Monday, May 23, 2016

Regulation Crowdfunding Investment Limit

The SEC's Regulation Crowdfunding sets forth the rules pursuant to which companies may raise capital through the SEC's equity crowdfunding exemption.  One of those rules sets limits on the amount of crowdfunding investments by any one investor in crowdfunding offerings (by all companies conducting crowdfunding offerings) in any 12-month period.

Specifically,  Rule 100(a)(2) of Regulation Crowdfunding provides:

"The aggregate amount of securities sold to any investor across all issuers in reliance on [the equity crowdfunding exemption] during the 12-month period preceding the date of such transaction, including the securities sold to such investor in such transaction, shall not exceed: 

(i) The greater of $2,000 or 5 percent of the lesser of the investor’s annual income or net
worth if either the investor’s annual income or net worth is less than $100,000; or

(ii) 10 percent of the lesser of the investor’s annual income or net worth, not to exceed an
amount sold of $100,000, if both the investor’s annual income and net worth are equal to or more
than $100,000."

The investment limit (for all crowdfunding investments) for a crowdfunding investor always results in a number:

  • between $2,000 and $5,000; or 
  • between $10,000 and $100,000. 
Put another way, the investment limit for a crowdfunding investor can never be:

  • less than $2,000;
  • more than $5,000 but less than $10,000; or 
  • more than $100,00.
I have developed a handy calculator for determining the investment amount limit for a particular equity crowdfunding investor based upon their income, net worth, and prior crowdfunding investments in the past 12-months. Feel free to contact me if you'd like a copy of the investment limit calculator.

Tuesday, May 17, 2016

Equity Crowdfunding under Federal Law has Arrived!

It's finally here.  Four years after the JOBS Act of 2012 was signed into law which required the SEC to adopt rules permitting equity crowdfunding, the SEC's final rules titled "Regulation Crowdfunding" have gone effective.

Effective May 16, 2016, U.S. companies may now offer and sell shares of stock and other securities via crowdfunding and qualify for an exemption from securities registration requirements under Section 4(a)(6) of the Securities Act of 1933, as amended.

I'm still wading through the SEC's 685-page final rule release adopting Regulation Crowdfunding, which is available here.  I plan to blog about this matter further in the coming days, but in the meantime, you can read "Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers" written by the SEC, which is available here.

Friday, May 13, 2016

Little Known Facts: LLCs and Statutory Attorney's Fees in Texas

Here's a Little Known Fact about an advantage of operating as a limited liability company (LLC) in Texas.

LLC's are not subject to Section 38.001 of the Texas Civil Practice and Remedies Code, which permits statutory recovery of reasonable attorney's fees from individuals and corporations for certain claims, including claims for an oral or written contract.

Section 38.001 of the Texas Civil Practice and Remedies Code provides as follows:

"A person may recover reasonable attorney's fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for:
(1) rendered services;
(2) performed labor;
(3) furnished material;
(4) freight or express overcharges;
(5) lost or damaged freight or express;
(6) killed or injured stock;
(7) a sworn account;  or
(8) an oral or written contract."

A 2014 case decided by the Houston Court of Appeals (Fleming v. Barton) has confirmed that the statute means what it says - that only individuals and corporations (not LLCs, limited partnerships (LPs), limited liability partnerships (LLPs) and other entities) may be liable under Section 38.001. Relying upon the plain language of the statute, that court denied a claim for legal fees under Section 38.001 against Fleming & Associates, L.L.P. because it was a limited liability partnership.

But wait a second, why wouldn't a limited liability company, limited liability partnership, or limited partnership who lost a breach of contract lawsuit face the same liability as a natural person or a corporation that was guilty of the exact same breach?

It arises as a quirk of Texas's statutory codification process.  When the Civil Practice and Remedies Code was adopted in 1986, it replaced the existing Article 2226 of the Texas Revised Civil Statutes, which permitted recovery of legal fees against “a person or corporation.”  The then-recently adopted Texas Code Construction Act had defined "person" broadly to include any legal entity, including governmental entities.  So in seeking to avoid substantive changes to Article 2226, the drafters chose the word "individual" instead of "person" to clarify that governmental entities could not be subject to liability under Section 38.001.

This strikes me as a great area of the law for the Texas legislature to step in and clarify that LLCs, LPs, LLPs, and other business entities (perhaps excluding governmental entities) should face the same liability under Section 38.001 as individuals and corporations.

Note that the issue discussed above relates only to statutory attorney's fees provided for by Section 38.001 of the Texas Civil Practice and Remedies Code.  Nothing in that section prevents an LLC or other entity to agreeing to cover another party's attorney's fees pursuant to a contract.

Thursday, April 21, 2016

Does Big Board = Big Problem for Texas LLC?

Texas limited liability companies have tremendous flexibility in choosing how they may be governed. That can be a blessing and a curse.  Let me explain.

Each Texas LLC must elect to be member-managed or manager-managed in its certificate of formation.  Then the LLC's company agreement generally determines if the company may or may not have officers representing the company and how the management rights will be allocated among the officers (if any), managers (if any), and members.  The benefits of this flexibility are easy to see: the LLC can choose to slice-and-dice the management and control functions of the company in any number of ways that suit its interests.  For example:

  • officer(s) might be responsible for day-to-day management of the company in the ordinary course; 
  • manager(s) approval might be required for more substantial matters, such as taking out a loan or entering into a material contract; and
  • member(s) approval might be required for major decisions, such as entering into a merger, accepting a new member, or amending the company agreement.    
LLCs often seek to establish a Board of Managers which would be analogous to a Board of Directors of a corporation. In that case, it is not unusual for the LLC's company agreement to provide that no individual manager has the power or authority to bind the company (much like a single director of a corporation with multiple directors would not be able to bind the corporation).  Such a provision would be effective to deny any particular manger the actual authority to bind the company.

But might a rogue manager nonetheless have apparent authority to bind the LLC? Probably so. Recall that a manager-managed Texas LLC must identify its initial managers in its certificate of formation. So the world would be on notice as to the identity of the mangers - but not necessarily the scope of their authority, which in this example is limited by the company agreement which is not publicly filed. The default presumption under the Texas Limited Liability Company Law is that a manager is an agent that may bind the LLC (see Section 101.254 of the Texas Business Organizations Code).

Bottom line, a Texas LLC has at least some risk that a rogue manager might act without actual authority (but with apparent authority) to bind the company.  That's a risk a Texas corporation does not face - a director of a corporation generally does not have apparent authority to bind a corporation because corporations generally act through their officers, not their directors.

Thanks to Allen Sparkman for highlighting this issue in a paper he presented to the UT-CLE Securities Regulation and Business Law Conference.

Wednesday, April 6, 2016

“Take It to the Limit” in your next M&A Deal

Thanks to Fort Worth Business for publishing my M&A article on its website here. In the article, I use Eagles lyrics as a jumping off point to discuss key lessons for folks involved in merger or acquisition transactions.  The best part of writing the article was spending an afternoon listening to Eagles Radio on Pandora to "research" this project.  I hope you have as much fun reading it as I did writing it.

Rest in Peace(ful Easy Feeling), Glenn Frey.

Friday, March 25, 2016

The Ongoing Death of Paper - Delaware UCC Filings

Bad news for the paper industry and for those of you still filing your Uniform Commercial Code (UCC) financing statements by paper - the State of Delaware is no longer accepting paper UCC filings. Effective December 1, 2015, a person wishing to make a UCC filing with the Delaware Secretary of State's office must now either file electronically or deliver its paper UCC filing to an "Authorized UCC Filer" who in turn will file the UCC electronically.

For those of you still wedded to pen and paper, you can access a list of Delaware Authorized UCC Filers here.

If you are headed to the beach, you might consider taking along the Delaware Secretary of State's complete administrative rules which are available here.

Friday, March 11, 2016

TECH Talk - TEXAS Style Radio Show Appearance

Today I had the pleasure of being a guest on TECH Talk - TEXAS Style radio podcast sponsored by TECH Fort Worth and hosted by Sarah Zink.  Today's topic was Real Estate Leasing Essentials for your Small Business.  We discussed some of the key issues small business's should be aware of before entering into a commercial real estate lease agreement.

This was my third time as a guest on this program.  On my first appearance we discussed "What to Know When Selling Your Business."  My second appearance covered similar territory with "10 Things You Should Know Before Selling Your Business."

All three radio podcasts are available for your listening pleasure at TECH Talk - TEXAS Style's homepage on Blog Talk Radio's website here.