San Diego Corporate Law: 5% Interest in Restaurant Not a "Security" As we have written here at San Diego Corporate Law, if you are selling and/or offering "securities" in California, you must comply with both federal and California securities laws -- the Corporate Securities Law of 1968 (Corp. Code, [...]
Shareholder Derivative Actions (Part III): "Demand Futility" Doctrine As we discussed in Part I of this series, shareholders of San Diego corporations can bring lawsuits on behalf of the corporation against other shareholders and against members of the board of directors. These are called shareholder derivative actions. As we [...]
Shareholder Derivative Actions (Part II): What Happens After the Demand Letter? As we discussed in Part I of this series, shareholders of San Diego and California corporations can bring derivative lawsuits against members of the board of directors. Technically, these are lawsuits filed on behalf of the corporation seeking [...]
Shareholder Derivative Actions (Part I): The "Demand" Requirement Under California law, San Diego corporations have a duty to take actions that are in the best interest of the company and the investors. Failure by the board to do this will lead to litigation, in particular, shareholder derivative actions. However, [...]
San Diego Businesses: Using Stock Options as Employee Compensation If you run your San Diego business as a non-public corporation, one method of compensating your employees for their hard work - particularly upper management employees - is by issuing shares of stock as part of their compensation package. This [...]
Due Diligence and Selling/Buying a Business: Data Breach Disclosures On February 21, 2018, the Federal Securities and Exchange Commission ("SEC") issued new guidance on public corporation cybersecurity disclosures; note that the SEC focuses on publicly-held corporations. However, the new SEC cybersecurity guidelines are relevant to small, closely-held corporations, and [...]
Flexible Disclosure Options Under Regulation D - Rule 504 In general, any securities to be offered or sold in San Diego or in California must be registered to comply with both federal and California securities laws -- the Corporate Securities Law of 1968 (Corp. Code, §§ 25000-25707) and the [...]
San Diego Corporate Law: Revisiting What is a Security and Securities Fraud Offerings and sales of securities in California are governed by both federal and California securities laws -- the Corporate Securities Law of 1968 (Corp. Code, §§ 25000-25707) and the federal Securities Act of 1933 (15 U.S.C. § 77b). If you are offering [...]
San Diego Corporations: What are Fractional Shares? As the name would imply, a "fractional" share of stock means a fraction, part, or portion of a whole share. Thus, a one-half share is considered a "fractional" share. See Cal. Corp. Code § 407. Here is a quick primer on how [...]
San Diego Corporations: What are Shareholder Rights? When you become a shareholder of a San Diego corporation or any corporation in California, you become an owner of some interest in the company. As an "owner," you have certain rights, just like the owner of land has certain rights, like [...]
After You Incorporate, What Next? Congratulations on your newly incorporated San Diego, California corporation. Filing the incorporation papers with the California Secretary of State is not the end of the process. There are several important steps to take after you have become an "Inc." Here is a quick list. [...]
California Corporation Law: Can Minority Shareholders be "Controlling" Shareholders? As we have discussed, it has long been the law in San Diego and California that majority shareholders of corporations and other corporate entities owe fiduciary duties to other shareholders and owners. Among those duties are: Duty of loyalty to [...]
Are Cryptocurrencies "Securities" Under California Law? SEC Offers Guidance Cryptocurrencies have been in the news lately with Bitcoin reaching the $19,000 plateau in mid-December 2017. Some analysts are predicting that Bitcoin will surge even higher, though other analysts disagree. See report here. But, Bitcoin is not the only cryptocurrency. [...]
California Private Security Exemptions: What is a Preexisting Relationship? Sales of securities in California are governed by the California Corporate Securities Law of 1968 codified at Cal. Corp. Code, § 25000 et seq. Violation of the law can lead to criminal, civil, and administrative proceedings. San Diego Securities Law: [...]
What is a "Security" Under California Law? Many people are aware that the offer and sale of securities are governed by federal and California law. The applicable California law is the Corporate Securities Law of 1968 ("CSL"). See Cal. Corp. Code, §§ 25000-25707. In general, § 25110 of the [...]
Do You Owe a Duty of Care to Investors in Your Business? Many California business owners owe duties of care to their investors under California law. Generally, the duty of care requires business owners to act in good faith and in the best interests of the business. It is [...]
Payment of Finder’s Fees for Securities Sales in California California’s new law permitting payment of finder’s fees to middlemen in securities purchases creates new business incentives within the state. However, the law contradicts a long-held Securities and Exchange Commission policy against finder’s fees. Essentially, California has legalized payment of [...]
My Investor Is Being Too Hands On. Is There Anything I Can Do? Investors getting very involved in the business can cause problems for business owners who want to retain control. On one hand, without the investor, the business would not have the money to fund its operations. On [...]
What to Promise Investors and What to Keep to Yourself If You Want to Stay Out of Court Promoting your business to investors could land you in court if you run afoul of the detailed and complicated California and federal laws surrounding sale of securities. This post focuses on [...]
What Is the Difference Between Federal Securities Laws and California Securities Laws, and How Do They Apply to Me? Both the state of California and the federal government have laws about securities on the books, but the two sets of laws differ significantly. Federal and California securities laws cover [...]
I used crowdfunding for my startup. What happens if my business fails? So you have a really cool idea for a startup, but you don’t have the money you need to launch it. Your last $5 paid for two slices of pizza last night. You’re certain your product will [...]
What Constitutes a Material Misrepresentation in a Securities Offering? California Corporations Code Section 25401 provides: “It is unlawful for any person to offer or sell a security in this state, or to buy or offer to buy a security in this state, by means of any written or oral communication [...]
What Securities Exemptions are Available in California? Under California Corporations Code Sections 25110, 25120 and 25130, as well as federal law, it is unlawful for any person to sell any type of security unless that security has either been registered with the California Secretary of State (or the Securities and Exchange Commission) or [...]
What is a Private Placement Memorandum? In order to raise capital, many small businesses seek investors through what are known as private placements. These “private placements” can offer limited partnership interests, common or preferred shares of stock in small corporations, bonds, or even notes. These offerings are generally exempt [...]
Should I Use an Incentive Stock Option Plan? As with every aspect of business, there are pros and cons to establishing an incentive stock option plan; but before one can even make the decisions necessary, it is important to understand what an incentive stock option plan is. The incentive [...]
The California Corporate Securities Law of 1968 – What is it Anyway? The California Corporate Securities Law of 1968 (“Securities Law”) became effective on January 2, 1969 Marc Levin, California Corporate Securities Law of 1968: The Issue of the Nonissuer, 2 Loy. L.A. L. Rev. 87 (1969) and regulates all offers and sales of [...]
Understanding Preferred Instrument Term Sheets in Early Stage Funding Structuring early stage investments as preferred instruments, such as preferred stock, is significantly more complex than working with convertible notes; understanding preferred instrument term sheets in early stage funding is essential knowledge. This post will introduce some of the commonly [...]
Part Two: Positioning Your Startup to Appeal to Angel Investors A previous article introduced the concept of reviewing and structuring a startup to appeal to angel investors. That article briefly discussed some of the common points of inspection for the due diligence conducted by an interested angel. This article [...]
Understanding Convertible Note Term Sheets in Early Stage Funding Once an angel has decided to invest in a startup, they will either seek a convertible note or equity in the form of preferred stock. In either case, a term sheet is often used to communicate the basic details of [...]
Positioning Your Startup to Appeal to Angel Investors After initial seed money and the money from friends and family has been exhausted, early stage startups enter a challenging phase in the financial life of the company. For biotech startups in particular, this can be the beginning of a relentless [...]
ERISA Fiduciaries Must Monitor Retirement Plan Investments The United States Supreme Court has issued a reminder to plan fiduciaries responsible for selecting investment options available to participants in employee benefits plans subject to ERISA. Any such fiduciary has an ongoing duty to monitor the total performance of plan investments, [...]
Private Placements: The Advantages of 506(c) Companies seeking to raise capital through a private placement have long preferred to proceed under Rule 506 of Regulation D of the Securities Act of 1933. Regulation D provides a safe harbor for private offerings, with three separate registration-exemption schemes governed by Rules [...]
Avoiding Rescission Exposure in a Private Placement Private placements can be a great vehicle for raising money to infuse a business with much needed capital while avoiding the formalities of a public offering. Many businesses that lack the contacts to secure sufficient attention and investment from a venture capital [...]
Proposed Equity Crowdfunding Rules Released On Thursday, October 24th, the SEC released a proposed set of equity crowdfunding rules that would allow companies to sell securities via equity crowdfunding. While made legal when President Obama signed the JOBS Act on April 5, 2012, crowdfunding will remain limited to [...]
General Solicitation Rule 506(c) As mandated by the Jumpstart Our Business Startups Act (JOBS Act) signed April 5, 2012, the Securities and Exchange Commission has released a final rule ending (under specific circumstances) the eighty-year ban on general solicitation of private placements. Rule 506(c) of Regulation D became effective September [...]
Rule 506 General Solicitation The Securities and Exchange Commission has released proposed amendments to Regulation D of the Securities Act of 1933 that would allow for general solicitation (read: advertising) of private placements. The proposed rules, mandated under the Jumpstart Our Business Startups Act (JOBS Act), were published [...]
LLC vs. Corporation for Equity Crowdfunding The traditional debate for promoters of start-ups when choosing which entity to utilize has been confined to three (really four) choices: sole proprietorship/partnership, S-Corp, or LLC. In most instances, each of these forms has allowed for initial losses to be passed through to [...]
Equity Crowdfunding is "No Fund" I recently received a question about the use of equity crowdfunding to create an investment pool that would create a small investment fund to purchase equity and debt securities in other small businesses. In short, the answer is that it is not allowed. While [...]
Avoid the Crowd Even before equity crowdfunding was signed into law earlier this month, an article in The Wall Street Journal voiced a critical opinion of equity crowdfunding. The idea behind equity crowdfunding is to ease the process of capitalizing small and start-up businesses; in turn, it is [...]
Preparing for Equity Crowdfunding Equity crowdfunding will not become available for mass use until early 2013. However, it is expected that a great deal of investor money will be ready for equity crowdfunding when it comes online. Wefunder.com reported on April 6, 2012, just one day after the [...]
Equity Crowdfunding Fundamentals Although equity crowdfunding is now legal, the Securities and Exchange Commission (SEC) has 270 days to implement the equity crowdfunding provisions found in Title III of the Jumpstart Our Startups Act (JOBS Act) adopted last week. Until the SEC releases the regulations it proposes to [...]
Equity Crowdfunding Legal Today the Jumpstart Our Startups Act (JOBS Act) was signed into law. Within the law are two key provisions allowing small and startup businesses to capitalize by raising funds from investors. The first provision under Title II of the JOBS Act modifies the prohibition against [...]
Pursue Investors For many small business owners, the thought of bringing investors into their business evokes emotions of both hope and fear. Yes, the dreams of capital to expand into new markets or finally develop the product that for years now has been stuck in R&D limbo would [...]
Starting a New Business Starting a business begins with planning. However, once the plan is in place, the plan must be executed. Below are the ten steps you will need to execute to transform your business idea into an operating business. #1. Write a Business Plan A well written [...]
