-closing solvency covenant shall not be used, directly or indirectly, as a non-recourse carveout or as the basis for any claim or action against a borrower or any guarantor or other surety on a non recourse loan.” (2012 Mich. Act No. 67.) There is an estimated $700 billion of outstanding non-recourse CMBS financing in the United States. The CRE Finance Council estimates that as much as ten to fifteen percent of the outstanding CMBS loans are drafted on loan documents similar to that found in Cherryland and Chesterfield. Borrowers should carefully review their loan documents to make sure they are not subject to the same risks exposed in these cases. You can be sure that lenders will be looking for the same opportunity to impose full-recourse liability against defaulting borrowers.
19 Apr / 2012
Do Not Track is a policy proposal turned technical mechanism that enables users to opt out of tracking from websites they do not directly visit, including analytics services, advertising networks, and social platforms. It is different from the “Do Not Call” list as it is not a list, but rather works though a signal sent from a user’s browser.
For the basic implementation of Do Not Track, the browser signals to websites a “Do Not Track” HTTP header every time a user’s data is requested from the website. The website is then supposed to follow the command and not deliver targeted advertisements based on the information. In addition to the simple browser signal, the Digital Advertising Alliance (DAA), an industry coalition of media and marketing associations, has developed a mechanism that places an imbedded icon in behaviorally targeted online ads. When a user click the icon, he or she is shown how the ad was targeted and delivered and then given an opportunity to opt out of such advertising. The DAA approach would allow consumers to opt out of ads either 1) through the icon or 2) through settings on their web browser. Mozilla, Microsoft, and Apple have already implemented some of these ideas into their browsers and Google is slated to incorporate some form of Chrome by the end of 2012.
Importantly, with Do Not Track protections turned on, consumers will still see advertisements and their information will still be tracked and used by websites they visit directly. For instance, when a consumer shops on Amazon, the consumer’s page history will still be tracked by Amazon, leading to targeted advertising on the Amazon site. However with Do Not Track in place, third-party advertisement providers will not be able to use that information for more targeted advertising.
A major problem with the current implementation of Do Not Track is that currently websites are not required to comply with the requests, neither by law nor by any broad social consensus. Therefore very few websites recognize and respect this privacy signal. However, Yahoo recently announced that it would be implementing a Do Not Track protocol to its websites. In addition, as the major browser providers are adopting this approach and with some very vocal entities such as the Electronic Frontier Foundation and Federal Trade Commission supporting implementation, the push for legislation regarding Do Not Track is heating up. There was a Senate bill introduced in May of 2011, however we expect to see further push for this type of legislation in the near future.
Of course with any issue regarding privacy, there is contention over the both the merits and implementation of legislation. Representative Mary Bono Mack, a California Republican and subcommittee chairwoman, doubts the necessity for Do Not Track and stated, “Where is the public outcry for legislation? Today, I’m simply not hearing it. I haven’t gotten a single letter from anyone back home urging me to pass a privacy bill.” Meanwhile, the Stanford University Laboratory, a vocal supporter of Do Not Track, and entity that runs the donottrack.us website argued in a comment to the FTC that consumers overwhelmingly desire more privacy protections on the internet. They also state that Do Not Track would affect only a small amount of the online advertising market, funds that they suggest would just be funneled in a different direction.
While the Do Not Track protocol and implementation is still being worked out and will likely require legislative intervention to force compliance from websites and advertisement services, with the further call for legislation by the FTC it is likely that the Do Not Track movement will continue to pick up steam and will soon lead to a major legislative push.
What This Means for Business
For most startups and other companies, Do Not Track legislation should not have too much effect on day-to-day operations. For companies that are actually in the business of online advertising that uses non-visitor tracking, then such companies will of course need to closely conform their conduct to the language of any passed legislation. Additionally, it may be smart for these companies to implement Do Not Track mechanisms now as the public will likely soon become more informed about the Do Not Track push. Companies that currently pay for online advertising using non-visitor tracking might want to consider other forms of online advertising because with the passage of Do Not Track legislation and with many consumers likely choosing the Do Not Track option, such ads will been seen by far fewer eyes and thus be less lucrative.
On Thursday, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act). This Act, comprised of several bipartisan-supported bills designed to ease capital-raising for small businesses, will undoubtedly be a major game-changer for capital raising and the business of investing in startups. What follows is an analysis of the most important sections and what these changes will mean for startups.
“Crowd funding” typically connotes a way of financing a project or business, usually through online means of bringing investors and capital-raisers together. Congress in its ever-clever acronymous legislative action gave Title III a short title of “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012″ — or the CROWDFUND Act.
The CROWDFUND Act allows companies to raise startup capital from a large number of investors each investing just a small amount. Investors are limited in the amounts they can invest: if the investor’s annual earnings or net worth is less than $100,000,they can invest the greater of $2,000 or 5% of their annual income; if their net worth and annual earnings is greater than $100,000, they can invest 10% of annual income or net worth, not to exceed $100,000.
On the issuer’s side, the aggregate amount of stock sold to all investors cannot exceed $1 million per year. The Act also imposes other disclosure requirements on the issuer such as providing investors with certain company information and a stated purpose describing the uses for which the capital raised will be used. Most notably, the Act requires the issuer to sell its stock through an intermediary “broker or funding portal,” who must register with the SEC.
The usefulness of this is still unclear and we’ll have to wait until the final regulations are released (due in 270 days) to really know. There is cause for doubt, though, in the act itself. First, the Act requires a great deal of information to be provided about the company, its issuers, the founders, and the securities being offered. In most cases, to get this right is going to require a lot of time by lawyers and accountants (who, by the way, still bill by the hour). Second, the bill provides a pretty broad cause of action against the issuer, AND its officers and directors, for material misstatements or omissions. Given that most startups fail, the real winners here may be plaintiffs attorneys, who will undoubtedly be reviewing with a fine-tooth comb the offering materials of every failed crowd-funded startup looking for some technical misstatement.
General Solicitations in Regulation D Offerings
Regulation D of The Securities Act of 1933 allows companies to avoid costly SEC registration for certain securities offerings. Before the JOBS Act, companies could only offer Reg D securities to persons with whom they had a pre-existing relationship, what is termed a “private offering”. Now, the Act expands this exemption to allow for general solicitations, whereby companies and their brokers can advertise the offering to the general public, although importantly, only accredited investors can purchase.
Every entrepreneur who has ever tried to raise capital (according to the rules) has experienced the frustration stemming from the inability to tell people about the opportunity. This will indeed make it easier for startups to get the word out. Critics though, worry that this allows brokers too much freedom to aggressively advertise stocks to unsuspecting investors — for example, the elderly. I also worry about the noise investment scheme advertisements will generate and the likelihood that it may actually drown out the voices of entrepreneurs seeking capital.
“IPO On Ramp” and “Emerging Growth Companies”
In what has been dubbed the “IPO on Ramp,” the Act designates a new category of “emerging growth” companies and outlines a streamlined IPO process for those companies. The classification for an “emerging growth company” is simple: businesses earning under $1 billion in gross revenue fall within this category’s scope. This classification allows companies to publicly issue stock while exempting them from burdensome disclosure and governance requirements to which larger public companies are subject. It also exempts these companies from Dodd-Frank rules giving shareholders a non-binding vote on executive compensation. The real winners here are VC’s and angel investors as this will create an opportunity for earlier liquidity events. In theory, this should “trickle down” in the form of more active angels and VC’s and perhaps better valuations for the startups.
Private Company Flexibility and Growth
Title V of the Act raises the threshold level on the number of shareholders before a company must go public from 500 to 2,000, thus encouraging a company’s marginal growth without it facing the prospect of filing costly disclosure documents. The need for this stems largely from startups using equity compensation for their employees. Think Facebook.
Regulation A Offerings
Companies who raise under $5 million through an IPO could file under Regulation A to avoid filing periodic reports to shareholders, which conventional publicly-held companies must do. The JOBS Act raises the $5 million ceiling to $50 million, thus easing one burden in issuing an IPO. Regulation A was originally designed as a simplified way to go public in a small way. It has been used rarely in the last decade, however, as the $5 million limit was seen as too low given the costs of compliance with the still someone onerous rules, both before and after the offering. There hasn’t been much attention to this, but we suspect this could generate a new cottage industry of service providers promoting direct private offerings (DPO’s) as again a viable option to raising capital from the public without going through an investment banker.
Should the startup community be happy that legislation permitting crowd funding has finally passed? The bottom line is that it is too soon to tell what kinds of regulations the SEC or state regulators will impose and how the markets will react to these new freedoms. But it is certainly is going to be an exciting couple years watching this play out.
With the growing trend in cloud computing, chances are you use “the cloud” in at least some aspect of your business. ”Cloud computing” refers to remotely accessing services or information from third party data centers. It essentially stores your data on a distant server, allowing you to access it from any location, assuming a device with internet capabilities is available. By outsourcing data storage needs, companies can achieve greater efficiency and cost-savings. However, these benefits are not without risks.
A host of issues can arise when third parties have control over your data, especially when a lack of certainty exists regarding the location of data storage facilities and the ways in which that data is protected. Among the factors contributing to risks:
- vulnerability to hackers and data breaches, resulting in lost, destroyed or improperly disseminated data;
- storing various parties’ data on common servers; and
- varying laws governing privacy and data protection across different jurisdictions and geographic locations.
Cloud computing risks can all lead to business disruptions, privacy law violations and disclosure of confidential information, which can mean significant financial consequences for both the cloud provider and you, the customer.
You might think that since you transferred your data to the third party, you also transferred financial liabilities for data loss or other business interruption–it is up to the third party to protect your data, and it should be liable for any losses resulting from data breaches. But this is rarely the default position.
Allocating Risk: Read the Contract
Most cloud service providers contractually place the responsibility of security on their customers. However, companies are becoming increasingly aware that their service contracts with cloud vendors leave them little recourse in the event of a problem. It is crucial to read the fine print and negotiate with your vendor to define its responsibilities and liabilities for damaged, lost or stolen data. The negotiation could be difficult, as the potential liability is usually much greater than the value of the contract–some vendors take a hard line and say their contracts are non-negotiable; others are open to discussion and might take on a portion of the liability.
Since it is unlikely you’ll be fully protected by the cloud providers’ service agreement, considering an insurance policy to limit risk is worthwhile. While some observers say that cloud computing is generally covered under a business’s existing cyber risk policy, it is important to pay close attention to specific terms in the policy. For example, “computer system” or “computer network” can be defined terms in a policy and you should ensure that these cover cloud computing. In the end, the key is to square up your insurance policy with gaps in your cloud service contract.
As individuals and businesses increasingly become dependent on cloud technology for daily needs, learning about the associated risks and ways to protect yourself are also important. Since this is a developing technology, the law governing it is new and disjointed: different jurisdictions have different requirements and standards. Staying informed will help protect you and your business from potentially significant financial losses due to mishaps in the cloud.
So, you’ve decided to act on your million dollar idea and formed a company. You’ve got an exciting product, momentum, and your workload is at the point where you need to bring in additional employees to help carry out your vision. What’s that you say? Not enough cashflow to pay employees a competitive salary?
Fear not, savvy entrepreneur! You might consider an equity incentive package.
Equity incentives help cash-strapped startups attract talent without digging deeply into the company’s coffers. Typically, a company reserve 5-20% of its equity as an additional perk to employee compensation. You have a few choices when it comes to equity incentives, a popular form being stock options.
A stock option is an agreement to sell a specified number of shares at a specified future date. Stock options are broken down into two sub-groups: qualified and non-qualified stock options.
Qualified vs. Non-Qualified Options
Qualified options meet certain requirements under section 422 of the federal tax Code, which provide some tax benefits to the employee upon exercising the option.
- If the employee sells the stock, it will count as capital gains, not personal income, and is taxed at a lower rate
- Employers get more simplified bookkeeping — when the option is exercised, employers do not have to withhold federal income tax, Social Security tax, or Medicare payments.
- First, you don’t have to worry about meeting tax requirements for qualified options;
- Second, most employees want the cash from selling stock sooner rather than later (one requirement for qualified options is that the employee hold the stock for either two years after the grant, OR one year after exercising the option, whichever time period is longer)–NQOs avoid this holding requirement.
The takeaway is that non-qualified options may be the better choice in most cases: only a small percentage of employees will realize the tax advantages of qualified stock options, and the costs in tracking required compliance outweigh the minimal benefits gained.
Restricted stock differs from options in that the employee pays nothing for the stock, but the stock is subject to forfeiture if the recipient terminates employment within a specified period of time. Restricted stock is taxed on the vesting date for the stock award, as opposed to options, which are not taxed until the employee chooses to exercise the option.
Stock Appreciation Rights (SARs)
Another less popular equity incentive plan are SARs. In SARs, a contract entitles an employee to receive the appreciation in a specified number of shares of stock over a specified period, typically in cash or stock. The employee counts this payout as ordinary income upon exercising the SAR, and the employer gets a tax deduction on that date.
When offering equity incentives, tax considerations are key in determining which plan is best for the company. If your startup is cash-poor but idea-rich, you’ll need top talent to implement your company goals. Equity incentives are a practical way of attracting and keeping valuable employees.