Friday, December 28, 2012

Texas IPO Market 2012

Further evidence has emerged that energy continues to drive the Texas securities law market.

According to The Texas Lawbook, there have been 13 IPOs priced by companies based in Texas in 2012.  Those 13 IPOs offered an aggregate of $3.9 billion of securities.  As was the case in 2011, more than half of the 2012 Texas IPO's (7 of 13), representing more than half of the value of the offerings ($2.5 billion of $3.9 billion) were conducted by energy sector companies.

This will probably be my final blog of 2012.  Thanks to all my readers and have a very Happy New Year!

Wednesday, November 14, 2012

Rule 506: the 500 Lbs. Gorilla of Regulation D

When it comes to raising capital for small businesses, Rule 506 is where all the action is.

As readers of this blog will probably know, every offering of securities must be registered or exempt from registration. Because registering an offering of securities is an expensive and time-consuming enterprise, most small businesses seek to find an exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act").

In 1982, the Securities and Exchange Commission ("SEC") adopted Regulation D, which provided three rules exempting private placements of securities from the registration requirements of the Securities Act: Rule 504, Rule 505 and Rule 506.

Rule 504 provides an exemption from registration requirements for private companies offering not more than $1,000,000 of securities to an unlimited number of investors.

Rule 505 provides an exemption from registration requirements for companies offering not more than $5,000,000 of securities to not more than 35 investors and an unlimited number of accredited investors.

Rule 506 provides an exemption from registration requirements for companies offering any dollar amount of securities to not more than 35 investors, each of whom must be sophisticated, and an unlimited number of accredited investors.

So which rule get used the most in practice?  Overwhelmingly, most issuers of securities in private placements under Regulation D choose to rely on Rule 506, selling strictly to accredited investors.

Rutherford B. Campbell, Jr., a professor at the University of Kentucky, conducted a study of 27,000 Form D's filed from 2008 to 2010 which was published in the August 2011 issue of The Business Lawyer.  Professor Campbell found that 94% of all Regulation D offerings relied upon Rule 506, 1.6% relied upon Rule 505 and 4.4% relied upon Rule 504.  88.5% of the Regulation D offerings studied limited their offerings exclusively to accredited investors.  Even among offerings of $1,000,000 or less (which would therefore qualify under Rule 504), 78.6% of the issuers chose to rely upon Rule 506 rather than Rule 504.

Professor Campbell attributed the popularity of Rule 506 to the exemption such offerings enjoy from state level blue sky regulations under the National Securities Markets Improvement Act of 1996 ("NSMIA").  I agree.  

Tuesday, November 13, 2012

Texas's New Trademark Law

The State of Texas adopted changes to our trademark law which went effective September 1, 2012.  The trademark law has been revised to conform with the Model State Trademark Bill and to be more consistent with federal trademark law.

Here are some of the highlights of the new law:

  • The initial term and each renewal term of a state trademark registration has been reduced from 10 years to 5 years.
  • Trademark registrations must now be notarized and must now include 3 specimens of the trademark in use.
  • The Texas Secretary of State's office must now search the database of the United States Patent and Trademark Office in addition to its own trademark database before approving an initial trademark application.  The USPTO trademark database is available here.
  • Licenses and security interests of trademarks may now be recorded for notice purposes with the Secretary of State.
  • Holders of registered trademarks in Texas may now recover profits earned by an infringer against the trademark as well as triple-damages if the infringer acted with actual knowledge of the trademark or in bad faith.
The new trademark law can be found in Section 16 of the Texas Business and Commerce Code.  The Secretary of State's office provides FAQ's regarding the new law here.  Texas also adopted new Trademark Administrative Rules in connection with the new law, which rules are available here.

Wednesday, October 31, 2012

Little Known Facts: Prepayment Premiums

It is not unusual for a commercial loan agreement to include a provision which requires the borrower to pay a penalty in order to prepay the loan prior to maturity.  But would such a prepayment premium be considered "interest" under Texas usury law?

No.  Section 306.005 of the Texas Finance Code specifically excludes prepayment premiums from the definition of interest for the purpose of commercial loans in Texas.  The full text of the provision reads as follows:

“§306.005. PREPAYMENT PREMIUMS AND SIMILAR AMOUNTS.  With respect to a loan subject to this chapter, a creditor and an obligor may agree to a prepayment premium, make-whole premium, or similar fee or charge, whether payable in the event of voluntary prepayment, involuntary prepayment, acceleration of maturity, or other cause that involves premature termination of the loan, and those amounts do not constitute interest.”

Section 306.001(5) of the Texas Finance Code defines a “commercial loan” as “a loan that is made primarily for business, commercial, investment, agricultural, or similar purposes.  The term does not include a loan made primarily for personal, family, or household use.”

I hope everybody has a safe and happy Halloween.  My daughters are dressing up as a pirate and a Greek goddess.  I'm counting on sneaking one or two pieces of candy from their bags - but please don't tell them!

Thursday, October 4, 2012

LLC: The Most "Famous" Entity in Texas

Last year, my daughter got her ears pierced for the first time.  She was very excited to be getting earrings, but she was disappointed that the pair of earrings that she initially selected were out-of-stock.  "My favorite earrings were too famous," she explained.  Well, using my daughter's definition, the limited liability company (LLC) is clearly to most famous entity in Texas.

Accordingly to the Texas Secretary of State's office, almost 87,000 new LLC's were formed in Texas in 2011, compared to 24,000 for-profit corporations and 6,000 limited partnership (LPs) during the same year.

As of June 1, 2012, there were almost 464,000 active LLCs, 369,000 for-profit corporations, and 128,000 LPs in Texas.

That's pretty amazing considering that Texas did not adopt its Limited Liability Company Act (since replaced by the Texas Business Organizations Code) until August 26, 1991!

Wednesday, October 3, 2012

Stinky Restaurant Revisited

Today I saw a great presentation that Laura Elkind gave to the Corporate Counsel Section of the Tarrant County Bar Association titled "Disclaimer of Reliance in Settlement Agreements, Leases and Other Contracts."  The presentation stressed the importance of disclaimers of reliance in contracts as a result of the 2011 Texas Supreme Court case of Italian Cowboy vs. Prudential (a/k/a the Stinky Restaurant case).  I previous wrote about this case here. Besides being a very important case under Texas contract law, the Stinky Restaurant case also involves a very interesting set of facts (including "ungodly" smells!).  You can read the Court's opinion here.

Thursday, September 27, 2012

Non-Waivable Provisions of Texas LLC Law

Is there a business law topic that doesn't benefit from the input of a quote from a 1980's movie starring Chevy Chase?  I sure hope not!

This blog post will explore the ability of a Texas limited liability company to waive the default provisions under the Texas Limited Liability Company Law (TLLCL) (Title 3 and Title 1, as applicable, of the Texas Business Organizations Code (TBOC)).  So we now turn to Fletch on the importance of waivers:    

Fletch: Aren't you gonna read me my rights?
Cop: You have the right to remain silent. You have the right to have your face kicked in by me. You have the right to have your balls stomped on by him.
Fletch: I think I'll waive my rights.

Generally, the members of a Texas limited liability company are free to agree to virtually any arrangement regarding the management and operation of their limited liability company.  For example, the members may have the same or different management rights, economic (profit and loss) rights, voting rights, information rights, etc.  This flexible nature of the limited liability company structure is part of the reason why the LLC has become the most popular choice of entity in Texas.  But if the members fail to reach an agreement on any of these issues, or if the company agreement of the limited liability company is silent on them, the TLCL provides default provisions which will govern the LLC and its members.  For example, absent an agreement to the contrary, a member of an LLC has no right to withdraw from the company and the other members have no right to expel him (Section 101.107 of the TBOC).  Another default provision under the TLLCL provides that absent an agreement to the contrary, profits and losses of the LLC are allocated among the members in proportion to the agreed value of the members' respective contributions to the company (Section 101.201 of the TBOC).

Fortunately, virtually every default provision of the TLLCL can be modified by agreement of the LLC's members (Section 101.052(c) of the TBOC).  The exceptions to that general rule (i.e., the non-waivable provisions of the TLLCL) are the following matters identified in Section 101.054 of the TBOC:

(1)  Section 101.054 of the TBOC itself may not be waived or modified (obviously!);
(2)  The LLC must have at least one member (Section 101.101 of the TBOC);
(3)  A promise to contribute to the LLC must be in writing and signed to be enforceable (Section 101.151 of the TBOC);
(4)  The LLC may not make distributions if it would cause the LLC's liabilities to exceed the value of its assets.  Similarly, a Series LLC may not make a distribution with respect to any series if its liabilities would exceed its assets. (Sections 101.206 and 101.613 of the TBOC);
(5)  The LLC has an obligation to maintain a list of its members and their respective ownership percentages and other books and records (Section 101.501 of the TBOC);
(6)  If the company is a Series LLC, it must respect the integrity of each series of membership (Section 101.602(b) of the TBOC);
(7)  Words and phrases interpreted or defined in Chapter 1 of the TBOC (Definitions and other General Provisions) may not be waived or modified to the extent such words or phrases are used to interpret a provision or define a word or phrase contained in one of the Sections listed above or below;
(8)  Chapter 2 of the TBOC (Purposes and Powers) may not be waived or modified, except that the following Sections of Chapter 2 may be waived or modified in the company agreement:

  • Section 2.104(c)(2)(permitting a member to challenge a guaranty by the company as not benefiting the   company);
  • Section 2.104(c)(3)(permitting the company or its legal representative to challenge a guaranty as not benefiting the company); or 
  • Section 2.113 (limiting the company's purposes and powers);

(9)  Chapter 3 of the TBOC (Formation and Governance), may not be waived or modified, except that Subchapter C (Governing Persons and Officers) and Subchapter E (Certificates Representing Ownership Interest) may be waived or modified in the company agreement; and
(10)  Chapter 4 of the TBOC (Filings) may not be waived or modified;
(11)  Chapter 5 of the TBOC (Names of Entities, Registered Agents & Registered Offices) may not be waived or modified;
(12)  Chapter 7 of the TBOC (Liability) may not be waived or modified;
(13)  Chapter 10 of the TBOC (Mergers, Interest Exchanges, Conversions & Sales of Assets) may not be waived or modified;
(14)  Chapter 11 of the TBOC (Winding Up & Termination) may not be waived or modified, except that Section 11.056 (requiring a winding up of the company upon the company no longer having members with certain exceptions) may be waived or modified; and
(15)  Chapter 12 of the TBOC (Administrative Powers) may not be waived or modified.

Of course, any provision listed above may be waived or modified in the company agreement if (1) the provision itself authorizes the limited liability company to waive or modify the provision in the company's governing documents, or (2) if the provision itself specifies: (A) the person or group of persons entitled to approve a modification; or (B) the vote or other method by which a modification is required to be approved.

A provision of the TLLCL that grants a right to a person, other than a member, manager, officer, or assignee of a membership interest in a limited liability company, may be waived or modified in the company agreement of the company only if the person consents to the waiver or modification.

Finally, Section 101.054 of the TBOC notes that the company agreement may not unreasonably restrict a person's right of access to records and information under Section 101.502 of the TBOC.

Tuesday, September 25, 2012

North Texas Private Investment in Q2

"It's all ball bearings nowadays." - Irwin M. "Fletch" Fletcher as airplane technician, Gordon Liddy.

"It's all energy nowadays." - Me.

I couldn't hep but think of Chevy Chase's classic movie line when I reviewed the Dallas Business Journal's Private Investment Survey for the second fiscal quarter of 2012.  The survey shows total private investment in North Texas of $1.24 billion for Q2, of which $1.13 billion was raised by Venari Resources LLC, an oil exploration firm.  Of the remaining $120 million of private investment, $53.7 million went to other energy-related companies.  

So by my calculations, 95% of the private equity raised in North Texas in Q2 went to into the energy sector.  So maybe it's not all energy nowadays, but it's pretty darn close.   

By the way, I learned last week that Burton "Bubba" Gilliam, the actor that played Bud opposite Chevy Chase in the scene quoted above, is a fellow resident of North Texas.  Since he's one of my favorite actors, I thought that was pretty cool.

Thursday, September 6, 2012

The Incredible Shrinking Accredited Investor Status

Is it time for the SEC to consider adjusting the thresholds for individual accredited investor status?

The term "accredited investor" is defined in Rule 501(a) of Regulation D.  Status as an accredited investor is important because companies that issue securities to accredited investors may be able to qualify for one or more exemptions from registration and disclosure requirements under the securities laws.  Under Rule 501(a), an investor who is a natural person may qualify as an accredited investor if the investor has either:
(1) an individual net worth, or joint net worth with that person's spouse, in excess of $1,000,000, excluding the value of any equity in their primary residence; or
(2) individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.

Regulation D was adopted in March of 1982.  For context, that's also the year Eddie Murphy made his film debut in 48 Hrs.  The $1,000,000 and $200,000/$300,000 thresholds have not changed since then.  Adjusted for 30 years of inflation to today, the thresholds for individual accredited investor status would now be $2,424,381 for net worth, $484,876 for individual income, and $727,314 for joint income with the investor's spouse.  That's based on my calculations from the U.S. Department of Labor Bureau of Labor Statistics' Consumer Price Index for All Urban Consumers from March 1982 to July 2012 available here.

Or to flip that analysis around, the $1 million net worth requirement today would have been the equivalent of a $412,476 net worth requirement in 1982.  As Seinfeld's George Costanza might say, that is significant shrinkage!

Friday, August 31, 2012

SEC: "Verify Means Verify"

As I have blogged about previously, the JOBS Act required the SEC to adopt rules which would permit general solicitation in connection with a Rule 506 private offering made strictly to accredited investors if the issuers "take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the [SEC]."

So, of course, securities law practitioners have been anxiously waiting for the SEC to adopt those new rules and clarify what actions an issuer must take to "verify" the accredited investor status of purchasers of its securities in Rule 506 offerings.  

On August 29, the SEC proposed amendments to Rule 506 to implement the changes required by the JOBS Act.  Those proposed amendments are available here.  Under the proposed amendments, the SEC addressed the question of what is required to "verify" accredited investor status by stating that the issuer must "take reasonable steps to verify that purchasers of securities sold in any offering under this § 230.506(c) are accredited investors."  The SEC's proposing Release explains that "reasonableness" "would be an objective determination, based on the particular facts and circumstances of each transaction."  The determination would include the following factors:
  • the nature of the purchaser and the type of accredited investor that the purchaser claims to be;
  • the amount and type of information that the issuer has about the purchaser; and
  • the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.
In short, the SEC is saying "verify means verify."

Fortunately, the Release goes on to provide quite a bit of helpful commentary describing different types of accredited investors and how an issuer might verify their status.  For example, an issuer could verify the status of an investor who claims to be an accredited by virtue of the fact that he is a registered broker-dealer by going to FINRA's BrokerCheck website.  The Release acknowledges that verifying the status of a natural person who claims to meet the net worth or annual income test for accredited investor might be more challenging.  Among other possible verification methods, the Release suggests that one or more private companies might get into the business of providing accredited investor certifications upon which an issuer might be able to reasonably rely for more difficult determinations.

Wednesday, August 22, 2012

Praise for NVCA Model VC Legal Documents

One of my favorite resources for venture capital transactions is the National Venture Capital Association's (NVCA) Model Legal Documents, which are available here.

I feel the same way about model legal documents that Irwin M. "Fletch" Fletcher feels about file cabinets, as he told us in the 1989 classic film, Fletch Lives:  "I love them when they're unlocked, neatly organized and tell me exactly what I wanna know."

Well, no model legal document is as terrific as Fletch's model file cabinet, but the NVCA model forms have an amazing amount of information and commentary on venture capital terms.  They are "unlocked" in that they are freely available to the public at NVCA's website (  They are certainly neatly organized.  Whether or not they tell you exactly what you "wanna know" of course depends upon the specifics terms of your particular deal.

The NVCA model legal documents attempt to reflect "best practices" from both the West Coast and the East Coast and include the following typical VC documents:
  • Term Sheet
  • Stock Purchase Agreement
  • Certificate Of Incorporation
  • Investor Rights Agreement
  • Voting Agreement
  • Right of First Refusal and Co-Sale Agreement
  • Management Rights Letter
  • Indemnification Agreement
  • Model Legal Opinion

Monday, August 6, 2012

JOBS Act article in Texas Lawyer

Regular readers of this blog will know that I am very interested in the Jumpstart Our Business Startups (JOBS) Act.  The JOBS Act represents probably the most significant change to the US securities laws since I began practicing law in 1998.  The JOBS Act should make it easier for many business to raise capital in the public and private markets.

Today, the Texas Lawyer published an article that I wrote about the JOBS Act, which is available here.  The article was part of their Special Report on Banking and Finance.

Thursday, August 2, 2012

Jason Villalba, Republican for Texas House

How many times have you said, "The world would be a better place if it was run by corporate and securities lawyers"?  Okay, probably not that often.  But the State of Texas could certainly benefit by adding one such person to the Texas House.

One of my best friends and one of the top corporate and securities lawyers around, Jason Villalba, has just won the Republican Party primary for the Texas House District 114 (which includes North Dallas, Preston Hollow, Lake Highlands, etc.).  

If elected, Jason will be a huge asset to the State of Texas in Austin.  Congratulations, Jason, and good luck in November!

Friday, July 27, 2012

What is an Emerging Growth Company?

When I hear the term "emerging growth company" I have visions of a computer company operating out of a garage in Silicon Valley.  Or maybe a telecom start-up company in Richardson's Telecom Corridor.  One image I certainly do not have is 134-year old English soccer team from Manchester, England.  But that is exactly one of the beneficiaries of the EGC-status conferred by the federal Jumpstart Our Business Startups (JOBS) Act. 

The JOBS Act created the term Emerging Growth Company and conferred upon EGC's many benefits under the federal securities laws, including fewer financial disclosure obligations.  To be an EGC, a company must have annual revenues of less than $1 billion, have had its IPO after December 8, 2011, have been public for less than five years, and have a public float of its stock of less than $700 million.  I wrote an article on the JOBS Act available here:

I just got back from a family vacation to London where I heard that Manchester United, perhaps the world's most famous soccer team, is going public and will be listed on the New York Stock Exchange.  Somehow, I don't think the 75,000 fans that regularly attend their games at Old Trafford Stadium will fit inside any garage in Silicon Valley.  But just because Manchester United doesn't fit my image of an Emerging Growth Company doesn't mean they don't fit the definition enacted by Congress under the JOBS Act.

Manchester United's registration statement is available here:

As a supporter of the rival English soccer club, Chelsea, I can't say I'd be that upset if the risk factor set forth on page 17 of the registration statement comes to pass: ("[Manchester United] cannot ensure that our first team will be successful in the Premier League or in the other leagues and tournaments in which it plays.  Relegation from the Premier League or a general decline in the success of our first team, particularly in consecutive seasons, would negatively affect our ability to attract or retain talented players and coaching staff, as well as supporters, sponsors and other commercial partners, which would have a material adverse effect on our business, results of operations, financial condition and cash flow.").

Wednesday, July 11, 2012

M&A Deals Under Siege

One of my favorite movies is Under Siege, the film in which Steven Segal portrays Casey Ryback, a Navy cook and former Navy Seal forced into action to save a U.S. battleship from a terrorist takeover led by Tommy Lee Jones. As much as I loved that movie, I was shocked to learn that it was actually nominated for two Academy Awards! See 

Anyway, I couldn't help but think of Under Siege when I read the following statistic in The Economist magazine.  96% of M&A transactions over $500 million faced legal challenges in 2011.  That's up from 39% in 2005.  Thus, any party to a significant M&A transaction should expect to be sued.  That's why it is critical that the board of directors of any company undertaking an M&A transaction carefully plan the transaction process to ensure a fair process and a fair price for the target's shareholders.  That planning should include engaging experienced bankers and transaction lawyers to help walk the company through a process that should be expected to be reviewed and second-guessed in a courtroom after the deal is announced.   

Tuesday, July 3, 2012

How are Delaware Entities Like Rabbits?

Delaware corporate law is popular.  How popular?  Well, almost half of U.S. publicly traded corporations were formed in Delaware. Delaware has more corporate entities, public and private, than people — 945,326 to 897,934.  One address in Delaware (1209 North Orange) is the legal address for more than 285,000 separate businesses!  These statistics all come from one of my favorite bloggers, Sandy Leeds of Leeds on Finance (  

Why is Delaware so popular?  Its corporate law is well-developed.  It has special courts dedicated to corporate law issues; so its corporate justice tends to be swift, fair, and dispensed by judges who specialize in corporate law issues.  But regardless of how Delaware became the go-to state for corporate law, it now enjoys the advantage of familiarity. Virtually every corporate lawyer knows and understands Delaware corporate law, so parties rarely object to doing business under Delaware law.  Even if another state could devise a "better" set of corporate law statutes and courts, corporate lawyers would not be in a hurry to drop decades of precedent and familiarity with Delaware corporate law to get comfortable with another state's laws and practices.  

Like the QWERTY keyboard, it might not be the best layout of letters if one were starting from scratch, but changing keyboards (or state corporate law) after the world has learned and embraced QWERTY (or Delaware) seems unlikely to happen any time soon.

Friday, June 29, 2012

Is there Wisdom in Crowdfunding?

Crowdfunding seems to be getting quite a bit of buzz these days.  Crowdfunding means raising a little bit of cash from a whole lot of investors.  It has a certain democratic air to it - it's not nearly as stuffy as a boring old private placement to a limited number of sophisticated and/or accredited investors.

There's only one problem with crowdfunding - it's virtually impossible to do legally (and cost-effectively) under the current securities laws of the United States!  That's because an offering of securities to a crowd is, almost by definition, a public offering which is heavily regulated by the SEC and state securities commissioners.  

But all that may be about to change.  Under the recently adopted JOBS Act, Congress has carved out an exemption from certain aspects of the federal securities laws for issuers engaged in crowdfunding.  The bad news is, the crowdfunding exemption doesn't become effective until the SEC adopts rules implementing the crowdfunding concept.

Once adopted, the crowdfunding rules will permit companies to issue up to $1,000,000 of securities through crowdfunding during any 12-month period.  Investments by any particular investor in a crowdfunding offering are limited to:

  • the greater of $2,000 or 5% of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; or
  • 10% of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000.
Crowdfunding will have to take place through a registered broker-dealer or an SEC-authorized funding portal.

The Texas State Securities Board has released a very informative letter on the "POTENTIAL HAZARDS OF RUSHING INTO 'CROWDFUNDING'" which is available here.

Monday, June 25, 2012

DFW Private Investments Q1 2012

It seems the market for private capital in Dallas-Fort Worth is a little top-heavy this year. According to a survey conducted by the Dallas Business Journal, DFW area companies raised $574 million from private equity, venture capital and angel investments during the first quarter of 2012.  However, two deals (Ennis-Flint and Lucid Energy) accounted for $480 million, or 84% of the total private investment in DFW during that fiscal quarter.

Wednesday, May 16, 2012

Little Known Fact: Director and Officer Liability for Failure to pay Franchise Tax

Directors and officers can be a risk averse group.  They write provisions into their corporate charters and bylaws providing for various levels of exculpation and indemnification.  They take out D&O liability insurance.  They enjoy the benefits of the Business Judgment Rule, which generally protects business decisions made by the board of directors from judicial scrutiny.

But one area of potential liability for directors of Texas corporations that might easily be overlooked is Section 171.255(a) of the Texas Tax Code.  That section provides:  "If the corporate privileges of a corporation are forfeited for the failure to file a report or pay a tax or penalty, each director or officer of the corporation is liable for each debt of the corporation that is created or incurred in this state after the date on which the report, tax, or penalty is due and before the corporate privileges are revived. . ."

If a Texas corporation does not file its franchise tax reports and pay its franchise tax, directors and officers of the corporation can be liable as if they were partners and the corporation were a partnership.  See Section 171.255(b) of the Texas Tax Code.

Thus, if you are an officer or director of a corporation chartered or doing business in Texas, it is a very good idea to stay current on your franchise tax reports and payments!

Wednesday, May 9, 2012

IPO's in 2011

What can be said about the initial public offering (IPO) market for 2011?

It was much better than 2008.

According to Practical Law The Journal (a terrific publication, by the way), there were 61 IPOs of $50 million or more by United States companies in 2011.  That's down 18% from 2010, but up 70% from 2008.  The hottest industry was social media/Internet, which accounted for 33% of 2011's US IPOs.  As of December 31, 2011, there was a backlog of 202 companies that have filed their initial registration statements but have not yet had their IPOs go effective.

Tuesday, May 8, 2012

Notarized Signatures in Texas

Ever wonder why certain legal documents have to be notarized?

Well, a deed conveying real property must be notarized (or "acknowledged, sworn to with a proper jurat, or proved according to law") in order to be recorded in the real property records of the appropriate county, as required by Section 12.001 of the Texas Property Code.

So what is the proper form of acknowledgment to be used by a notary public (or other appropriate officer)?

That is covered in Chapter 121 of the Texas Civil Practice and Remedies Code ("TCPRC").

Personally, I prefer to use the short form acknowledgment which is authorized by Section 121.008 of the TCPRC and reads as follows (assuming the signatory is a natural person):

"State of Texas
County of ________

This instrument was acknowledged before me on (date) by (name or names of person or persons acknowledging).

(Signature of officer)
(Title of officer)
My commission expires: ________"

Tuesday, May 1, 2012

What is CF Disclosure Guidance?

What is CF Disclosure Guidance?

Here's a hint, it has nothing to do with Cystic Fibrosis or the University of Central Florida (sorry, fighting Patriots!).

CF Disclosure Guidance is a collection of guidance letters released by the SEC's Division of Corporate Finance. The SEC has issued five CF Disclosure Guidance letters since September 14, 2011, covering the following topics:

  • Topic No. 1: Staff Observations in the Review of Forms 8-K Filed to Report Reverse Mergers and Similar Transactions (9/14/11)
  • Topic No. 2: Cybersecurity (10/13/11)
  • Topic No. 3: Staff Observations in the Review of Promotional and Sales Material Submitted Pursuant to Securities Act Industry Guide 5 (12/19/11)
  • Topic No. 4: European Sovereign Debt Exposures (1/6/12)
  • Topic No. 5: Staff Observations Regarding Disclosures of Smaller Financial Institutions (4/20/12)
The purpose of CF Disclosure Guidance is to put issuers on notice of frequent SEC comment letter topics.  The CF Disclosure Guidance is available on the SEC's website here:

Friday, April 27, 2012

JOBS Act Article

Yesterday, CityBizList Dallas published an article I wrote about the JOBS Act which is available here.

As you can tell from the article, I think the JOBS Act is very good news for growing businesses seeking capital from either the private or public markets.  I suspect private offerings will be especially aided by the relaxation of restrictions on general solicitation with regard to Rule 506 offerings.  Of course, we'll have to see what the final SEC implementing regulation look like, but I think growing businesses will be pleased with the results.

Thursday, April 26, 2012

Young Investors Wall Street Camp

Like many who grew up in the 1980's, my favorite television character was Alex P. Keaton, the economics-obsessed kid from the classic show "Family Ties."  I couldn't help but think of Alex when I heard that the Future Investor Clubs of America is offering the Young Investors Wall Street Camp at Rice University.  No doubt Alex would have relished an opportunity to "enjoy financial intelligence training, video and board games, field trips to local financial districts, and guest speakers from some of America's largest corporations."  The camp's website ( says the kids will get a camp T-shirt. I couldn't find any mention of one of Alex's trademark argyle sweaters, however.

Wednesday, April 18, 2012

Trusts and Estates website

One of the neatest parts of practicing law at a firm like Cantey Hanger LLP is that I get to work with some pretty amazing attorneys.  One such attorney is Noel Ice, a recognized leader in the field of trusts and estates law.  Noel maintains a website named that has a tremendous amount of very useful information, including over 150 articles, memos, and other resources related to estate planning and probate materials generated by Noel over the last couple of decades. I encourage readers of this blog to check it out.

Monday, April 9, 2012

JOBS Act becomes law

On April 5, President Obama signed into law the Jumpstart Our Business Startups Act (the "JOBS Act").  The JOBS Act represents the most significant change to the law governing securities offerings since the Securities Act of 1933.  I'm sure I will be blogging about the JOBS Act quite a bit in the coming months as the SEC rolls out its new rules implementing the JOBS Act, but I thought I'd mention an aspect of the law I found most interesting today.

Many private offerings will soon no longer be private!  Let me explain.  Most private offerings of securities rely upon Rule 506 for its exemption from the registration requirements of the Securities Act.  Usually, Rule 506 offerings are made exclusively to accredited investors (investors with high incomes, high net worths, or both).  Rule 506 currently prohibits general solicitation (such as advertisements on television, radio, newspaper, etc.) to publicize the offering.  The JOBS Act requires the SEC to adopt rules permitting general solicitation connection with 506 offerings on so long as all of the purchasers of securities in the offering are accredited investors.  Hence, companies seeking capital will soon be able to publicly offer securities in a "private" offering!  These are interesting times to be a securities lawyer.

Thursday, April 5, 2012

Little Known Facts: English First for Recording Instruments

With six flags having flown over Texas and numerous foreign languages spoken in this state, one might wonder if property can be conveyed and recorded in a language other than English.  While parties may be able to agree to convey property in a language other than English, a deed or any other instrument relating to real or personal property cannot be recorded in Texas unless it is written in English.

Section 11.002 of the Texas Property Code provides that "an instrument relating to real or personal property may not be recorded unless it is in English or complies with this section." That statute identifies only two exceptions to the English-only rule for recording instruments in Texas, each of which require that an English translation accompany the foreign language filing:
  1. An instrument written in another language executed prior to August 22, 1897; or
  2. An English instrument with a foreign-language acknowledgement if acknowledged outside the United States and containing a certificate, stamp, or seal of a notary public or other official before whom the acknowledgment was taken.

Tuesday, March 27, 2012

Use of Assumed Names in Texas

How does the Texas Business Organizations Code ("TBOC") address the use of assumed names by companies in Texas?  That's a trick question - it doesn't, except by reference to the Texas Assumed Business or Professional Name Act (the "Assumed Name Act"), Chapter 71 of the Texas Business and Commerce Code.

Under the Assumed Name Act, a company that conducts business in Texas under other than its legal name (an assumed name) must file an assumed name certificate.

If the company using an assumed name is a filing entity, such as a corporation, limited partnership or limited liability company, the assumed name certificate must be filed with the Texas Secretary of State and the Texas county where the company's principal office is located (or if the company's principal office is outside of Texas, the Texas county in which the company's registered office is located).

If the company is not a filing entity, such as a sole proprietorship, the company must file the assumed name certificate in each Texas county in which the company maintains a business premises (or each county it conducts business if it does not maintain a business premises in any county).

The assumed name certificate must state:
  1. the company's assumed name;
  2. the company's legal name;
  3. the company's jurisdiction of formation;
  4. the period, not to exceed 10 years, that the assumed name will be used;
  5. the company's entity type;
  6. the address of the company's principal office or registered office, as applicable; and 
  7. the counties in which the assumed name will be used.
An assumed name certificate must be renewed every 10 years if the name is still in use. The renewal certificate must be filed within six months prior to the assumed name certificate's expiration date.

Filing an assumed name certificate does not give the company the right to use the assumed name in violation of another company's the common or statutory copyright law or similar law.      

A company that violates the Assumed Name Act may face civil or criminal penalties.

Monday, February 27, 2012

Lessons from Linsanity

Like many basketball fans worldwide, I've been captivated by the story of Jeremy Lin.  In case you've missed the seemingly endless coverage of the Jeremy Lin story (dubbed "Linsanity") on ESPN and elsewhere, Lin is the starting point guard for the NBA's New York Knicks.  Since getting his first NBA start earlier this month, Lin has been terrorizing the NBA.  Among the amazing bullet points about Lin are as follows:

  • Lin is a 2010 graduate of Harvard University.  As a 1998 graduate of Harvard Law School myself, I can tell you that it is very rare for a Harvard man to excel in the NBA.  How rare?  The last Crimson player in the NBA was Ed Smith in 1954!   
  • Lin is a Taiwanese-American and the first American-born NBA player ever to be of Chinese or Taiwanese descent.
  • Lin was undrafted out of college, waived by two other NBA teams, and was in-and-out of the NBA's developmental league (D-league) before landing as a back-up for the Knicks this year.  At some points during his brief NBA career his prospects were so uncertain that he was sleeping on his brother' couch rather than signing a lease on his own apartment.
  • The Knicks were 8-15 with their season circling the drain until injuries and poor play by other Knicks forced Lin into playing time and into the national spotlight.  Then, Linsanity struck and the Knicks won 7 straight games.
  • During Lin's first 5 games as a starter, he scored 136 points (27.2 points per game), the most by any NBA player in his first 5 games as a starter since the 1976 NBA-ABA merger.

There is very little about Linsanity that is not amazing and unprecedented, so what can we learn from all this?  Well, here are a few timeless nuggets that are reinforced by the Linsanity story:

1) Dream Big.  We shouldn't let stereotypes or other people's preconceived notions limit the dreams or goals we set for ourselves.  Jeremy Lin had let the facts that he played basketball at Harvard, or that he was a Taiwanese-American, or that he was undrafted, cause him to give up on his dream of playing in the NBA.  He believed in himself and eventually the rest of the world started believing in him too.

2) Be Ready.  Although Jeremy Lin began his career in the D-league and began the season as a back-up player, he worked hard and was prepared.  So when the coach called his name, he was ready to perform.  There is an old saying that "Luck is where preparation meets opportunity."  Lin wasn't lucky - he was prepared when he got his opportunity.

3)  Be Bold.  Beyond being ready, Lin was bold and played his game when his number was called.  Given his humble background, he knew he might not have many chances to show what he could do in the NBA.  So when he got the chance, he didn't play safe - he played with confidence and aggressiveness.  And that has made all of the difference.

4) Have Fun.  Lin's joy for the game is obvious on the court, making his journey more fun for all of us to follow.  As Mae West famously said, "You only live once, but if you do it right, once is enough."

Tuesday, February 14, 2012


Last week I saw a very interesting presentation by a representative of the OTC Markets Group Inc.  That's the company that runs the world's largest trading market for companies whose stocks are traded over-the-counter (OTC).  OTC companies are not listed on a stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq.  OTC Markets operates three tiers of trading markets for OTC companies:

  • OTCQX (its top tier);
  • OTCQB (its middle tier); and
  • OTCPink (its bottom tier).
OTC Market competes with OTC Bulletin Board (OTCBB) for quotation of OTC stocks, though a security may be dually quoted on both OTC Market and OTCBB.  According to information provided by the representative of OTC Market, the securities marketplace seems to be moving in OTC Market's direction.  In 2008, both OTC Markets' OTC Link platform and OTCBB each provided about 35,000 quotes.  Today, OTC Link provides about 65,000 quotes, while the OTCBB provides about 5,000 quotes.

The representative of OTC Market seemed to attribute much of their success to the fact that their OTC Link platform is electronic while the OTCBB platform is telephonic, thereby making the OTC Link system more user-friendly.  I don't know if the OTC Link system is truly more user-friendly (I invite any readers who are registered broker-dealers to comment on that issue), but I would note that the OTCBB requires its companies to be current in its SEC reporting obligations under the 1934 Act, while the OTC Market has no such requirement. The OTCBB loses companies on the top end that "graduate" to become exchange-listed companies and those on the bottom end who choose to "go dark" and cease their SEC reporting obligations. OTCQX companies need not be SEC-reporting, but the OTCQX does have requirements regarding asset size ($2 million), revenues ($2 million), minimum share price ($0.10), etc., while the OTCBB does not.

As of today, there are 330 securities quoted on the OTCQX and 2,355 securities quoted on the OTCBB.  

Wednesday, January 25, 2012

Covenants Not to Compete in Texas

When is a non-competition agreement enforceable against an employee in Texas?

That question is simultaneously very simple and very complex to answer.  We'll tackle the simple answer first.  Generally, a covenant not to compete is enforceable under Texas law when it complies with Section 15.50(a) of Texas Business and Commerce Code which provides:

“[A] covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.”

So when is a covenant not to compete "ancillary to or part of" an otherwise enforceable agreement?  That's the complex answer. 

In 1994, the Texas Supreme Court took a stab at answering that question when it decided the case of Light v. Centel Cellular Co. of Texas.  In Light, the court established a two-pronged test: 

"(1) the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer’s interest in restraining the employee from competing; and 
(2) the covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement."

Under Light, an employer's promise to provide confidential information and trade secrets to its employee contemporaneously with the signing of a non-competition agreement would be enforceable as a covenant ancillary to an otherwise enforceable agreement.  On the other hand, under Light, if the employer does not promise to provide confidential information or trade secrets as part of the agreement (even if the employee later actually does receive such confidential information or trade secrets!), the covenant would not be enforceable because at the time the contract was signed it was a unilateral contract - the employer could fire the at-will employee the next day and never provide such confidential information or trade secrets, so the parties didn't have an "otherwise enforceable agreement."

Since 1994, the Texas Supreme Court has slowly backed away from its very narrow reading of Section 15.50(a) of the Texas Business and Commerce Code in Light.

In 2006, in Alex Sheshunoff Management Services, L.P. v. Johnson, the Texas Supreme Court removed Light's restrictions on enforcing executory unilateral contracts.  Hence, a covenant not to compete made by an employee in exchange for an employer's confidential information or trade secrets may now be enforced so long as such confidential information or trade secrets are actually delivered to the employee during the course of his or her employment, even if the employer was not contractually obligated to provide such information at the time the agreement was signed.

In 2011, in Marsh v. Cook, the Texas Supreme Court further liberalized the holding in Light, thereby further expanding the types of agreements which could give rise to an enforceable covenant not to compete.  In Marsh, the court ruled that the grant of stock options to an employee could be sufficient to support a covenant not to compete.  The court reasoned that the grant of stock options to the employee was reasonably related to the employer's legitimate business interest in protecting its goodwill.  The Marsh court thus rejected the Light court's requirement that the otherwise enforceable agreement must "give rise" to the employer's interest in enforcing the covenant not to compete and replaced it with a requirement that the otherwise enforceable agreement "reasonably relate" to the employer's interest.  

Although determining the enforceability of any particular covenant not to compete under Texas law continues to be challenging and fact-specific, there is recent trend at the Texas Supreme Court toward making such covenants easier to enforce.