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 (http://leedsonfinance.com/).  


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.

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.

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.

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!

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.

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: ________"

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:  http://sec.gov/divisions/corpfin/cfdisclosure.shtml#cfguidancetopics