Friday, January 20, 2017

"Friends and Family" Investment Regulation

Many startups initially raise money by enticing their friends and family to invest.  This is what they need to know about the securities laws surrounding such transactions. Under the Securities Act of 1933, a company or private fund may not offer or sell securities unless the transaction has been registered with the SEC or an exemption from registration is available. A securities offering exempt from registration with the SEC is sometimes referred to as a private placement or an unregistered offering. Regulation D contains the rules providing exemptions from the registration requirements. Rule 506 is the most common exception for startups, but Rules 505 & 504 also have attractive features.

Rule 506: Sophisticated investors, PPM

Rule 506 allows to offer securities only to preexisting contacts (no advertising of the offering) who are either accredited investors or not. An accredited investor is anyone who:

- earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
- has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

On the income test, the person must satisfy the thresholds for the three years consistently either alone or with a spouse, and cannot, for example, satisfy one year based on individual income and the next two years based on joint income with a spouse. The only exception is if a person is married within this period, in which case the person may satisfy the threshold on the basis of joint income for the years during which the person was married and on the basis of individual income for the other years.
In addition, entities such as banks, partnerships, corporations, nonprofits and trusts may be accredited investors.

The following entities would be considered accredited investors:

-any trust, with total assets in excess of $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person,  or
-any entity in which all of the equity owners are accredited investors.

In this context, a sophisticated person  means the person must have, or the company or private fund offering the securities reasonably believes that this person has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.

So, can you still raise money from those who do not fit any of the above definitions of an accredited investor?  Yes, but be careful.

Rule 506 permits a company to include up to

Wednesday, January 18, 2017

Drafting IT Master Service Agreements

Correctly drafted MSA can be a sales tool. That’s because, when you present your MSA template to a potential client, they judge your company based on that contract. Will you treat them fairly or is the agreement too one-sided? If there are too many disclaimers and limitations of liability, then why is the company so worried about the quality of their work? If there is too much legalese, it’s not written in simple English, clients will wonder whether your work product will also be too convoluted and difficult for them to understand.

If, on the other hand, the MSA is drafted neatly, clients will tend to assume that your work will be neat as well. So, how to draft it neatly, fairly to all parties, while at the same time protecting yourself from unnecessary liability? A good MSA will have the following basic elements: SERVICES, PRICING, IP OWNERSHIP, LIABILITY, BOILERPLATE


- Scope of work included. Objective specifications, metrics, key performance indicators, service levels. Tip: specify which work is excluded.Scope of included work can be attached as a Statement of Work (SoW) to the MSA. This way the general general terms and conditions apply to all projects, whereas the SoW’s can be attached on an as‐needed basis. So that if there is additional work, parties don’t have to renegotiate a big contract again; they can just attach short new SoW’s to the MSA.
Additional services shall be billed at provider’s regular rates.

- Cooperation. Frequently, work stalls because client procrastinates in providing the necessary materials. Cooperation clause can include penalty for that (e.g. provider’s right to terminate contract early and keep the deposit).

- Service defects.

- Acceptance mechanism. E.g., work is deemed accepted if Client fails to reject it within a specified period. Client should  have to give written detailed reasons for any rejection.

Monday, December 5, 2016

GOP Senators Ask Obama to Stop Issuing New Regulations

Today, Senator Cory Gardner (R-CO) and 22 other Republican Senators requested Obama administration stop issuing non-emergency rules and regulations in the final month of his term.  The Senators' letter to Obama states that “the American people made it clear on November 8th that they expect regulatory relief.”

Obama’s regulatory efforts can add up to a substantial sum but many of them are likely to be overturned by the next administration. American Action Forum think tank published a report claiming Obama’s regulatory costs during his last two months in office could add up to $44.1 billion. One of the President-elect Donald Trump’s campaign promises is to provide regulatory relief.  For the first time since 2007, the executive and legislative branches of government are run by the same majority. So, many of  Obama’s 11th hour rules are likely to be rolled back.

The GOP Senators’ letter criticized “the Waters of the United States (WOTUS) rule unfairly burdening our farmers and ranchers, the anti-coal rules eliminating thousands of jobs and driving up household energy costs, or the Dodd-Frank rules denying our small businesses access to capital, federal agencies continue to produce reams of new regulations that hurt our job creators and cripple our economy.”

The letter was also signed by Jeff Flake (R-AZ), Mike Lee (R-UT), Ben Sasse (R-NE), Deb Fischer (R-NE), John Barrasso, M.D. (R-WY), Roy Blunt (R-MO), Tom Cotton (R-AR), Shelley Moore Capito (R-WV), Jerry Moran (R-KS), James M. Inhofe (R-OK), John Hoeven (R-ND), John Thune (R-SD), Roger F. Wicker (R-MS), Michael B. Enzi (R-WY), Marco Rubio (R-FL), Joni Ernst (R-IA), Mike Rounds (R-SD), Ted Cruz (R-TX), David Perdue (R-GA), Pat Roberts (R-KS), Bill Cassidy, M.D. (R-LA), and Dan Sullivan (R-AK).

IRS Tips Against Online Identity Theft

Today, as a part of the ongoing Security Summit effort, the Internal Revenue Service has issued some recommendation on how taxpayers can better protect their identity and financial information from scammers. Specifically, the IRS advises to:

- Understand and Use Security Software. Security software helps protect computers against the digital threats that are prevalent online. Generally, the operating system will include security software or you can access free security software from well-known companies or Internet providers. Essential tools include a firewall, virus/malware protection and file encryption if you keep sensitive financial/tax documents on your computer. Do not buy security software offered as an unexpected pop-up ad on your computer or email. It’s likely from a scammer.

- Allow Security Software to Update Automatically. Set security software to update automatically. Malware — malicious software — evolves constantly, and your security software suite updated routinely to keep pace.

- Look for the “S.” When shopping or banking online, always look to see that

Saturday, November 19, 2016

Adidas Loses Trademark Case vs. Church

Last week, the U.S. Court of Appeals for the Federal Circuit blocked adidas from registering a trademark that sounds confusingly similar to a trademark that a small church had registered before. Here is how the case unfolded.

In 2009, adidas tried to register a federal trademark “Adizero.” However, adidas's application was denied because the Christian Faith and Fellowship Church had already registered a similarly sounding trademark "Add a Zero" for the same category of merchandise that adidas sells, "namely, shirts, and caps." "Add a Zero" was the church's trademarked fundraiser where every donor was encouraged to add an extra zero at the end of the amount they normally donate.

Adidas then offered $5,000 to the church to give up its trademark. However, the church felt the amount offered was too small. Adidas refused to add any more zeros to its offer and initially managed to get the USPTO’s Trademark Trial and Appeal Board (“TTAB”) to have the church's trademarks cancelled.

On what grounds? Federal trademark law states that, to register a valid trademark, you have to actually use it in interstate commerce. E.g., you'd have to actually sell something bearing the trademark, preferably to somebody out of state. It's not enough to just pay the filing fee and maintenance fees. The logic behind this rule is to ensure that good trademarks go to businesses that actually use them, not some squatters. Did the church sell anything using their trademark? Yes! Grand total of two hats to a parishioner who lives not much farther than 5 miles away from the church. Christian Faith Fellowship Church is located in Zion, Illinois, within five miles of the Illinois–Wisconsin border. Being located so close to the border, the Church’s parishioners include both Illinois and Wisconsin residents. So, the church argued that selling two hats counts as interstate commerce.  But the TTAB still cancelled the church's trademark for non-use because the TTAB concluded that two hats is too small ("de minimus") of a transaction and, therefore, should not count as "use in commerce."

The church appealed to the Federal Circuit and won last week. The Federal Circuit ruled that even a small sale should count as "use in commerce" because there is no de minimus exception in the Lanham Act that defines the "use in commerce" requirement.

However, the church's victory is not final yet. The Federal Circuit sent the case back to the TTAB for consideration of other arguments raised by adidas.

Thursday, November 17, 2016

New Law Requires Disputes with CA Employees to Be Resolved in CA Under CA Law


On January 1, 2017, the California Labor Code will be amended to require employers to ensure that disputes involving employees who reside and work in California to be adjudicated in California under California law. That sounds reasonable but it is currently not common practice. Sometimes California employers offer their workers agreements that require disputes to be resolved in another state.  Normally, this is because another state's law is more favorable to employers than California law.

Current law:

California courts are already empowered to refuse to allow moving the case out of state if doing so would substantially diminish the rights of California residents. But Senate Bill 1241 makes that rule even stronger by actually spelling it out in the amended Labor Code. Specifically, existing law:

1) Permits California courts to exercise jurisdiction on any basis not inconsistent with the state or federal Constitutions. A court is also authorized to stay or dismiss most actions in which it finds “that in the interest of substantial justice” the action should be heard in a forum outside of California.
2) Allows the court to refuse to enforce the contract or the unconscionable clause.
3) “Unconscionability is defined through both a ‘procedural’ and a ‘substantive’ element, the former focusing on ‘oppression’ or ‘surprise’ due to unequal bargaining power, the latter on ‘overly harsh’ or ‘one-sided’ results.”
4) Holds that forum selection clauses will be enforced only so long as California residents will not find their substantial legal rights significantly impaired by their enforcement.

New law:

On January 1, 2017, Senate Bill 1241 will prohibit employers from requiring an employee who resides and works in California to adjudicate disputes outside the Golden State and/or under the law of a state other than California. That bill will amend  Section 925 of the  Labor Code to read:

925. (a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:
(1) Require the employee to adjudicate outside of California a claim arising in California.
(2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.
(b) Any provision of a contract that violates subdivision (a) is voidable by the employee, and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute.
(c) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees.
(d) For purposes of this section, adjudication includes litigation and arbitration.
(e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.
(f) This section shall apply to a contract entered into, modified, or extended on or after January 1, 2017.

Therefore, any provisions in employment agreements entered into, modified or extended on or after January 1, 2017 that violate Section 925 can be voided at the request of the employee.   The updated statute also provides a way for the employee to be awarded attorneys’ fees.

Note that, according to Sec. 925(e), the mandatory California-only choice of law does not apply to contracts entered into with an employee who was represented, individually, by legal counsel during the negotiation of the terms of a work agreement containing forum selection and choice of law provisions.

Saturday, November 12, 2016

Russia Blocks LinkedIn, Warns Facebook and Twitter

On Thursday, the Moscow City Court ruled to ban professional social network LinkedIn because of its failure to comply with a controversial data localization law that requires platforms that collect Russian citizens' personal information to store that information inside Russia.  Companies are reluctant to do that out of concerns that the government will force them to hand over users' personal info to law enforcement and intelligence agencies. That would make it difficult for companies to uphold their privacy policies and possibly make them subject to publicized controversies.

LinkedIn has a total of over 400 million users, of which 2.6 million are in Russia. Federal Law 526-FZ came into effect last year on grounds of "overall state security issues" and "increased instances of personal data leakage."  The law states that all personal information provided by Russian citizens when registering on websites, making online purchases or sending electronic messages is considered personal data and must be stored on servers within Russia. platforms violating the law can be fined, blocked and placed on the blacklist of Roskomnadzor, Russia's communications watchdog.

This is the first time Russia enforced this law, although Roskomnadzor had audited 1,500 firms for compliance, securing agreement from Google, eBay, Apple, Booking,com and other Western companies. Facebook and Twitter have refused to cooperate and received a warning from the presidential adviser for internet issues, German Klimenko.

Tuesday, November 8, 2016

Can I Use Amazon Affiliate Links in YouTube Videos?

There is currently confusion in the YouTube community as to whether the creators are allowed to post Amazon affiliate links in the video descriptions. I was wondering about that too, since I recently started Mermaids and Gems underwater modeling channel where I post Amazon affiliate links to my books and photo gear I use.

Yes, you can post Amazon affiliate links in YouTube video descriptions because: 1) YouTube Terms of Service ToS do not prohibit it and 2) YouTube emailed me to confirm it. I will now elaborate on both of those points.

1.YouTube ToS do not prohibit affiliate links. 

My law practice is centered around eCommerce and software, which is why I have drafted and reviewed hundreds of Terms of Service for various types of platforms. YouTube ToS confuse users because Section 4.D states:

Saturday, November 5, 2016

McDonald's to Pay California Workers $3.75 Million in a Wage Theft Lawsuit

McDonald's settled, for $3.75 million, a federal lawsuit alleging that a franchise owner in the San Francisco Bay Area cheated hundreds of workers out of wages and overtime. Approximately 800 workers should be covered by the settlement.

The lawsuit was filed in 2014 in federal court in San Francisco. It sought a court order designating McDonald's as the joint employer of workers at its various franchise restaurants. Joint employer status means that the company (not just individual franchisees) is responsible for working conditions at restaurants.

The lawsuit alleged workers at the five Bay Area McDonald's franchises did not receive their full wages through September 2013, overtime for overnight shifts, required meal periods and rest breaks and reimbursement for time and money spent ironing and cleaning their uniforms. McDonald's was accused of controlling the terms and conditions of employment at the franchises in part by insisting that the owner strictly monitor and curtail labor costs.

In 2015, however, a judge ruled that McDonald's was not a joint employer. Nevertheless, the judge allowed the employees to argue they believed McDonald's was their employer.

McDonald's spokeswoman Terri Hickey said in a statement that the company reached a settlement in order to avoid the costs and inconvenience of continued litigation. She stressed that the court had previously ruled that McDonald's is not a joint employer of its independent franchisees' employees.

Thursday, November 3, 2016

Fed Judge: No Ballot Selfies During This Election in California

On Wednesday, a federal judge in San Francisco, William Alsup, has upheld a 100+ year old California laws that bans voters from disclosing the contents of their marked ballots to anyone. These laws were initially implemented to prevent vote-buying and voter intimidation. Back in the old days, vote buyers would demand to see the marked ballots. But now many people just feel the urge to take pics of their ballots for their social media accounts.

That’s why the plaintiff in the lawsuit, the American Civil Liberties Union, argued that these laws are outdated and violate freedom of expression. ACLU insists that voters should be free to take pictures of their ballots, upload them to social media and use them to persuade their friends.

California legislators have actually already repealed those laws but the reversal does not come into effect until January 1, 2017. So, the ACLU lawsuit essentially sought to move that effective date to cover the elections this year.

However, the judge refused to do that. He stated that suspending the old laws less than a week before the election would be “a recipe for confusion.” “No one is at fault more than the ACLU for bringing this lawsuit at the last minute and trying to jam this down their throat,” Alsup said.

California Secretary of State Alex Padilla issued a statement, "I supported a new law that is paving the way for “ballot selfies” to be permitted under state law. This new law will go into effect on January 1, 2017. In the meantime, voters can still take a selfie with their ‘I Voted’ sticker... Californians can still use their smartphones at the polls. Many voters use their smartphones to access their sample ballot or notes they have made about candidates and ballot measures.”

So, ballot-box selfies will be allowed at future elections in California but not before January 1, 2017.

Some states allow voting selfies, some do not, and in some states the situation is unclear which confuses the voters. E.g., when Justin Timberlake took a selfie inside a voting booth in Tennessee to encourage young people to vote early, he may have broken a law without realizing it. Justin Timberlake is not being prosecuted for this and it is unlikely that voters in California will be. So far, California has not enforced its ballot selfie ban.