Corporate Law

The Rules Are Live! A Primer for Equity Crowdfunding Under The JOBS Act

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May 16th, 2016 marks a milestone for crowdfunding with the JOBS Act Title III finally taking effect. The rule’s biggest impact will be the inclusion of millions of non-accredited investors to the pool of funds that is powering a new wave of crowd investments. With the JOBS Act Title III, persons earning under $100,000 can now invest a limited portion of their income in retail online investments. While the rule brought many welcome changes to issuers wishing to take advantage of this financing method, new regulations and restrictions are also now in effect. 

The company funding limit under Title III cannot exceed one million dollars in a 12-month period. To start the funding process, the first step is to file a Form C. This form requires extensive information and is the SEC’s way of ensuring that investors have thorough knowledge about their potential investment. In the Form C, the issuer must identify officers, directors, and equity holders that own in excess of 20% of the company. The issuer must also disclose the price, number of shares offered and the deal deadline. The required financial statements will change depending on the amount being raised. 

If the issuer is seeking funding under $100,000 it will have to release certain information from its federal income tax returns and produce an internal GAAP financial statement review certified by the company CEO. For funding between $100,000 and $500,000, GAAP financial statements must be reviewed by a third party CPA. If the raise exceeds $500,000 then a third party CPA must review the financial statements if this is the Company’s first offering under the crowd-funding regulations, and must be audited by a third party CPA if this is the second or subsequent offering by the Company under these regulations.

All of a company’s required information must be submitted to an “intermediary” as defined in the regulations, which will supply a platform on which the information is available electronically to potential investors. Once the issuer has submitted all relevant information and has chosen a platform, there are still many rules to abide by, including SEC general advertisement limitations. General advertising is prohibited, except for certain specific disclosures, including a notice that identifies the issuer and the terms of the offering and provides other limited information, provided that the notice must direct the potential investor to the intermediary’s platform.    

After the funding has begun, the issuer must file a Form C-U at 50% and 100% of the funding target. Nonetheless it is important for issuers to be even more proactive with investor information, which must be provided through platform updates. In this way the SEC ensures that all updates are in one place for all potential investors to access.  Issuers are not allowed to utilize email updates and interviews outside the platform; even events such as demo days may cause problems.

Even though Title III has opened the door to millions of people, there are certain aspects that do not live up to all stakeholder expectations. The one million dollar cap is arguably one of its main constraints with many issuers often needing substantially more in a twelve month period. Investors are also limited in the amounts they can invest in a twelve month period under these regulations through a somewhat complex formula based on net worth and annual income.  For example, an investor with annual income of $100,000 a year and $500,000 in net worth would be subject to an investment limit of $5,000 in a twelve month period for all of his or her investments made under these regulations.  And as noted above, investors are limited in communicating with issuers only through the platform, with such communications available to all with access to the platform.

While these are only some of the changes each party will face, this is not all bad news. The transition toward a better experience cannot come without the hardships of regulation. In a world of increasing economic inequality, providing better options for those previously barred from this type of funding participation becomes increasingly important. As legislators address this in their own ways, it is important for companies to provide the information infrastructure needed to make this disruptive force a reality.

LEGAL DISCLAIMER: This article is not intended to be, nor may it be used as, legal advice or tax advice.  This article shall be used solely for general, non-directed informational purposes.  No attorney-client relationship has been formed by virtue of this article and Ressler + Wynne Ressler, PC has in no way agreed or consented to provide you with legal representation by virtue of this article.

Considerations of Moving Your Business to Texas & Why You Should Choose Austin

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Austin is frequently dubbed “the new Silicon Valley” and for good reason.  According to the Austin Business Journal, more than 9,000 businesses moved out of California in 2015, with most of those moves to Texas. With a recent attempt by California legislature to raise the corporate tax (from 8.25 percent to 18.84 percent) it’s not surprising that many California-based business are looking for a new place to call home.

If you are thinking about moving your business to Texas, consider the advice of the RWR Legal team, who have represented and connected innovators, and their startups, since 1996.

Here are some of the top reasons to move to Austin as well as a couple of tips and tricks to consider once the choice has been made.

Top Reasons to Move Your Business to Austin:

1. Texas has Significantly Lower Corporate Taxes
In Texas, a corporation, partnership or limited liability company is each taxed on something called its “margin”, which is its gross income with limited deductions. The tax rate will vary depending upon the type of business that it operates and ranges from 0.375% to 0.75%. Entities with $1,130,000 or less of revenue are not subject to tax. Further, there is no minimum tax and its owners are not subject to any further taxes, as Texas does not have a personal income tax.

This is generally much lower than business taxes in California. In California, a corporation is taxed at a rate of 18.84% (recently increased from 8.84%) on its net income over $100,000 (with a minimum tax of $800). A partnership or limited liability company would only be required to pay the minimum $800 in taxes; however, its owners would also pay an income tax on their share of the partnership or limited liability company income.

2. Austin has a developed, highly interactive Entrepreneurial Community

Texas entrepreneurial communities are developing at a rapid pace.  Austin has a very interactive ecosystem and prides itself on helping people connect with who they need to succeed.  We have many co-working spaces open and ready to welcome newcomers and visitors as well as incubators and accelerators designed to bring mentorship and other resources to growing businesses.

3. Capital Opportunities

If you have a business that is looking for investment or is already in the process of raising money, look to the Austin’s well-regarding entrepreneurial and investment community for guidance. One of many options is The Central Texas Angel Network, which has invested more than $90 million since 2006 and continues to be the most active angel investment group in North America.

4. Personal Income Tax

Texas is one of the few states that does not have a state income tax, which not only puts a little extra money in your pocket at the end of the day, but also attracts strong prospective employees.

5. Weather 

Texas has mild winters and mostly sunny days the rest of the year, Texas is a great place to move or expand your business. It does get hot in the summer (with multiple days hovering around 100 degrees), but if you don’t mind the occasional heat wave, Austin is your place.

6. Expansion 

Austin is one of the fastest-growing cities in the country.  With new construction happening throughout downtown and the surrounding areas, there’s plenty of office space and apartments/homes for employees to relocate.

Top Things to Consider After You Decide to Move:

1. Transfer your LLC 

Unless your company was incorporated in Texas, you will have to register as a foreign corporation. Fortunately, this isn’t as difficult as it sounds, and the  U. S. Small Business Administration actually explains the options for moving the LLC to a new state. You can continue your LLC in your old state, but will have to register as a foreign LLC in your new state, which means more paperwork, involving duplicate annual reports. Luckily, all the ins and outs of transferring the LLC can be easily navigated by your legal counsel.

2. Review Agreements 

Agreements drafted under a different state law may need some adjustment when you move your business to Austin. Make sure to review existing employee agreements to ensure compliance with Texas law, including non-competes and other employee restrictions that can be broader in Texas.

3. Check Permits and Licenses 

When moving a business to a new state, it helps to make sure you have everything buttoned-up before you go to ensure the easiest transition possible.  Depending on your business, this includes securing sales tax permits, filing annual franchise tax and public information reports, and obtaining any needed insurance, licenses and permits. If you have questions about any of these requirements in regards to your business, the RWR Legal team is here to help.

4. Incentives & Employment Details 

If you have employees, you may need to register for unemployment tax account with Texas Workforce Commission. It also is beneficial to research any state tax incentives that may apply to your business.

5. Culture & Lifestyle 

With an array of music festivals, food trucks, coffee shops, nightlife and beautiful hiking trails, Austin is a lively city filled with new experiences. The city features a diverse range of things-to-do, making it an appealing home for prospective employees.

Overtime News

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When an employee is considered “exempt” per the Fair Labor Standards Act (FLSA), this means that you as the employer do not have to pay overtime. Today, an executive, administrative or professional employee can only be considered exempt from overtime if he or she is paid at least $455 per week or $23,660 per year, and meets certain other tests. If this seems like a low threshold, former President Barack Obama agreed with you, and under the Obama administration, the Department of Labor (DOL) was directed to update and modernize the regulations governing this exemption, and issued a rule that was to take effect December 1, 2016.  According to a recent Fortune magazine article, the rule “would have doubled to $47,500 the maximum salary a worker [could] earn and still be eligible for mandatory overtime pay. The new threshold would have been the first significant change in four decades.” 1)

Struck Down

However, on November 22, 2016, Texas U.S. District Court Judge Amos Mazzant—coincidentally appointed by President Obama—granted a preliminary injunction in a lawsuit filed by an alliance of 21 states and several industry groups that effectively blocked the proposed rule. Therefore, the old DOL standard still applies, and under the so-called “white-collar overtime exemption,” you can avoid paying overtime in many situations.

But Wait

While a district court preliminary injunction can at times be a death sentence for a rule, it is not certain how the Trump administration feels about the issue, and it may support a rise in the minimum salary level. If this happens, employer implications could be significant.

Be Ready

In addition to the potential increase in minimum salary, employers must always be ready to demonstrate that employees they designate as “exempt” meet one of the “white collar” or other exemptions, and demonstrate that workers that they designate as “independent contractors” are not disguised “employees” for purposes of the law.  They must also keep appropriate time records for all non-exempt employees.  Failure to comply with the FSLA and DOL regulations can be costly. If only one of your employees becomes disgruntled, believes they were not paid in accordance with the overtime rules, and decides to sue, that can be the start of a collective action where other “similarly situated” employees can join the lawsuit against you after it has been filed.  Defending a lawsuit can quickly become costly, and if you lose, you could be forced to remit back pay along with attorney fees, liquidated damages and court costs in some cases.

We Are Here to Help

If you do have a compliance question, or if you would like a review of your compensation policies be sure to email or call us at 512-320-0601. We are a full-service startup-centric law firm well equipped to handle your needs.

 

LEGAL DISCLAIMER: This article is not intended to be, nor may it be used as, legal advice or tax advice.  This article shall be used solely for general, non-directed informational purposes.  No attorney-client relationship has been formed by virtue of this article and Ressler + Wynne Ressler, PC has in no way agreed or consented to provide you with legal representation by virtue of this article.