New JOBS Act Regulations, Equity Crowdfunding, and Alternatives

Looking to invest in a startup online?  Have your own entrepreneurial idea that may require additional funding?  There have been recent changes in the law that may affect just that.

Certain provisions of the Jumpstart Our Business Startups (JOBS) Act recently came into effect as of May 2016.  Most importantly, Title III of the Act reduced restrictions around equity crowdfunding.  Small businesses are now able to raise more capital through online investments by being accessible to all potential investors.  Now, any individual can invest their money in these early-stage businesses, with the only caveat being that the amount they can invest ultimately depends on their net worth.  This is different than prior rules because it used to be prohibited for any individuals with a net worth of under a certain standard to invest at all, whereas now there are, in essence, tiered amounts permissible for all.  Conversely, if you’re going to be on the other side of the transaction and are looking for investors in your company, it’s important to note that the company itself is subject to minimum disclosure requirements as they pertain to the totality of cash raised.

Equity crowdfunding, however, also involves a great deal of risk.  In addition to the possibility that an investment may be significantly, if not entirely, lost due to the venture failing, it likewise is seen as a more expensive option in general.  It also may be difficult to read and understand all available information and data provided without the assistance of a financial or legal professional.  Such an endeavor may also take up a lot of company bandwidth, and there may be unforeseen pressures associated with the venture.  Due to these factors, it’s possible that such an extensive legal undertaking may not necessarily be for you.  If that’s the case, many alternatives are available:

1. Borrowing from a bank is likely the most common scenario one imagines when building out his or her company.  Banks may grant loans to individuals or companies at a pre-determined rate of interest, oftentimes offset by a security interest or collateral. There are many loan options but not all business can qualify for a loan. Working with an experienced business attorney and business banker will be key if you go this route. Sometimes, however, the company is too new or has some unique aspect which prevents it from getting a loan, and so another option may be private investors.
2. Borrowing from private investors, such as friends and family, is another viable option.  One should decide at the outset whether this kind of payment is structured like debt or equity, and treat it as such.  Putting the parameters of the agreement in writing is also highly encouraged.
3. Active partners may help contribute financially to a business while also taking on some of the work associated with it.  This option may benefit a business by growing the expertise within it while freeing up time, however, the control and overall dynamic of the business may change and future profits may need to be aptly divided.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us

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Small Business Mergers & Acquisitions

Mergers and acquisitions (M&A’s) aren’t just for big corporations. Small businesses can, and frequently do, merge with or buy out competitors. If you’re contemplating an M&A transaction as a buyer or seller, here are a few tips to get the process started.

If you’re the Buyer, you should know:

1. What contracts the Seller has and whether they will be terminated. A merger or acquisition agreement can provide that the Buyer will be the legal successor of the Seller, and will assume all the Seller’s legal obligations. However, it’s best to figure out what those obligations are early on. If the Seller has contractual obligations that the Buyer doesn’t want to continue, the Seller will need to pursue termination of those contracts.

2. Who’s paying taxes. Most contracts transferring large assets allocate tax responsibility, including assessments against land, to the Seller. There’s not a hard rule, however, so it’s best to have a written agreement that tax payments remain the Seller’s responsibility until the purchase or merger is complete. This minimizes risk in the event the transaction becomes protracted or is never accomplished.

3. That you can cancel company shares. For example, a merger agreement can provide that at the time the merger becomes effective, corporate shares simply cease to exist. They could be replaced by a proportionate share of stock in the new company, but there’s nothing requiring a buyer to do so.

4. That buying out or merging with a competitor isn’t the only way to purchase its assets. An asset purchase agreement is a routine way for businesses to sell a portion of their assets—for instance, a product and associated trademarks—without needing to acquire the whole business.

 

If you’re the Seller, you should know:

1. That selling your business without merging doesn’t mean you have to terminate its current form. A corporation acquired by another corporation, for example, could simply become a subsidiary of the buyer corporation.

2. That if you do terminate your business in its current form, there’s probably a defined legal process for it. For example, specific rules govern the terminating or “winding up” of an LLC, including paying out shareholders. For a corporation, you might need to file a notice of dissolution with the Secretary of State that the corporation no longer exists. Many states’ Secretary of State websites have resources for dissolving various businesses.

3. Whether the buyer expects you to sign a non-compete agreement. If a competitor is buying you out, it’s safe to assume they don’t want you establishing a new competing business in the near future. Non-compete provisions can even survive the termination of a contract like a merger agreement, so it pays to be attentive to where, how soon, and how much you can exercise your expertise after selling your business.

4. Whether you’re indemnified against future lawsuits. An ideal acquisition or merger agreement would clearly state that you’re not obligated to help the Buyer defend any claim arising against the Buyer related to the Seller’s business after the acquisition or merger takes place, pay costs and attorneys’ fees, or pay any damages awards.

 

Lastly, both Buyers and Sellers can benefit from the advice of an experience attorney to help tailor a merger or acquisition agreement to a business’ individual needs. This article was sponsored by Vlodaver Law Offices, LLC, a business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.