New York’s Blue Sky Securities Laws – A Primer for Startups and Other Issuers by Michael Stanczyk

3d blue sky bookAs a younger lawyer I was regularly working on securities offerings.  For the bulk of the offerings they were private placements to accredited investors under SEC Rule 506(b), which involved filing a Form D and state notice filings.  In most states it was pretty straightforward. New York, however, was not straightforward then, and still remains a mystery to many people.  Over the years I searched for a book that covered the basics of New York’s Martin Act (the law covering securities offerings in the State), but never found exactly what I was looking for.  I kept working on deals and writing posts for this blog (in addition to memos and white papers, etc.), and over time I compiled a decent amount of information and knowledge of the subject and decided to put it all into one place.  Next thing you know I had the beginnings of a book.  Link to see it on Amazon here.

Now I don’t profess to being a specialist in the field of securities, as there are many complexities and rabbit holes to go down if you get outside the more “vanilla” type offerings. Startups, emerging companies and even investment funds, however, generally are raising money through private placements under SEC Rule 506(b). This book gives the basics and is, like its titled, a primer.  I tried to walk a fine line to allow it to be read by non-lawyers, with enough citations to assist legal practitioners.

Admittedly, this book is a niche product.  The prospective audience is those whose companies are looking to raise money, or individuals otherwise involved in some aspect of companies raising money.  I hope it can be helpful to such individuals, including younger attorneys just getting started in the field.

In any event, the book is for sale in paperback and e-book on Amazon.   I personally feel the paperback is easier to read and to flip back and forth to things, and to view the exhibits and addenda, which should be consulted. I have a number of copies of the book, and if any readers of this blog or friends and colleagues of mine would like a free copy, feel free to reach out.  Thanks for the support.

Use your Retirement Plan to Fund your Startup

First of all, I won’t advise anyone to withdraw their 401(k) funds early as the tax hit the IRS enacts is insane.  If you are thinking about doing that, please don’t, or at least don’t do so until you’ve spoken to your accountant.

This post will, however, detail how to use your qualified retirement plan or IRA to start a new, or buy an existing, business.  This name given to the process I’ll discuss is rollovers as business startups (“ROBS”).  The main gist is that an individual’s current retirement plan is rolled over into a newly established 401(k) plan sponsored by a startup company and then used to purchase the startup company’s stock.  The ROBS arrangement allows income taxes and penalties (see IRC Section 72(t))to be avoided because it is a rollover from one qualified plan to another. Read more

New York’s STARTUP-NY Program

Starting at the beginning of 2014, New York’s STARTUP-NY Program went live.  Here is the official website for the initiative.  Its goals are laudable but its only available to a small niche of companies.  If your company qualifies, however, the benefits are rather nice.

In summary, the Program provides eligible companies with free office space (at certain locations) for a period of time and the employees of the company pay no state income tax on their income (at least for the first five years, with a small amount possibly paid in years 5 through ten).  The Program is attempting to lure out-of-state companies into New York, while encouraging sprouting of new startups that otherwise may not have started without these benefits.  Overall New York is looking to add more jobs in the state, and the more jobs now (even with tax breaks) the more taxes the state can collect in teh future.  Read more

Domestic International Sales Corporations

If you export products for sale of any type and don’t know what an IC-DISC (or simply a DISC) is, or think it’s a round piece of plastic you put in your computer’s drive, then keep reading.  Any United States business with qualifying export sales can save a large amount of money with the use of a Interest Charge Domestic International Sales Corporation (referred to hereinafter as a “DISC”). Read more

How to form a Single Member LLC in New York State

There are a lot of small businesses out there operating as sole proprietorships, that is they operate the business through the individual(s), and there is no formal entity.  Many sole proprietors tell me that they’ve filed a d/b/a with the local county (here, the counties of Onondaga, Tompkins or Monroe), and therefore believe that is all they need to ensure that they are not personally liable, but this is not correct.

The main reason people incorporate or organize LLCs is to limit liability.  Debts and contractual obligations are not something that you want to owe personally if you can avoid it.  Setting up an LLC will create a seperate legal entity from yourself that you will operate the business through, own business assets, and contract through.  Not much has to change when you form a single member LLC.  LLC’s are also useful because the IRS will let you choose how you want the LLC taxed (either as a disregarded entity, S corp or C corp).

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Hack-a-thon Agreements

I hit on the Hack-a-thon craze in an earlier post. The IP that is created by the hackers in these programs has to be owned by someone, although there are still times where everyone walks away not knowing what everyone’s rights are.  If nothing is ever signed by all participants and the hackathon sponsor, its unclear who owns what.

There are a couple different options.  The sponsor may want to own everything, or may want to at least have a perpetual paid up license to use the IP created.  The hackers should get some rights as well, but its been hard to delineate what and how it should be handled.

A friend of mine and a fellow startup lawyer, Dave Capuccilli of The Capucilli Firm has been working on a solution to this dilemma. Check out his latest iteration to a Hack-a-thon Collaboration Agreement, courtesy of Docracy.  Its a great way to ensure all hackers and the sponsor get a fair shot at using the IP created.

I currently represent a few companies that were born at Hack-a-thons and Startup Labs (a similar idea but slightly different format/program), and if they had an agreement like this signed before they came to me it would have made things much smoother.

IRS’s “Check the Box” Regulations for LLCs

There are many reasons why LLCs can be great for business owners.  For those types of businesses that have revenue and don’t need outside investors or to issue stock options (although LLC profits interests can work), LLCs are a good choice.

For a lot of startup companies, a corporation may be the right choice, especially if it will be seeking investors, plans to be acquired by a larger player in the industry at some point, or would like to have an IPO or other offering. The choice for a lot of companies especially in the high tech sector is the corporation. But if those aren’t your goals, if you have a business plan, target market, product and are ready to sell and make revenue then an LLC may be the right choice for you. Whatever industry you are in, an LLC can be a beneficial entity to use. LLCs can do complex and sophisticated things with respect to splitting profits, can have interesting classes and structures, require less paperwork than would a corporation, and are by far more flexible. (I’ve kind of beat the LLC v. Corp. horse to death earlier so will get to the point now). One of the other great advantages of the LLC form is that it can elect (i.e. choose) to be taxed as either disregarded entity (if one member then a sole proprietorship, and if multiple members than a partnership), an S-corporation or a C-corporation.

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New York’s Proposed Angel Investor Tax Credit

I’ve been following a bill proposed by New York Assembly member Kellner for a while now.  It is an Angel Investor Tax Credit, available to investors in “qualifying businesses”.   New York Bill No. A09958.  Investors would receive a credit based on 25% of their investment, but the maximum investment you can obtain the credit for is capped at $250,000.

A qualifying business is one that:

  1. has gross revenue of less than $1M for the year before the investment;
  2. has no more than 20 full time employees (60% must reside in NY State);
  3. has operated in the State of NY for no more than seven consecutive years; and
  4. has received no more than $2M in investments (eligible for the credit from one or more angel investors)

To be eligible for the credit, the angel investor must be an accredited investor as defined in Rule 501 of Regulation D, except for those that either 1. control fifty percent or more of the company being invested in, or 2. any company whose normal business activities include venture capital investment.

First, the idea is noteworthy.  A number of other states have passed similar credits to encourage angel investing.  In Wisconsin, they passed such a credit and angel investments increase from $30M in 2005 to $180M in 2010.  That’s staggering.   I would prefer to see that the credit be available for seed/angel and venture capital companies, however.  I think excluding them is a bad idea.

There are some critics of state angel investor tax credits.  They are usually out of state VC funds and investors.   They say that these types of credits would discourage interstate investing, such as Boston based VC’s investing in New York startups, and other such situations.  I don’t know if those critiques are warranted, however, as out-of-state investors aren’t penalized in any way other than having more competition in New York State.  As investors in-state are now sure they will at least recoup 25% of their investment in the year after they invest, as well as having the possibility for large returns (i.e. the home run) down the road.

The bill was referred to the ways and means committee in April and held for consideration there in June.  There hasn’t been much action on it since then and won’t be until at least 2013.  It is something to keep in mind however as any incentive that can be put on the table to get the economy moving, especially the startup community is a good idea.  Access to capital is a big issue for many young companies.