by Guest Author on March 20, 2014
Entrepreneurs looking to build for success need more than just passion and a great idea. They need a foundation ready to lean into their success. This means making smart, informed choices from the beginning. With your business and the marketplace in mind, pick a team of startup advisors (attorney, CPA, banker, insurance agent, and IT guru) experienced in and devoted to your success. And, then, do not be afraid to take their advice.
In my career, each new entrepreneurial client arrives with an abundance of energy and vision, but seeks help navigating some important initial questions: what is the best business structure (C-corporation, S-corporation, partnership, limited liability company); what are the business’ tax responsibilities; how is initial equity awarded; what are my personal liabilities for the business; what sort of contracts are needed to protect the business and its owners; and, perhaps most importantly, how can I finance this startup?
In my upcoming posts we will explore in greater depths numerous legal and business topics for the new and emerging businesses’ points of view focusing on real-world examples and with an emphasis on accessing capital in today’s private investment markets, including the new equity crowdfunding exemption created by the JOBS Act that is anticipated to go “live” in the Summer of 2014.
Based my 30 years of experience representing startups, emerging and mature businesses, I can state without hesitation that no business, regardless of the level of risk, should operate as a sole proprietorship because this entity choice offers no corporate veil of limited liability thereby exposing the single owner to all the financial risks. Moreover, because a sole proprietorship can have only one owner, this is not a practical choice. Few businesses today can either launch or be fostered with only one owner. Thus, the choices of entity structures are corporations, LLCs, partnerships and/or combination thereof. As we explore these legal structures and their characteristics, we will do so with capital access and startup financing options top of mind.
In 1982, the Securities and Exchange Commission (SEC) initiated rulemaking to create Regulation D which created three new exemptions from registration: Rule 504; Rule 505; and Rule 506 with the stated goal of increasing small businesses’ access to capital. While Reg D has been widely used over the past 30 years, its requirements on the offering processes and the costs associated with such processes have come to be seen as unduly restrictive and expensive. Crowdfunding under the new Section 4(a)(6) as created by the JOBS Act and being developed through SEC rulemaking seeks, in part, to lower the barriers to entry to private capital markets by permitting non-registered broker/dealer organizations known as “funding portals” to facilitate equity offerings using the Internet and to hopefully bridge the funding gap of startups and small business looking to raise the essential first dollars needed to start a business.
To frame our onging discussions of entrepreneurial law matters, here are the basic parameters of the new Section 4(a)(6) exemption from registration, commonly known as equity Crowdfunding:
- The amount raised must not exceed $1 million in a 12-month period (this amount is to be adjusted for inflation at least every five years);
- Individual investments in a 12-month period are limited to:
- the greater of $2,000 or 5 percent of annual income or net worth, if the investor’s annual income or net worth is less than $100,000; and
- 10 percent of annual income or net worth (not to exceed an amount sold of $100,000), if annual income or net worth is $100,000 or more;
- Transactions are only conducted through an intermediary that is either a registered broker/dealer or is registered as a new type of entity called a “funding portal.”
Have more legal questions? You can see Rita and many others speak at our Startup Law Summit on May 3rd.
About the Author
Rita W. Garry has been representing privately-held companies in all areas of corporate, securities, and commercial law since her graduation from Boston University School of Law in 1983. She is partner with Golan & Christie, a 20-year old Chicago-based business, real estate and commercial litigation law firm. Ms. Garry is a frequent speaker and presenter on business law topics and has published numerous articles on SEC regulations of private placements of securities, including the new crowdfunding exemption. She has received service excellence rewards from Women in Management and the Heartland REALTOR Organization.
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