From Big Law to Solo and Beyond
The SEC has assured the markets that it “will remain open and operational in the event the federal government undergoes a lapse in appropriations on October 1.”
Any changes to the SEC’s operational status after October 1 will be announced on www.sec.gov.
If you want more juicy details of the SEC’s operational plan in the event of a government shutdown, enjoy this link:
I got another (non-client) question about whether I prefer corporations or LLCs for startups.
Short Answer:
It depends.
Long-Winded Answer:
I have found that an LLC will often provide more flexibility in terms of division of rights and responsibilities from the default rules in many business entity statutes. In addition, there is more flexibility in terms of pass-through tax treatment with an LLC than with a corporation, even with a Subchapter S election.
If there are a small number of owners, or it is owned by a single person, they can usually get to the same result regardless of the entity type. In that case, the most important thing is to have some type of limited liability entity in place, and a corporation and an LLC are similar enough that the same results can be achieved through a variety of strategies.
Many people suggest a corporation because it is easier to attract investors, but that is not necessarily the case. Only a small portion of small businesses attract the type of institutional investors (such as venture capital firms) that would require the company be organized as a corporation. Investors in some industries may expect specific organizational forms for their investment. For example, real estate or natural resources investors may expect the company to use a limited partnership.
If an entrepreneur is in discussions with, or knows it may want to approach, an investor prior to organization, the investor’s concerns can be met up front. However, in the beginning the organizational form should be driven by the entrepreneur’s and business’ needs. Unless the entrepreneur knows who will make the investment and what their criteria is, there is no way to predict the terms up front as every situation is different, and there is likely to be some required restructuring done prior to the investment in any case.
Cross-posted at Underdisclosed.com.
I have been getting my share of Bitcoin-related inquiries lately. Here are some thoughts regarding the risk of engaging in Bitcoin-denominated transactions.
In my view, the biggest risk of Bitcoins is the regulatory issue. This risk exist whether you conduct Bitcoin-denominated business or trade Bitcoins like you would with any other currency.
There has been a lot of news lately about the efforts of a variety of U.S. regulators to understand Bitcoin, and these regulators are not in the business of exempting financial products that compete with government issued currencies or act outside of the established financial regulatory environment.
Governments in general, the U.S. government in particular and state governments particularly are wary of alternative financial vehicles. The U.S. government does not have a particularly good track record even where the law would seem to be on the side of the financing vehicle. For example, the U.S. and state governments went after Paypal while it was in its IPO process. In addition, there have been several “e-gold” currencies in the past that have failed for a number of reasons, from criminal behavior on the part of the principals to allegations of the currencies being used for fraud or money laundering. There has also been a crackdown on activities of banks and financial institutions that attempt to evade U.S. laws by locating offshore or on Indian reservations.
In addition, there are the governmental concerns with tracking financial transactions for purposes of combating money laundering, drug trafficking and terrorism, and I cannot imagine that the government would exempt Bitcoin from these extensive regulatory obligations. However, I am not sure Bitcoin would be in a position to comply with them. This would make Bitcoin difficult to use in the U.S. or by U.S. persons and subject the creator(s) of Bitcoin to substantial risk, even as secretive as they are, as the head of founders of PokerStars, Full Tilt Poker and Absolute Poker could tell you.
As a result of all of the above, there is substantial expense and risk in using and accepting Bitcoins, as there should be a risk premium attached due to the very real possibility that the U.S. and other governments could shut them down.
“Annual” means “annual,” right? How hard could it be. Let’s allow some ambiguous drafting, course of dealing and New York Stock Exchange regulations make it complicated.
Background
PIMCO is a big fund company and Brigade is an investor in two of its funds, each of which is a Massachusetts business trust.
The funds sent notices to investors of their intent to hold annual meetings as usual. Brigade sent notice that it was going to nominate a trustee for election at the annual meetings. PIMCO rescheduled the meetings to the last day of its fiscal year.
The funds’ declarations of trust require annual meetings at least 15 months after the first sale of shares and thereafter as specified in the bylaws.
The funds’ bylaws provide that annual meetings shall be held, so long as common shares are listed for trading on the NYSE, on at least an annual basis.
The NYSE requires listed companies to hold an annual shareholders’ meeting during the fiscal year.
Brigade filed suit seeking an injunction requiring PIMCO to hold the annual meeting as soon as practical and a declaration that the bylaws require an annual meeting at least once within any twelve month period.
Brigade contends that the rescheduling to nineteen months after the last annual meeting does not count as “annual,” which means within twelve months of the last annual meeting. PIMCO says “annual” means “during the fiscal year.”
What the Court Says “Annual” Means
Interpretation of Governing Documents
The court noted that the reference to the NYSE clearly means that an annual meeting must be held, at the very least, once every fiscal year, even though the bylaws do not explicitly say that.
However, the court reviewed the bylaw provision for shareholder notices together with the annual meeting requirement.1 It also noted that the bylaws provided for a special meeting in lieu of annual meeting, which may take place outside of the “annual period,” a thirty day window following the anniversary of the previous year’s annual meeting, which is not an “annual meeting,” but a “special meeting.”
The court also noted that this interpretation is consistent with how PIMCO historically scheduled its meetings and the usual meaning of “on an annual basis.”
There is more going on here than contract interpretation, and you may already know this if you have ever dealt with this issue before a court.
The Real Issue
Many courts don’t come out and say it, but the Brigade court did. Where the bylaws are ambiguous, it will construe them against the drafters, in other words, the company.
The upshot is that courts do not like it when companies try to escape the wrath of a shareholder vote. As the court said,
“Moreover, where “bylaw provision are unclear, we resolve any doubt in favor of stockholders’ electoral rights.””
The court went on to quote a variety of shareholder friendly cases for the proposition that voting in corporate elections is a fundamental right of shareholders, and the court will not interpret ambiguous governing documents to allow the company to postpone an election.
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1Bylaws Section 10(c):
“To be timely, the Shareholder Notice must be delivered to or mailed and received at the principal executive offices of the Trust not less than forty- five (45) nor more than sixty (60) days prior to the first anniversary date of the date on which the Trust first mailed its proxy materials for the prior year’s annual meeting; … provided, … however, if and only if the annual meeting is not scheduled to be held within a period that commences thirty (30) days before the first anniversary date of the annual meeting for the preceding year and ends thirty (30) days after such anniversary date (an annual meeting date outside such period being referred to herein as an “Other Annual Meeting Date”), such Shareholder Notice must be given in the manner provided herein by the later of the close of business on (i) the date forty-five (45) days prior to such Other Annual Meeting Date or (ii) the tenth (10th) business day following the date such Other Annual Meeting Date is first publicly announced or disclosed” (emphasis added).
The Federal Trade Commission sent letters to search engines regarding advertising practices on their websites. The FTC noted that they are having trouble telling the difference between search results and ads. As a result, the search engines need to comply with FTC rules. The letters update the previous guidance the FTC offered for digital advertisers.
In the letter, the FTC noted that consumers ordinarily expect that natural search results included and ranked based on relevance to a search query, not based on payment from a third party.
We will ignore the fact that these “consumers” are typically using a free service and get to the broad strokes of the FTC’s guidance. Basically, the FTC wants to make sure that advertising is sistinguishable from natural results. This applies regardless of the type of device the “customer” uses to access the search engine.
Among the lucky recipients of the letter are AOL, Ask.com, Bing, Blekko, DuckDuckGo, Google, and Yahoo!, as well as 17 of the most heavily trafficked search engines that specialize in the areas of shopping, travel, and local business, and that display advertisements to consumers.
For those of us in the Freelance Economy, It is Q3 tax day. Have a happy and a healthy!
Link: U.S. v. Vilar
Amid a selection of evidentiary and litigation-y claims, the recent 2nd Circuit case of U.S. v. Vilar did have some interesting nuggets for securities professionals. Looking at an open issue following the U.S. Supreme Court case of Morrison v. National Australia Bank Ltd., the court looked at whether criminal liability under the Securities Exchange Act of 1934 extended to conduct outside the U.S.
Morrison was a civil case that limited Exchange Act Section 10(b) and Rule 10b-5 to domestic transactions in securities.
Background
The defendants were investment managers and advisers managing up to $9 billion before the tech bubble burst. They offered select clients the opportunity to invest in securities that paid a high, fixed rate of interest, which were backed primarily by high quality, short-term deposits. However a portion was invested in publicly traded emerging growth stocks. See where this is going?
The bubble burst and the defendants were not able to meet the interest payments. They created another investment vehicle and sold it to an investor, using the proceeds to settle a portion of the previous securities and for various personal expenses. This investor complained to the SEC after demands to return her funds were met with questionable responses.
The defendants were convicted on a variety of securities, mail and wire fraud counts.
The Argument
Relying on Morrison, he defendants argued that their convictions should be reversed since their conduct was extraterritorial, or outside the U.S.
The court agreed and quoted Morrison for the proposition that when a statute gives no clear indication of an extraterritorial application, it has none. Although Section 10(b) clearly forbids a variety of fraud, its purpose is to prohibit crimes against private individuals or their property, which is the sort of statutory provision for which the presumption against extraterritoriality applies (responding to the government’s examples of cases broadly applying statutes extraterritorially where the victims were government actors). A statute either applies exterritorially or it does not, and once it is determined that a statute does not apply extraterritorially, the only relevant question is whether the conduct occurred in the territory of a foreign sovereign. In such a case, the court’s test is:
A securities transaction is domestic when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed within the United States. More specifically, a domestic transaction has occurred when the purchaser has incurred irrevocable liability within the United States to take and pay for a security, or the seller has incurred irrevocable liability within the United States to deliver a security.
The Upshot
The conviction stands. The conduct at issue was conducted in the United States, with ties to New York and Puerto Rico, which counts for the court’s purposes.
The defendants claimed that they structured the transaction carefully to avoid U.S. jurisdiction. However, the court declined to “rescue fraudsters when they complain that their perfect scheme to avoid getting caught has failed.”
The Takeaway
The court summarized its conclusion on the relevant (to us) point as follows:
On August 31, 2012, I officially left Big Law Firm, and on September 1, 2013, the Law Office of Douglas M. Berman, PLLC turned on the lights. I’ve been working on my own ever since. Happy Anniversary to me!