Securities 101: Introduction to Crowdfunding

64Px - 011Crowdfunding– Alan N. Walter –

This post is a primer on crowdfunding for entrepreneurs and other people who are not securities lawyers.


I’ll start by talking a bit about securities and then about equity and non-equity offerings. Bear with me; we’ll get to crowdfunding.

What is a security? The most common types of securities are stocks, bonds and notes. However, just about any instrument representing a share or interest in a company will be a security.

Securities are regulated by federal and state law. The primary federal laws regulating the registration and sale of securities are the Securities Act of 1933 and the Securities Exchange Act of 1934. The primary state laws regulating securities, known as blue sky laws, are variations of the Uniform Securities Act, a model statue created by the National Conference of Commissioners on Uniform State Laws.

Registration and Exemption

Securities must be registered to be sold, unless there is an exemption for the security or for the sale.

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Another Trap for Business Owners: Misclassifying Workers

bomb– Alan N. Walter –

It’s imperative that businesses classify their employees properly for legal (and moral) reasons. Let’s consider the factors that determine whether a worker is an employee or an independent contractor and, if an employee, whether the worker is exempt from pay rate regulations.

W-2 Employee or 1099 Independent Contractor

Government taxing and labor agencies are both concerned that workers are properly classified. The taxing agencies want to receive all the taxes they are entitled to; the labor agencies, that workers receive all the benefits they are entitled to.

There is no bright line that determines whether a worker is a 1099 independent contractor or a W-2 employee. In fact, there is not even one set of guidelines to use in making the determination; the criteria used by the taxing agencies and labor agencies overlap but differ.

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SEC’s Proposed Crowdfunding Rules: An Overview

64Px - 011Crowdfunding— Alan N. Walter —

The Securities and Exchange Commission (SEC) has finally proposed rules under the JOBS Act to allow companies to sell securities through the vehicle of crowdfunding. Comments on the proposed rules can be submitted in writing or on the SEC site through February 3, 2014.

I present for your edification (and enjoyment?) an overview (and partial cribbing) of the 585 page proposal. Needless to say, this writeup will, by necessity, not reflect all of the nuances of the proposed rules.


Crowdfunding is a source of capital that allows an individual or entity to raise funds through small individual contributions from a large number of people. Individuals interested in the crowdfunding campaign can share information about the project, cause, idea or business with each other and decide whether to fund the campaign based on the collective wisdom of the crowd.

A number of sites, such as Kickstarter and Indiegogo, currently allow funds to be raised through crowdfunding. In return for contributions, these sites give donors tokens of esteem, but not any equity in the project that funds are being raised for.

The federal JOBS Act, and the proposed rules under the Act, would change that. It would allow equity to be raised and securities to be sold through crowdfunding.

Click through below to see some of the details of the proposed rules.

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Non-Competes: Sword and Shield

Alan N. Walter –

Pondering Non-Competes
Pondering Non-Competes

Restrictive covenants – agreements not to do certain things – are common in employment agreements. The most common: non-disclosure, non-solicitation, and non-competition.

Let’s talk about non-competition agreements or non-competes. Companies often ask employees to sign non-competes. Their basic purpose is to protect the employer when (inevitably?) the employee moves on to other (greener?) pastures, by limiting the employee’s ability to compete with the company.

Non-competes are governed by state law. That is, each state gets to decide whether the contract terms of a non-compete (governed by its law) should be enforced. Some states are more favorable to companies; others to employees. Generally speaking, though, a non-compete will be enforced if it is (1) based upon valid consideration (see below), (2) necessary to protect the company’s interests, and (3) is reasonable in geographic area and duration.

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Crowdfunding: Not Ready for Prime Time

Alan N. Walter –

64Px - 011CrowdfundingWhat Crowdfunding Is:

Crowdfunding is the raising of capital or money by a company by the selling of small amounts of itself to lots of investors.

The JOBS Act:

Crowdfunding advocates were encouraged by the enactment of the Jumpstart Our Business Startups Act (the JOBS Act), in 2012. The alleged purpose of the JOBS Act was to
revigorate the US economy by encouraging the investment of capital in US companies. The Act accomplishes – or will accomplish – several things:

  • increasing the number of shareholders a company can have before needing to register with the Securities and Exchange Commission (SEC)
  • providing new exemptions from having to register a security offering with the SEC, including a new exemption for crowdfunding
  • reducing the required amounts of disclosures and regulations for certain
  • removing the general ban on advertising and general solicitation with respect to certain private placement of securities

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A Trap for New Business Owners: Piercing the Corporate Veil

bombAlan N. Walter –

Individuals, acting by themselves or with a group, are generally responsible for their actions; that is, they have general liability for their actions. By forming an entity such as a limited liability company or corporation, each individual in the group can shield himself from general liability, can limit his liability to his investment in the entity. The states permit—or even promote—this as a means of encouraging individuals to take risks and start businesses.

However, under certain circumstances, the limited liability of the entity can be lost; and general liability can extend to its owners. This is known as “piercing the corporate veil” or “piercing the entity veil.” As is the case with many legal issues, the reasons for piercing the entity veil are complicated and vary from state to state. To compound the problem, there are few statutes that govern this issue; individual state law is primarily derived from common law and court decisions.

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