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Financing and Protecting California Businesses

Advise your clients with assurance on the practical issues of raising capital, tax and regulatory compliance, and protection of business operations.

Advise your clients with assurance on the practical issues of raising capital, tax and regulatory compliance, and protection of business operations.

  • Capital sources and strategy
  • The business plan
  • Private placements; venture capital agreements  
  • Equity and debt financing, including private offerings under Regulation D and crowdfunding
  • Initial public offerings
  • Equipment leases; letters of credit
  • Business insurance
  • Intellectual property protection
  • Cybersecurity
  • Licenses, permits, and registrations
  • Tax and accounting elections; tax compliance
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Advise your clients with assurance on the practical issues of raising capital, tax and regulatory compliance, and protection of business operations.

  • Capital sources and strategy
  • The business plan
  • Private placements; venture capital agreements  
  • Equity and debt financing, including private offerings under Regulation D and crowdfunding
  • Initial public offerings
  • Equipment leases; letters of credit
  • Business insurance
  • Intellectual property protection
  • Cybersecurity
  • Licenses, permits, and registrations
  • Tax and accounting elections; tax compliance

1

Seeking Capital: Sources and Strategy

Neal H. Brockmeyer

  • I.  OVERVIEW  1.1
  • II.  ANALYSIS AND STRATEGY
    • A.  Preliminary Analysis  1.2
    • B.  Determining Type of Financing  1.3
    • C.  Designing Capital Structure  1.4
    • D.  Preparing Business Plan  1.5
    • E.  Identifying Appropriate Sources  1.6
    • F.  Approaching Potential Sources  1.7
  • III.  SOURCES OF CAPITAL
    • A.  Friends, Relatives, and Business Associates  1.8
    • B.  Angels  1.9
    • C.  Government Programs  1.10
      • 1.  Federal Government
        • a.  Small Business Administration
          • (1)  Overview of the Small Business Administration  1.11
          • (2)  SBA Business Loans: General Requirements  1.11A
          • (3)  SBA 7(a) Loan Program  1.11B
          • (4)  SBA 504 Loan Program  1.11C
          • (5)  SBA Microloans  1.11D
          • (6)  Other SBA Loan Programs  1.11E
          • (7)  SBA Loan Structures
            • (a)  Direct Loans  1.12
            • (b)  Loan Guaranties  1.13
          • (8)  Other SBA Financial Assistance Programs  1.14
        • b.  Other Federal Government Sources  1.15
      • 2.  State and Local Government  1.16
        • a.  State and Local Development Companies  1.17
        • b.  State Tax Incentives  1.17A
        • c.  Other State and Local Sources  1.18
    • D.  Venture Capital  1.19
      • 1.  Private Venture Capital  1.20
      • 2.  Small Business Investment Companies  1.21
      • 3.  New Markets Venture Capital Companies  1.22
      • 4.  Capital Access Companies  1.23
      • 5.  Business Development Companies  1.23A
    • E.  Corporate Partners  1.24
    • F.  Institutional Sources  1.25
    • G.  Incubators and Accelerators  1.26
    • H.  Crowdfunding; Peer-to-Peer (P2P) Lending  1.27
    • I.  Other Sources  1.28

2

The Business Plan

Jacob C. Reinbolt

  • I.  OVERVIEW
    • A.  Uses of Business Plan, Process of Drafting  2.1
      • 1.  Financing Proposal for Investors and Lenders  2.2
      • 2.  Operational Tool  2.3
      • 3.  Satisfy Statutory Requirements  2.4
    • B.  Attorney’s Role  2.5
    • C.  Contents of Business Plan  2.6
      • 1.  Front Cover  2.6A
      • 2.  Executive Summary  2.7
      • 3.  Management Team  2.8
      • 4.  Product or Service  2.9
      • 5.  Intellectual Property Protection  2.10
      • 6.  Manufacturing and Operations  2.11
      • 7.  Human Resources  2.12
      • 8.  The Market  2.13
      • 9.  Competition  2.14
      • 10.  Sales and Marketing  2.15
      • 11.  Company Background and Structure  2.16
      • 12.  Financial Information  2.17
        • a.  Required Financing  2.18
        • b.  Financial Projections  2.19
  • II.  CHECKLISTS: DRAFTING THE BUSINESS PLAN
    • A.  Checklist: Essential Contents of Executive Summary  2.20
    • B.  Checklist: Management and Organization  2.21
    • C.  Checklist: Principals and Key Members of Management Team  2.22
    • D.  Checklist: Product or Service  2.23
    • E.  Checklist: The Market and Marketing  2.24
    • F.  Checklist: Specific Areas to Address About the Competition  2.25
    • G.  Checklist: Financial Information  2.26
    • H.  Checklist: Presenting Business Plan to Investors  2.27
  • III.  FORMS
    • A.  Form: Confidentiality Agreement  2.28
    • B.  Form: Disclosure Agreement re Confidential Information  2.29

3

Agreements Among Founders

David L. Keligian

  • I.  INTRODUCTION
    • A.  Importance of Internal Agreements  3.1
    • B.  Ethical Issues
      • 1.  Conflicts Among Founders  3.2
      • 2.  Conflicts Between Founders and Business Entities  3.3
      • 3.  Rules Regarding Conflicts  3.4
    • C.  Founder Agreements
      • 1.  Typical Agreements  3.5
      • 2.  Determining What Agreements Are Required  3.6
    • D.  Assigning Property Rights; Capital Contributions to Entity
      • 1.  Legal and Business Issues  3.7
      • 2.  Tax Issues  3.8
    • E.  Employment Agreements
      • 1.  When Appropriate  3.9
      • 2.  Key Provisions
        • a.  General Considerations  3.10
        • b.  Arbitration Provisions  3.10A
        • c.  Termination Events  3.11
        • d.  Disability of Founder  3.12
    • F.  Buy-Sell Agreements  3.13
      • 1.  Benefits of Buy-Sell Agreement
        • a.  Provides for Orderly Business Succession  3.14
        • b.  Establishes Fixed Value  3.15
        • c.  Creates Liquidity  3.16
        • d.  Binds Internal Revenue Service to Value  3.17
        • e.  Preserves S Corporation Status  3.18
      • 2.  Types of Agreements  3.19
      • 3.  Coordination With Employment Agreement  3.20
      • 4.  Valuation and Funding Issues  3.21
    • G.  Stock-Based Compensation Arrangements
      • 1.  Stock Options  3.22
      • 2.  Restricted Stock Plan  3.23
      • 3.  Partnerships and LLCs  3.24
      • 4.  Tax Issues Regarding Equity Plans  3.25
  • II.  ASSIGNMENT OF INTELLECTUAL PROPERTY
    • A.  Introduction  3.26
    • B.  Form: Transfer and Assignment of Intellectual Property  3.27
  • III.  SHAREHOLDER BUY-SELL AGREEMENT  3.28
    • A.  Preamble, Recitals, and Definitions
      • 1.  Form: Preamble  3.29
      • 2.  Form: Recitals  3.30
      • 3.  Form: Definitions  3.31
    • B.  Transfers
      • 1.  Form: Permitted Transfers  3.32
      • 2.  Form: Transfers Under Shareholder Agreement  3.33
      • 3.  Form: Involuntary Transfers  3.34
    • C.  Purchase on Death, Termination of Employment, or Disability
      • 1.  Form: Events Triggering Purchase  3.35
      • 2.  Form: Repurchase  3.36
    • D.  Life Insurance
      • 1.  Form: Corporation to Insure Specified Shareholders  3.37
      • 2.  Form: Optional Purchase of Life Insurance by Shareholders  3.38
    • E.  Determination of Fair Market Value  3.39
    • F.  Payment Terms  3.40
    • G.  Optional “Shotgun” Buyout
      • 1.  Introduction  3.41
      • 2.  Form: “Shotgun” Buyout Provisions  3.42
    • H.  Legend on Shares; After-Acquired Shares; Will or Trust Provisions
      • 1.  Form: Legend on Shares  3.43
      • 2.  Form: After-Acquired Shares  3.44
      • 3.  Form: Will or Trust Provisions  3.45
    • I.  Form: Separation or Divorce Affecting Shareholders Who Are Married or Have a Domestic Partner  3.46
    • J.  S Corporation and Actions by Corporation
      • 1.  Form: Notice of Transfer or Prohibition on Ineligible Transfer  3.47
      • 2.  Form: Right of First Refusal  3.48
      • 3.  Form: Transfer Not Permitted Is Void  3.49
      • 4.  Form: Limitations on Corporation  3.50
      • 5.  Form: Shareholder Vote  3.51
      • 6.  Form: Distributions While S Corporation  3.52
      • 7.  Form: Accounting Closing  3.53
    • K.  Voting Agreement; Optional Order of Purchase; Personal Guaranty
      • 1.  Form: Voting Agreement  3.54
      • 2.  Form: Optional Order of Purchase for C Corporation  3.55
      • 3.  Form: Optional Personal Guaranty  3.56
    • L.  Covenant Not to Compete  3.57
    • M.  Provisions for Deferred Compensation in Event of Disability; Termination of Shareholder Agreement; Conflicts of Interest; Nonrepresentation
      • 1.  Form: Deferred Compensation in Event of Disability (Optional)  3.58
      • 2.  Form: Termination  3.59
      • 3.  Form: Conflicts of Interest  3.60
      • 4.  Form: Nonrepresentation  3.61
    • N.  Miscellaneous Matters; Signatures  3.62
      • 1.  Form: Notice to Successor  3.63
      • 2.  Form: Binding on Successors  3.64
      • 3.  Form: Signatures  3.65
    • O.  Exhibits to Shareholder Buy-Sell Agreement
      • 1.  List of Exhibits  3.66
      • 2.  Form: Calculation of Fair Market Value  3.67

4

Structuring a Financing Transaction

Neal H. Brockmeyer

  • I.  INTRODUCTION  4.1
  • II.  COMPANY’S AND PRINCIPALS’ OBJECTIVES  4.2
    • A.  Amount of Capital  4.3
    • B.  Minimal Dilution  4.4
    • C.  Retention of Flexibility  4.5
      • 1.  Subordination  4.6
      • 2.  Antidilution Provisions  4.7
      • 3.  Covenants  4.8
    • D.  Retention of Control  4.9
    • E.  Assistance From Investors  4.10
    • F.  Confidentiality  4.11
    • G.  Compatibility With Tax and Securities Law Goals  4.12
  • III.  INVESTOR OBJECTIVES
    • A.  Return on Investment  4.13
    • B.  Liquidity  4.14
    • C.  Controls  4.15
    • D.  Information  4.16
    • E.  Management’s Continued Participation  4.17
    • F.  Compatibility With Tax and Regulatory Goals  4.18
    • G.  Antidilution Protection  4.19
  • IV.  THE INVESTMENT VEHICLE
    • A.  Basic Considerations  4.20
    • B.  Qualified Small Business Stock  4.20A
    • C.  Common Stock  4.21
    • D.  Additional Classes of Stock  4.22
    • E.  Warrants and Options  4.23
    • F.  Debt Instruments  4.24
    • G.  Combinations of Debt and Equity  4.25
    • H.  Simple Agreements for Future Equity (SAFEs)  4.25A
    • I.  Lease Transactions  4.26
  • V.  RELATED AGREEMENTS  4.27
    • A.  Agreements Affecting Control  4.28
    • B.  Agreements Affecting Employees  4.29

5

Forms of Securities

Neal H. Brockmeyer

  • I.  GENERAL REQUIREMENTS  5.1
  • II.  STOCK CERTIFICATES
    • A.  Use of Standard Printed Forms; Exchange Requirements  5.2
    • B.  Form: Basic Stock Certificate  5.3
    • C.  Common Stock
      • 1.  Transfer Restrictions  5.4
        • a.  Form: Restrictions by Issuer  5.5
        • b.  Restrictions by Shareholder Agreement  5.6
        • c.  Restrictions Imposed by Commissioner of Business Oversight
          • (1)  Form: Promotional Shares  5.7
          • (2)  Form: Other Restricted Shares  5.8
        • d.  Restrictions Imposed by Federal Securities Laws  5.9
          • (1)  Form: Private Offerings  5.10
          • (2)  Form: Intrastate Offerings  5.11
      • 2.  Other Statements  5.12
    • D.  Preferred Stock
      • 1.  Rights, Preferences, Privileges, and Restrictions  5.13
      • 2.  Preferred Share Certificate  5.14
        • a.  Form: Statement of Preferences  5.15
        • b.  Form: Shares Subject to Redemption  5.16
        • c.  Form: Convertible Shares  5.17
        • d.  Other Legends  5.18
  • III.  PROMISSORY NOTES  5.19
    • A.  Notes as Securities  5.20
    • B.  Drafting Notes  5.21
      • 1.  Form: Basic Provisions  5.22
      • 2.  Special Provisions
        • a.  Prepayment  5.23
          • (1)  Form: Prepayment Without Premium  5.24
          • (2)  Form: Prepayment With Premium  5.25
        • b.  Form: Reference to Underlying Agreement  5.26
        • c.  Conversion Rights  5.27
        • d.  Form: Subordination  5.28
      • 3.  Legends  5.29
  • IV.  DEBENTURES
    • A.  Definitions  5.30
    • B.  Trust Indentures
      • 1.  Regulatory Considerations
        • a.  Trust Indenture Act Requirements  5.31
        • b.  Commissioner of Business Oversight Requirements  5.32
        • c.  Stock Exchange Requirements  5.33
      • 2.  Drafting Trust Indenture  5.34
    • C.  Debenture
      • 1.  Preliminary Considerations  5.35
      • 2.  Debenture Face
        • a.  Form: Face of Debenture  5.36
        • b.  Legends  5.37
      • 3.  Debenture Reverse
        • a.  Form: Reference to Indenture  5.38
        • b.  Form: Subordination  5.39
        • c.  Form: Conversion  5.40
        • d.  Form: Redemption  5.41
        • e.  Form: Default  5.42
        • f.  Form: Modifications  5.43
      • 4.  Form: Conversion Notice  5.44
  • V.  STOCK PURCHASE WARRANTS
    • A.  Description  5.45
    • B.  Securities Regulation  5.46
    • C.  Warrant Agreement  5.47
    • D.  Common Stock Purchase Warrant
      • 1.  Form: Basic Common Stock Purchase Warrant  5.48
      • 2.  Form: Definitions  5.49
      • 3.  Federal Securities Regulation Provisions
        • a.  Form: Registration Rights  5.50
        • b.  Form: Exercise, Transfer, and Exchange Restrictions  5.51
      • 4.  Form: Exercise  5.52
      • 5.  Form: Delivery of Stock Certificate  5.53
      • 6.  Antidilution Provisions  5.54
        • a.  Form: Stock Splits and Combinations  5.55
        • b.  Form: Reclassifications, Exchanges, and Substitutions  5.56
        • c.  Stock Dividends  5.57
        • d.  Sale or Issuance of Additional Shares  5.58
          • (1)  Sale Below Exercise Price
            • (a)  Form: Earlier Sale at Higher Price Not Recognized  5.59
            • (b)  Form: Earlier Sale at Higher Price Recognized  5.60
            • (c)  Supplementary Provisions
              • (i)  Form: Consideration for Stock  5.61
              • (ii)  Form: Consideration for Stock Dividends  5.62
              • (iii)  Form: Convertible Securities, Options, and Rights  5.63
              • (iv)  Form: Record Date  5.64
              • (v)  Form: Exempt Issuances  5.65
          • (2)  Form: Sale Below Market Price  5.66
        • e.  Unusual Actions
          • (1)  Form: Reorganizations, Mergers, Consolidations, or Sale of Assets  5.67
          • (2)  Extraordinary Distributions  5.68
          • (3)  Form: Prior Notice  5.69
          • (4)  Form: No Dilution or Impairment  5.70
        • f.  Mechanics of Adjustment
          • (1)  Form: Notice of Adjustments  5.71
          • (2)  Form: No Change in Warrant  5.72
      • 7.  Miscellaneous Provisions
        • a.  Form: Reservation of Stock  5.73
        • b.  Form: Listing on Stock Exchange  5.74
        • c.  Form: Replacement  5.75
        • d.  Form: Exchange and Transfer  5.76
        • e.  Form: Warrant Agent  5.77
        • f.  Form: No Rights as Shareholder  5.78
        • g.  Form: Negotiability  5.79
        • h.  Form: Modification  5.80
        • i.  Form: Governing Law  5.81
        • j.  Form: Expiration  5.82
        • k.  Form: Date and Signatures  5.83
      • 8.  Form: Subscription  5.84
      • 9.  Form: Assignment  5.85

5A

Issuing Common Shares to Founders and Investors

Steven T. Anapoell

Russell J. Wood

  • I.  INTRODUCTION  5A.1
  • II.  SCOPE OF CHAPTER  5A.1A
  • III.  LEGAL PRINCIPLES AND KEY CONSIDERATIONS  5A.2
    • A.  Common Versus Preferred Shares  5A.3
    • B.  Redeemable Common Shares  5A.4
    • C.  Voting Rights  5A.5
    • D.  Preemptive Rights  5A.6
  • IV.  PROCEDURES FOR ISSUING COMMON SHARES  5A.7
    • A.  Issuing Common Shares to Founders  5A.8
      • 1.  Determination of Share Value  5A.9
      • 2.  Consideration for Shares  5A.10
      • 3.  Federal and State Securities Law Exemptions  5A.11
      • 4.  California Community Property Law  5A.12
      • 5.  Procedures for Share Issuance to Founders  5A.13
    • B.  Issuing Common Shares to Third Party Investors
      • 1.  Additional Considerations  5A.14
      • 2.  Procedures for Sale of Common Shares to Investors  5A.15
  • V.  FORMS
    • A.  Form: Board Resolutions Authorizing Common Share Issuance to Specific Persons  5A.16
    • B.  Form: Board Resolutions Authorizing Private Offering of Common Shares  5A.17
    • C.  Form: Board Resolutions Approving Private Placement Memorandum and Employment of Brokers  5A.17A
    • D.  Form: Certificate of Investment Intent  5A.18
    • E.  Share Purchase Agreement: Common Shares
      • 1.  Form: Introductory Language and Recitals  5A.19
      • 2.  Form: Purchase and Sale of Securities  5A.20
      • 3.  Form: Purchase Price and Closing  5A.21
      • 4.  Form: Company’s Representations and Warranties  5A.22
      • 5.  Form: Purchaser’s Representations and Warranties  5A.23
      • 6.  Form: General Provisions  5A.24
      • 7.  Form: Signatures  5A.25
    • F.  Form: Investor Questionnaire  5A.26
    • G.  Form: Officers and Directors Questionnaire  5A.27
    • H.  Subscription Agreement: Corporate Shares
      • 1.  Form: Subscription  5A.28
      • 2.  Form: Investment Conditions  5A.29
      • 3.  Form: Issuer’s Representations and Warranties [and Covenants]  5A.30
      • 4.  Form: Purchaser Representations and Warranties  5A.31
      • 5.  Form: Indemnification  5A.32
      • 6.  Form: Choice of Law  5A.33
      • 7.  Form: Subscription for Shares   5A.34
      • 8.  Form: Title to Shares  5A.35
      • 9.  Form: Securities Legends  5A.36
      • 10.  Form: Completion and Acceptance of Subscription  5A.37
    • I.  Form: Restrictive Legend (Federal)  5A.38
    • J.  Form: Investment Representation Letter  5A.39
    • K.  Form: Memorandum to Client Regarding Procedures for Private Offering  5A.40
    • L.  Form: Notice of Transaction Pursuant to Corporations Code §25102(f)   5A.41
    • M.  Form: Bad Actor Questionnaire (Individuals)  5A.42
    • N.  Form: Bad Actor Questionnaire (Entities)  5A.43

6

Private Placements

Christopher J. Husa

  • I.  SCOPE OF CHAPTER  6.1
  • II.  NONPUBLIC OFFERINGS—SECTION 4(a)(2)  6.2
  • III.  ACCREDITED INVESTOR OFFERINGS—SECTION 4(a)(5)  6.3
  • IV.  LIMITED OFFERINGS—REGULATION D  6.4
    • A.  Definitions  6.5
      • 1.  Accredited Investor  6.6
      • 2.  Aggregate Offering Price  6.7
      • 3.  Number of Purchasers  6.8
      • 4.  Purchaser Representative  6.9
    • B.  General Conditions  6.10
      • 1.  Integration
        • a.  Safe Harbor  6.11
        • b.  Integration With Other Offerings  6.12
      • 2.  Information Requirements  6.13
      • 3.  Manner of Offering  6.14
      • 4.  Restricted Securities  6.15
      • 5.  Notice Filing  6.16
    • C.  Rule 504 Offerings  6.17
    • D.  Rule 505 Now Repealed   6.18
    • E.  Rule 506 Offerings
      • 1.  General Requirements of Rule 506  6.19
      • 2.  Offerings Involving “Bad Actors” Disqualified  6.19A
      • 3.  General Solicitation and Advertising  6.19B
      • 4.  Verifying Accredited Investor Status  6.19C
      • 5.  SEC Proposals  6.19D
    • F.  Disqualifying Provision  6.20
    • G.  Effect of Noncompliance  6.21
  • V.  COMPARISON OF EXEMPTIONS   6.22
  • VI.  OTHER EXEMPTIONS
    • A.  Intrastate Offerings  6.23
    • B.  Offshore Offerings  6.24
    • C.  Securities Act Rule 1001  6.25
    • D.  Securities Act Rule 701  6.26
  • VII.  RESALES OF RESTRICTED SECURITIES  6.27
    • A.  Rule 144  6.28
    • B.  Rule 144A  6.29
    • C.  Section 4(1½) and Section 4(a)(7)  6.30
  • VIII.  REGISTRATION OF BROKER-DEALERS  6.31
  • IX.  STATE LAW
    • A.  California
      • 1.  Generally  6.32
      • 2.  Securities Exempt From Qualification  6.33
      • 3.  Transactions Exempt From Qualification
        • a.  Private Offers  6.34
        • b.  Limited Offerings  6.35
        • c.  Qualified Purchasers  6.36
        • d.  Small Offerings  6.37
        • e.  Offers and Sales to Certain Types of Investors  6.38
        • f.  Stock Purchase and Option Plans  6.39
        • g.  Other California Exemptions  6.40
    • B.  Other States
      • 1.  General  6.41
      • 2.  NASAA Uniform Limited Offering Exemption and Statement of Policy  6.42
      • 3.  NASAA’s Electronic Filing Depository  6.43

6A

Drafting a Private Placement Memorandum Under Regulation D

Steven T. Anapoell

  • I.  INTRODUCTION  6A.1
  • II.  FEDERAL AND STATE DISCLOSURE OBLIGATIONS  6A.2
  • III.  SECURITIES LAW EXEMPTIONS FROM REGISTRATION  6A.3
  • IV.  PREPARING A PRIVATE PLACEMENT MEMORANDUM  6A.4
    • A.  Step 1: Engagement Letter
      • 1.  Describe Scope of Services  6A.5
      • 2.  Form: Sample Engagement Letter Clauses  6A.6
    • B.  Step 2: “Process” Letter  6A.7
    • C.  Step 3. Bad Actor Certifications/Questionnaires  6A.7A
    • D.  Step 4: Information Gathering/Due Diligence  6A.8
    • E.  Step 5: Legal Review  6A.9
    • F.  Step 6: Drafting the PPM  6A.10
    • G.  Step 7: Focus on Risk Factors  6A.11
    • H.  Step 8: Cold Review  6A.12
    • I.  Step 9: Initial Client Review  6A.13
    • J.  Step 10: Final Client Review and Delivery  6A.14
  • V.  RULE 502(b) CHECKLIST  6A.15
  • VI.  ELEMENTS OF A TYPICAL PPM  6A.16
    • A.  Cover Page  6A.17
    • B.  Notice to Investors  6A.18
    • C.  Table of Contents  6A.19
    • D.  Summary of Offering  6A.20
    • E.  Risk Factors  6A.21
    • F.  Forward-Looking Statements  6A.22
    • G.  Use of Proceeds  6A.23
    • H.  Offering Price; Capitalization; Dilution  6A.24
    • I.  Plan of Distribution  6A.25
    • J.  Description of Business and Properties  6A.26
    • K.  Material Pending Legal Proceedings  6A.27
    • L.  Management’s Discussion and Analysis (MD&A)  6A.28
    • M.  Management  6A.29
    • N.  Executive Compensation  6A.30
    • O.  Director and Officer Indemnification  6A.31
    • P.  Security Ownership  6A.32
    • Q.  Description of Securities  6A.33
    • R.  Relationships and Related Party Transactions  6A.34
    • S.  Market for Securities and Related Matters  6A.35
    • T.  Dividend Policy  6A.36
    • U.  SEC Position re Indemnification  6A.37
    • V.  Additional Information  6A.38
    • W.  Interests of Legal Counsel and Other Experts  6A.39
    • X.  Financial Statements; Financial Forecasts  6A.40
    • Y.  Exhibits  6A.41
  • VII.  SAMPLE PRIVATE PLACEMENT MEMORANDUM
    • A.  Introduction  6A.42
    • B.  Form: Sample Confidential Private Placement Memorandum  6A.43

6B

Equity Crowdfunding

David M. Lynn

John M. Rafferty

  • I.  REGULATION CROWDFUNDING; SCOPE OF CHAPTER  6B.1
  • II.  GENERAL REQUIREMENTS OF CROWDFUNDING
    • A.  Limit on Capital Raised; Individual Investment Limits  6B.2
    • B.  Offering Through an Intermediary  6B.3
    • C.  Companies Not Eligible for Crowdfunding Exemption  6B.4
  • III.  COMPANY DISCLOSURE REQUIREMENTS  6B.5
    • A.  Form C Disclosures  6B.6
    • B.  Financial Statement Requirements  6B.7
    • C.  Amendments to Form C; Progress Updates; Annual Report  6B.8
    • D.  Termination of Reporting  6B.9
    • E.  Offering Amount and Offering Mechanics  6B.10
    • F.  Types of Securities  6B.11
    • G.  Transfer Restrictions  6B.12
    • H.  Integration  6B.13
    • I.  Restrictions on Advertising and Promotion  6B.14
    • J.  Promoter Compensation  6B.15
  • IV.  REQUIREMENTS FOR INTERMEDIARIES  6B.16
    • A.  Conducting a Crowdfunding Offering
      • 1.  Single Intermediary; Financial Interests in Issuer  6B.17
      • 2.  Measures to Reduce Risk of Fraud  6B.18
      • 3.  Account Opening  6B.19
      • 4.  Educational Materials  6B.20
      • 5.  Issuer Information  6B.21
      • 6.  Investor Qualifications; Investor’s Acknowledgement of Risks  6B.22
      • 7.  Communication Channels  6B.23
      • 8.  Notice of Investment Commitment  6B.24
      • 9.  Maintenance and Transmission of Funds  6B.25
      • 10.  Confirmation of Transaction  6B.26
      • 11.  Completion of Offerings; Cancellations and Reconfirmations  6B.27
    • B.  Intermediary Registration and Other Requirements
      • 1.  Registration and Self-Regulatory Organization Membership  6B.28
      • 2.  Additional Requirements for Funding Portals  6B.29
      • 3.  Non-U.S. Funding Portals  6B.30
      • 4.  Exemptions From Broker-Dealer Registration and Safe Harbors  6B.31
      • 5.  Compliance Policies and Procedures  6B.32
      • 6.  Disqualification (“Bad Actor”) Provisions  6B.33
  • V.  FINRA’S FRAMEWORK APPLICABLE TO CROWDFUNDING PORTALS  6B.34
    • A.  General Standards; Application by Funding Portal  6B.35
    • B.  Funding Portal Conduct  6B.36
    • C.  Investigations and Sanctions  6B.37
  • VI.  KEY ISSUES FOR COMPANIES CONSIDERING A CROWDFUNDING OFFERING  6B.38
    • A.  New Capital Source  6B.39
    • B.  Disclosure Burdens  6B.40
    • C.  Large Stockholder Base  6B.41
    • D.  Limit on Offering Size  6B.42
    • E.  Limit on Individual Investment Amounts  6B.43
    • F.  Potential Challenges for Intermediaries  6B.44
  • VII.  CONCLUSION  6B.45

7

Investor Agreements

Linda M. DeMelis

  • I.  OVERVIEW
    • A.  Balancing Interests of Investors and Company  7.1
    • B.  Model Investor Documents  7.2
    • C.  Attorney Roles  7.3
  • II.  MEMORANDUM OF TERMS
    • A.  Introduction  7.4
    • B.  Negotiating Terms in Prevailing Economic Climate  7.5
    • C.  Specificity of Memorandum of Terms  7.6
    • D.  Memorandum of Terms: Series A Preferred Stock Financing
      • 1.  Form: Introduction  7.7
      • 2.  Form: Outline of Financing and Valuation  7.8
      • 3.  Form: Post-Financing Fully Diluted Capitalization  7.9
      • 4.  Form: Dividend Preference  7.10
      • 5.  Form: Liquidation Preference  7.11
      • 6.  Form: Redemption Rights  7.12
      • 7.  Form: Conversion Rights  7.13
      • 8.  Form: Antidilution Protection  7.14
      • 9.  Form: Voting Rights  7.15
      • 10.  Form: Board of Directors  7.16
      • 11.  Form: Protective Provisions  7.17
      • 12.  Form: Information Rights  7.18
      • 13.  Form: Registration Rights  7.19
      • 14.  Form: Transfer of Rights  7.20
      • 15.  Form: Right of Participation  7.21
      • 16.  Form: Right of First Refusal and Co-Sale  7.22
      • 17.  Form: Market Standoff  7.23
      • 18.  Form: Issuances to Employees  7.24
      • 19.  Form: Confidential Inventions and Assignment Agreement  7.25
      • 20.  Form: Auditors  7.26
      • 21.  Form: Directors’ and Officers’ Liability Insurance  7.27
      • 22.  Form: Key Person Life Insurance  7.28
      • 23.  Form: Confidentiality  7.29
      • 24.  Form: Nonsolicitation  7.30
      • 25.  Form: Expenses  7.30A
      • 26.  Form: Binding Nature; Governing Law  7.31
      • 27.  Form: Purchase Agreement  7.32
      • 28.  Form: Signatures  7.33
    • E.  Chart: Competing Interests of Investors and Company  7.34
  • III.  AMENDED AND RESTATED ARTICLES OF INCORPORATION
    • A.  Distinguishing Common and Preferred Stock  7.35
    • B.  Establishing Terms of Preferred Stock  7.36
    • C.  Form: Amended and Restated Articles of Incorporation
      • 1.  Form: Introduction; Name and Purpose of Corporation  7.37
      • 2.  Form: Authorized Capital  7.38
      • 3.  Form: Rights, Preferences, Privileges, and Restrictions of Capital Stock  7.39
      • 4.  Form: Dividend Preference  7.40
      • 5.  Form: Liquidation Preference  7.41
      • 6.  Form: Voting Rights  7.42
      • 7.  Form: Conversion Rights  7.43
      • 8.  Form: Redemption Rights  7.44
      • 9.  Form: Covenants  7.45
      • 10.  Form: Residual Rights  7.46
      • 11.  Form: Liability and Indemnification  7.47
      • 12.  Form: Miscellaneous Provisions; Signatures  7.48
    • D.  Chart: Competing Interests of Investors and Company  7.49
  • IV.  PREFERRED STOCK PURCHASE AGREEMENT
    • A.  Introduction  7.50
    • B.  Use of Model Form  7.51
    • C.  Form: Preferred Stock Purchase Agreement
      • 1.  Form: Introduction  7.52
      • 2.  Form: Recitals  7.53
      • 3.  Form: Purchase and Sale of Securities  7.54
      • 4.  Form: Definitions  7.55
      • 5.  Form: Representations and Warranties of Company  7.56
      • 6.  Form: Representations and Warranties of Investors  7.57
      • 7.  Form: Legends  7.58
      • 8.  Form: Conditions of Investors’ Obligations at Closing  7.59
      • 9.  Form: Conditions of the Company’s Obligations at Closing  7.60
      • 10.  Form: Miscellaneous Provisions; Signatures  7.61
    • D.  Chart: Competing Interests of Investors and Company  7.62
  • V.  INVESTOR RIGHTS AGREEMENT
    • A.  Introduction  7.63
    • B.  Form: Investor Rights Agreement
      • 1.  Form: Introduction  7.64
      • 2.  Form: Recitals  7.65
      • 3.  Form: Definitions  7.66
      • 4.  Form: Financial Statements and Reports  7.67
      • 5.  Form: Additional Information  7.68
      • 6.  Form: Inspection  7.69
      • 7.  Form: Investor Representation  7.70
      • 8.  Form: Right of Participation  7.71
      • 9.  Form: Other Covenants of the Company  7.72
      • 10.  Form: Termination of Covenants  7.73
      • 11.  Form: Demand Registration  7.74
      • 12.  Form: Piggyback Registration  7.75
      • 13.  Form: Expenses of Registration  7.76
      • 14.  Form: Termination of Registration Rights  7.77
      • 15.  Form: Registration Procedures and Obligations  7.78
      • 16.  Form: Information Furnished by Holder  7.79
      • 17.  Form: Indemnification  7.80
      • 18.  Form: Limitations on Registration Rights  7.81
      • 19.  Form: Transfer of Rights  7.82
      • 20.  Form: Market Standoff  7.83
      • 21.  Form: Opinion of Counsel  7.84
      • 22.  Form: Reports  7.85
      • 23.  Form: Termination  7.86
      • 24.  Form: Miscellaneous Provisions  7.87
      • 25.  Form: Signatures  7.88
  • VI.  RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
    • A.  Introduction  7.89
    • B.  Form: Right of First Refusal and Co-Sale Agreement
      • 1.  Form: Introduction  7.90
      • 2.  Form: Recitals  7.91
      • 3.  Form: Transfer of Shares by Founders  7.92
      • 4.  Form: Definitions  7.93
      • 5.  Form: Agreements Among the Company, Investors, and Founders  7.94
      • 6.  Form: Assignments and Transfers; No Third Party Beneficiaries  7.95
      • 7.  Form: Ownership  7.96
      • 8.  Form: Legend  7.97
      • 9.  Form: Escrow  7.98
      • 10.  Form: Change in Company’s Capital Structure  7.99
      • 11.  Form: Term  7.100
      • 12.  Form: Miscellaneous Provisions  7.101
      • 13.  Form: Signatures  7.102
      • 14.  Form: Consent of Spouse or Domestic Partner  7.103
  • VII.  VOTING AGREEMENT
    • A.  Introduction  7.104
    • B.  Form: Voting Agreement
      • 1.  Form: Introduction  7.105
      • 2.  Form: Recitals  7.106
      • 3.  Form: Shares Subject to Agreement  7.107
      • 4.  Form: Election of Directors and Related Matters; Certain Voting Rights  7.108
      • 5.  Form: Drag-Along Rights  7.109
      • 6.  Form: Legends  7.110
      • 7.  Form: Irrevocable Proxy  7.111
      • 8.  Form: Additional Parties to This Agreement  7.112
      • 9.  Form: Term  7.113
      • 10.  Form: Miscellaneous Provisions  7.114
      • 11.  Form: Signatures  7.115
  • VIII.  INDEMNIFICATION AGREEMENT
    • A.  Introduction  7.116
    • B.  Form: Indemnification Agreement
      • 1.  Form: Introduction  7.117
      • 2.  Form: Recitals  7.118
      • 3.  Form: Definitions  7.119
      • 4.  Form: Indemnity of Indemnitee  7.120
      • 5.  Form: Additional Indemnity  7.121
      • 6.  Form: Contribution in the Event of Joint Liability  7.122
      • 7.  Form: Advancement of Expenses  7.123
      • 8.  Form: Procedures and Presumptions for Determination of Entitlement to Indemnification  7.124
      • 9.  Form: Remedies of Indemnitee  7.125
      • 10.  Form: Nonexclusivity; Survival of Rights; Insurance; Subrogation  7.126
      • 11.  Form: Exception to Right of Indemnification  7.127
      • 12.  Form: Duration of Agreement  7.128
      • 13.  Form: Notice by Indemnitee  7.129
      • 14.  Form: Miscellaneous  7.130
      • 15.  Form: Signatures  7.131

8

Loan Financing

Susan R. Goldfarb

  • I.  SCOPE OF CHAPTER  8.1
  • II.  ROLE OF COUNSEL  8.2
  • III.  DECISION TO BORROW
    • A.  Advantages and Disadvantages  8.3
    • B.  Effect on Third Parties  8.4
  • IV.  TYPES OF LENDERS
    • A.  Commercial Banks  8.5
    • B.  Commercial Finance Lenders  8.6
    • C.  Insurance Companies  8.7
    • D.  Other Sources  8.8
  • V.  LOAN DOCUMENTATION
    • A.  Choosing a Bank  8.9
    • B.  Negotiation and Documentation  8.10
    • C.  Form: Loan Agreement  8.11
      • 1.  Form: Preamble  8.12
      • 2.  Form: Loan
        • a.  Form: Structure of Loan
          • (1)  Form: Term Loan (Promissory Note)  8.13
          • (2)  Form: Revolving Loan (Promissory Note)  8.14
          • (3)  Form: Revolving Loan (Borrowing Base and Loan Account)  8.15
        • b.  Form: Fluctuating Interest Rate  8.16
        • c.  Form: Fees  8.17
        • d.  Other Provisions
          • (1)  Prepayment Provisions  8.18
          • (2)  Material Adverse Change Provisions  8.18A
          • (3)  Post-Default Interest Provisions  8.18B
      • 3.  Form: Security
        • a.  Form: Security Agreement Required  8.19
        • b.  Form: Guaranty Required  8.20
        • c.  Subordination, Fraudulent Transfer Risk  8.20A
        • d.  Preference Risk; Sufolla and Deprizio Cases  8.20B
        • e.  Deprizio Waivers  8.20C
        • f.  Partnership Guaranties  8.20D
        • g.  Waiver of Suretyship and Other Defenses  8.20E
      • 4.  Form: Conditions Precedent
        • a.  Form: Introductory Clause  8.21
        • b.  Form: Opinion of Counsel  8.22
        • c.  Form: Corporate Resolutions  8.23
        • d.  Form: Evidence of No Substantial Financial Change  8.24
        • e.  Form: Notes, Guaranty, and Security Agreement  8.25
        • f.  Form: Certificate of Incumbency  8.26
        • g.  Other Conditions  8.27
      • 5.  Form: Representations and Warranties  8.28
        • a.  Form: Introductory Clause  8.29
        • b.  Form: Existence and Qualification  8.30
        • c.  Form: Subsidiaries  8.31
        • d.  Form: Corporate and Other Authority  8.32
        • e.  Form: Corporate/Limited Liability Company Action  8.33
        • f.  Form: Incumbency of Officers  8.34
        • g.  Form: Agreement Valid and Binding  8.35
        • h.  Form: No Contrary Bylaw, Agreement, or Statute  8.36
        • i.  Form: Clear Title  8.37
        • j.  Form: Pending Litigation  8.38
        • k.  Form: No Event of Default  8.39
        • l.  Form: Accuracy of Financial Statements  8.40
        • m.  Form: Validity of Liens  8.41
        • n.  Form: ERISA  8.42
        • o.  Form: Anti-Terrorism Representation  8.42A
        • p.  Other Representations and Warranties  8.42B
      • 6.  Form: Affirmative Covenants
        • a.  Form: Introductory Clause  8.43
        • b.  Form: Use of Loan Proceeds  8.44
        • c.  Form: Financial Requirements
          • (1)  Form: Working Capital  8.45
          • (2)  Form: Tangible Net Worth  8.46
          • (3)  Form: Debt to Net Worth Ratio  8.47
        • d.  Form: Information to Lender
          • (1)  Form: Notices to Be Given  8.48
          • (2)  Form: Financial Information  8.49
        • e.  Form: Operation of Business
          • (1)  Form: Corporate/Limited Liability Company Existence, Business, and Properties  8.50
          • (2)  Form: Payment of Taxes and Other Liabilities  8.51
          • (3)  Form: Insurance  8.52
          • (4)  Form: Accounting Practices  8.53
        • f.  Form: Sales of Fixed Assets  8.54
        • g.  Form: Compensating Balances  8.55
        • h.  Form: Depository Relationship  8.55A
        • i.  Form: Patriot Act Compliance  8.55B
        • j.  Form: Further Assurances  8.55C
        • k.  Other Affirmative Covenants  8.56
      • 7.  Form: Negative Covenants
        • a.  Form: Introductory Clause  8.57
        • b.  Form: Payment of Dividends  8.58
        • c.  Form: Purchase of Shares  8.59
        • d.  Form: Liquidation or Dissolution  8.60
        • e.  Form: Mergers or Acquisitions  8.60A
        • f.  Form: Limitations on Indebtedness  8.61
        • g.  Form: Transactions Affecting Assets
          • (1)  Form: Limitations on Liens  8.62
          • (2)  Form: Sale of Assets  8.63
          • (3)  Form: Sales of Receivables  8.63A
          • (4)  Form: Capital Expenditures  8.64
      • 8.  Other Negative Covenants  8.65
      • 9.  Form: Events of Default
        • a.  Form: Introductory Clause  8.66
        • b.  Form: Nonpayment  8.67
        • c.  Form: No False Representation or Warranty  8.68
        • d.  Form: Judgments  8.69
        • e.  Form: Bankruptcy
          • (1)  Form: Voluntary Bankruptcy Proceedings  8.70
          • (2)  Form: Involuntary Bankruptcy Proceeding  8.71
        • f.  Form: Default Under Other Agreement  8.72
        • g.  Form: Cross-Default  8.73
        • h.  Form: ERISA  8.74
        • i.  Form: Guarantor’s Impairments  8.75
        • j.  Form: Guaranty  8.76
        • k.  Form: Change of Ownership  8.77
        • l.  Form: Material Adverse Change  8.78
        • m.  Form: Catch-All Default  8.79
      • 10.  Form: Remedies  8.80
      • 11.  Form: Miscellaneous Provisions
        • a.  Form: Addresses  8.81
        • b.  Form: Successors and Assigns  8.82
        • c.  Form: Delay and Waivers  8.83
        • d.  Form: Expenses  8.84
        • e.  Form: Counterparts  8.85
        • f.  Form: Venue, Jurisdiction, and Process  8.86
        • g.  Other Provisions  8.87
      • 12.  Form: Execution  8.88
  • VI.  CALIFORNIA USURY EXEMPTIONS  8.89

9

Letters of Credit

George A. Hisert

Paul S. Turner

  • I.  INTRODUCTION  9.1
  • II.  ILLUSTRATIVE EXAMPLES
    • A.  Commercial Letters of Credit
      • 1.  Issuance of Credit Resolves Payment Impasse  9.2
      • 2.  Structure and Terminology of Commercial Letters of Credit  9.3
      • 3.  Effect and Functions of Commercial Letter of Credit  9.4
    • B.  Standby Letters of Credit
      • 1.  Many Uses of Standby Letters of Credit  9.5
      • 2.  Structure and Terminology of Standby Letters of Credit  9.6
  • III.  ISSUANCE OF LETTER OF CREDIT
    • A.  Application and Reimbursement Agreement  9.7
    • B.  Issuance, Advice of Credit, and Confirmation  9.8
    • C.  Duration of Letter of Credit  9.9
    • D.  Modification and Revocation of Letter of Credit  9.10
  • IV.  SOURCES OF LETTER-OF-CREDIT LAW
    • A.  Law Merchant  9.11
    • B.  Uniform Commercial Code  9.12
    • C.  International Chamber of Commerce  9.13
    • D.  Uniform Customs and Practice for Documentary Credits (UCP 600)  9.14
    • E.  International Standby Practices (ISP 98)  9.15
    • F.  Uniform Rules for Demand Guarantees (URDG 758)  9.15A
    • G.  United Nations Convention on Independent Guarantees and Standby Letters of Credit  9.15B
  • V.  FUNDAMENTAL PRINCIPLES OF LETTER-OF-CREDIT LAW  9.16
    • A.  Payment Against Documents
      • 1.  Issuer Deals Solely With Documents  9.17
      • 2.  Nondocumentary Conditions  9.18
    • B.  Independence Principle  9.19
    • C.  “Strict Compliance”  9.20
    • D.  Issuer’s Preclusion  9.21
  • VI.  FRAUD  9.22
  • VII.  STANDBY LETTERS OF CREDIT VERSUS GUARANTIES  9.23
  • VIII.  WRONGFUL DISHONOR
    • A.  Generally  9.24
    • B.  Examples  9.25
    • C.  Remedies for Wrongful Dishonor and Wrongful Honor  9.26
  • IX.  TRANSFERS; ASSIGNMENTS OF PROCEEDS
    • A.  Transfers  9.27
    • B.  Assignment of Proceeds  9.28
  • X.  CREDITWORTHINESS OF ISSUER  9.29
  • XI.  CONCLUSION
    • A.  Commercial Credits  9.30
    • B.  Standby Credits  9.31

10

Equipment Leasing

  • I.  INTRODUCTION  10.1
    • A.  Development and Availability of Equipment Leases  10.2
    • B.  Lease Categorization  10.3
    • C.  Benefits of Leasing
      • 1.  In General  10.4
      • 2.  Tax Considerations  10.5
      • 3.  Operational Considerations  10.6
      • 4.  Accounting Considerations  10.7
  • II.  ANALYZING AND PLANNING A LEASE TRANSACTION
    • A.  Determining Feasibility of Prospective Transaction
      • 1.  Review of Contracts and Agreements
        • a.  Existing Documents  10.8
        • b.  Special Permits  10.9
        • c.  Purchase Agreement  10.10
        • d.  Evaluation of Equipment  10.11
      • 2.  Financial Analysis  10.12
    • B.  Planning Lease Transaction  10.13
    • C.  Issues and Document Checklist  10.13A
    • D.  Commercial Finance Lender License  10.13B
    • E.  Commercial Financing Disclosure Requirements  10.13C
  • III.  TYPES OF LEASES
    • A.  Accounting Treatment of Lease  10.14
    • B.  True Lease for Tax Purposes  10.15
      • 1.  Court Decisions  10.16
      • 2.  Internal Revenue Service Rulings
        • a.  Characterization as True Lease  10.17
        • b.  Recharacterization as Conditional Sale  10.18
    • C.  True Leases Under the UCC  10.19
      • 1.  UCC Requirements for True Lease  10.20
      • 2.  Factors Used to Determine True Lease  10.21
      • 3.  Need for UCC-1 Financing Statement
        • a.  Possible Recharacterization as Loan or Security Interest  10.22
        • b.  Leveraged Leases  10.23
    • D.  Finance Lease Under the UCC  10.24
    • E.  Assignees  10.24A
    • F.  Leveraged Lease Transactions  10.25
    • G.  Sale and Leaseback Transactions  10.26
      • 1.  Form: UCC-1 Financing Statement  10.27
      • 2.  Form: UCC Financing Statement Addendum (Form UCC-1Ad)  10.27A
      • 3.  Form: UCC Financing Statement Additional Party (Form UCC-1AP)  10.27B
      • 4.  Form: Notice of Intended Sale and Leaseback  10.28
  • IV.  DOCUMENTING THE FINANCE LEASE
    • A.  Form: Commitment Letter  10.29
    • B.  Master Lease Agreement
      • 1.  Preparing Documentation  10.30
      • 2.  Form: Master Lease Agreement
        • a.  Form: Parties, Date, and Recitals  10.31
        • b.  Form: Lease  10.32
        • c.  Form: Term  10.33
        • d.  Form: Rent  10.34
        • e.  Form: Nature of Transaction  10.35
      • 3.  Form: Inspections and Reports
        • a.  Form: Lessee’s Inspection and Certification  10.36
        • b.  Form: Lessor’s Right to Inspection  10.37
        • c.  Form: Reports Concerning Equipment  10.38
        • d.  Form: Financial Reports  10.39
      • 4.  Form: Operating Matters
        • a.  Form: Licensing, Registration, and Taxes  10.40
        • b.  Form: Location, Use, and Maintenance  10.41
        • c.  Form: Insurance, Loss, and Damage  10.42
        • d.  Form: Disclaimer of Warranties  10.43
      • 5.  Form: Lessee’s Representations, Warranties, and Covenants  10.44
      • 6.  Form: Conditions Precedent to Lessor’s Obligations  10.45
      • 7.  Form: Termination
        • a.  Form: Surrender of Equipment  10.46
        • b.  Form: Holding Over  10.47
      • 8.  Form: Default and Remedies
        • a.  Form: Events of Default  10.48
        • b.  Form: Remedies  10.49
        • c.  Form: Cumulative Remedies  10.50
        • d.  Form: Costs and Attorney Fees  10.51
        • e.  Form: Present Value Rate  10.52
      • 9.  Form: Binding Agreement; Assignment
        • a.  Form: Restriction on Assignment by Lessee; Successors and Assigns  10.53
        • b.  Form: Assignment by Lessor  10.54
      • 10.  Form: Indemnity
        • a.  Form: General Provisions  10.55
        • b.  Form: Indemnity for Loss of Tax Benefits
          • (1)  Form: Assumptions  10.56
          • (2)  Form: Lessee’s Representations, Warranties, and Covenants  10.57
          • (3)  Form: Loss of Tax Benefits  10.58
          • (4)  Form: Amount of Indemnification  10.59
          • (5)  Form: Computations  10.60
          • (6)  Form: Right to Contest  10.61
      • 11.  Form: Attorney Fees and Costs  10.62
      • 12.  Form: Usury Savings Clause  10.63
      • 13.  Form: Security Deposits  10.64
      • 14.  Form: Governing Law; Venue  10.65
      • 15.  Form: Entire Agreement Between the Parties; No Modifications  10.66
      • 16.  Form: Signatures  10.67
    • C.  Form: Equipment Lease Schedule  10.68
    • D.  Form: Certificate of Acceptance  10.69

11

Business Insurance

Mary Craig Calkins

Kirk A. Pasich

  • I.  INTRODUCTION TO INSURANCE  11.1
  • II.  INSURANCE POLICIES AND PACKAGES  11.2
    • A.  First Party Versus Third Party Insurance  11.3
    • B.  Primary Level Policies  11.4
    • C.  Umbrella and Excess Policies  11.5
    • D.  Occurrence Versus Claims-Made Coverage  11.6
    • E.  Standard Form Versus “Manuscript” Policies  11.7
  • III.  ANATOMY OF AN INSURANCE POLICY  11.8
    • A.  Specific Coverage Parts  11.9
      • 1.  Declarations Page  11.10
      • 2.  Insuring Agreements  11.11
      • 3.  Definitions  11.12
      • 4.  Endorsements  11.13
      • 5.  Exclusions  11.14
      • 6.  Conditions  11.15
        • a.  Notice  11.16
          • (1)  Occurrence-Based Policies  11.17
          • (2)  Claims-Made Policies  11.18
        • b.  Cooperation Clause  11.19
        • c.  “Other Insurance” Provisions  11.20
        • d.  “Voluntary Payments” Provisions  11.21
        • e.  Other Conditions  11.22
    • B.  Certificates of Insurance Versus Binders  11.23
      • 1.  Certificates of Insurance  11.23A
      • 2.  Binders  11.23B
    • C.  Rescission or Cancellation of Policies  11.24
  • IV.  COMMON INSURANCE POLICIES  11.25
    • A.  General Liability Insurance  11.26
      • 1.  Pre-1986 CGL Policy Form  11.26A
      • 2.  Current CGL Policy Form  11.26B
      • 3.  Additional Insureds  11.26C
      • 4.  Economic Losses Not Covered  11.26D
      • 5.  Other Exclusions  11.26E
    • B.  Property Insurance  11.27
    • C.  Business Interruption Insurance  11.28
    • D.  Errors and Omissions or Professional Liability Insurance  11.29
    • E.  Directors and Officers Insurance  11.30
      • 1.  Scope of Coverage  11.30A
      • 2.  Claims-Made Coverage  11.30B
      • 3.  Definition of “Loss”  11.30C
      • 4.  Exclusions  11.30D
      • 5.  Reimbursement Obligation, No Duty to Defend  11.30E
      • 6.  Limitations on Settlement  11.30F
    • F.  Fiduciary Liability Policies  11.31
    • G.  Employment Practices Liability Insurance  11.32
    • H.  Environmental Impairment Liability Insurance  11.33
    • I.  Business Automobile Insurance  11.34
    • J.  Workers’ Compensation Insurance  11.35
    • K.  Fidelity Bond or Employee Dishonesty Insurance  11.36
    • L.  Title Insurance  11.37
    • M.  Miscellaneous Insurance Policies  11.38
  • V.  FUNDAMENTAL INSURANCE CONCEPTS  11.39
    • A.  Contract Interpretation  11.40
    • B.  Duty to Defend  11.41
    • C.  Duty to Indemnify  11.42
    • D.  Duty to Reimburse Defense Costs
      • 1.  Insurer’s Duty  11.43
      • 2.  Insured’s Duty  11.43A
    • E.  Duty to Investigate  11.44
    • F.  Bad Faith  11.45
    • G.  Motions for Stay  11.46
    • H.  Policy Limits and “Interrelated Acts”  11.47
    • I.  Deductibles and Self-Insured Retentions (SIRs)  11.48
    • J.  Self-Insurance  11.49
    • K.  Mandatory and Discretionary Insurance  11.50
    • L.  Admitted and Nonadmitted Insurers  11.51
    • M.  Reinsurance  11.52
  • VI.  CALIFORNIA INSURANCE GUARANTEE ASSOCIATION  11.53
  • VII.  PREMIUM FINANCING  11.54
  • VIII.  BROKERS AND AGENTS  11.55
    • A.  Liability of Agents and Brokers  11.55A
  • IX.  TERRORISM INSURANCE  11.56
  • X.  INTERNET AND E-COMMERCE  11.57
  • XI.  CYBER INSURANCE  11.58
  • XII.  INTELLECTUAL PROPERTY INFRINGEMENT  11.59

12

Intellectual Property Protection

Jacob C. Reinbolt

Frederick K. Taylor

  • I.  OVERVIEW  12.1
    • A.  Initial Determinations
      • 1.  Practical Realities  12.2
      • 2.  Analyzing Cost Versus Benefits of Protection  12.3
      • 3.  Analyzing Best Form of Protection  12.4
    • B.  Patents
      • 1.  What Patents Cover  12.5
      • 2.  How Patent Protection Is Obtained
        • a.  Patent Application Required  12.6
        • b.  Definiteness  12.6A
        • c.  Patent Marking and Notice  12.6B
        • d.  Managing Employee Inventions  12.6C
      • 3.  Prerequisites for Patent Protection  12.7
        • a.  Eligibility  12.7A
        • b.  Novelty  12.7B
        • c.  Nonobviousness  12.7C
        • d.  Usefulness (Utility Patents)  12.7D
      • 4.  Duration of Patent Protection
        • a.  Utility and Design Patents  12.8
        • b.  Provisional Patent Applications  12.8A
        • c.  Maintenance Fees Required  12.8B
      • 5.  Patent Searches  12.9
      • 6.  Enforcement and Infringement
        • a.  Infringement Defined  12.10
        • b.  Doctrine of Equivalents  12.10A
        • c.  Design Patents  12.10B
      • 7.  Defenses Against Patent Infringement  12.11
      • 8.  Remedies for Infringement
        • a.  Injunctions  12.12
        • b.  Damages  12.12A
      • 9.  International Patent Protection  12.13
      • 10.  Provisional Rights  12.14
      • 11.  Assignment of Patent Licenses  12.14A
    • C.  Copyrights
      • 1.  What Copyrights Cover  12.15
        • a.  Idea/Expression Dichotomy  12.16
        • b.  Originality Requirement  12.17
        • c.  Fixation Requirement  12.18
        • d.  Useful/Functional Features  12.18A
      • 2.  Digital Millennium Copyright Act  12.18B
      • 3.  Music  12.18C
      • 4.  Exclusive Rights of Copyright Owner
        • a.  Principal Exclusive Rights  12.19
          • (1)  Reproduction Right  12.19A
          • (2)  Right to Prepare Derivative Works  12.19B
          • (3)  Distribution Right  12.19C
          • (4)  Performance Right  12.19D
        • b.  Exclusive Rights Can Be Separately Licensed  12.19E
        • c.  Third Party “Inducing Infringement” Liability  12.19F
      • 5.  Assignment of Copyrights and Copyright Licenses; Recapture of Copyrights  12.19G
      • 6.  Limitations on Exclusive Rights of Copyright Owners
        • a.  Fair Use  12.20
        • b.  First Sale Doctrine  12.20A
        • c.  State Contract Law  12.20B
        • d.  Implied Licenses  12.20C
      • 7.  Ownership of Copyright  12.21
        • a.  Joint Authorship  12.22
        • b.  Authorship and Community Property  12.23
        • c.  Works Made for Hire
          • (1)  Statutory Requirements for Classification  12.24
          • (2)  Employee Defined  12.25
        • d.  Authorship of Websites  12.26
      • 8.  Duration of Copyright Protection  12.27
      • 9.  Registration of Copyrights
        • a.  Benefits of Registration  12.28
        • b.  Disadvantages of Registration  12.29
        • c.  Mechanics of Registration  12.30
      • 10.  Copyright Notice  12.31
      • 11.  Remedies for Copyright Infringement  12.32
        • a.  Actual Damages and Defendant’s Profits  12.33
        • b.  Statutory Damages  12.34
        • c.  Actual Damages Determination  12.35
    • D.  Trademarks
      • 1.  Definitions
        • a.  Trademark  12.36
        • b.  Service Mark  12.37
        • c.  Trade Name  12.38
        • d.  Other Types of Marks  12.39
      • 2.  Sources of Trademark Protection
        • a.  Common Law  12.40
        • b.  State Law  12.41
        • c.  Federal Law  12.42
      • 3.  Trademark Rights and Protection
        • a.  Rights  12.43
        • b.  Likelihood of Confusion  12.44
        • c.  Protection Among Different Goods and Services  12.45
      • 4.  Trademark Searches  12.46
        • a.  Search Should Be Broad in Scope and Done Early  12.47
        • b.  Thoroughly Review Search Results  12.48
      • 5.  Verbal Components of Trademark
        • a.  Descriptive Terms  12.49
        • b.  Arbitrary and Fanciful Terms  12.50
        • c.  Suggestive Terms  12.51
        • d.  Generic Terms  12.52
        • e.  Secondary Meaning  12.53
        • f.  Geographic Terms  12.54
        • g.  Names as Trademarks  12.55
        • h.  Letters and Numbers  12.56
      • 6.  Nonverbal Components of Trademark
        • a.  Designs  12.57
        • b.  Colors  12.58
        • c.  Product Design and “Trade Dress”  12.59
      • 7.  Use of Trademark  12.60
        • a.  Actual Use in Commerce Required  12.61
        • b.  As an Adjective  12.62
        • c.  Trademark Versus Trade Name  12.63
        • d.  Assignments in Gross  12.63A
      • 8.  Trademark Notices
        • a.  Federally Registered Trademarks  12.64
        • b.  Common-Law and State Trademarks  12.65
      • 9.  Federal Registration
        • a.  Benefits of Registration  12.66
        • b.  Federal Versus State Registration  12.67
        • c.  Federal Application Procedure  12.68
        • d.  Federal Intent-to-Use Application  12.69
      • 10.  Terms of Trademark Rights  12.70
      • 11.  Infringement  12.71
        • a.  Strength of Trademark  12.72
        • b.  Similarities of Marks  12.73
        • c.  Actual Confusion  12.74
        • d.  Different Chains of Commerce  12.75
        • e.  Trademark Dilution  12.76
        • f.  Improper Use of Trademarks in Domain Names  12.77
          • (1)  Anticybersquatting Consumer Protection Act  12.78
          • (2)  ICANN Arbitration for Domain Names  12.79
          • (3)  ICANN gTLD Trademark Clearinghouse  12.79A
        • g.  Keyword Advertising  12.80
        • h.  The Territoriality Principle  12.80A
        • i.  Innocent User Defense  12.80B
      • 12.  Policing Trademarks  12.81
    • E.  Trade Secrets
      • 1.  The Defend Trade Secrets Act of 2016  12.82
      • 2.  California UTSA; Definition of Trade Secret  12.82A
      • 3.  Independent Economic Value Requirement  12.83
      • 4.  Not Generally Known Requirement  12.84
      • 5.  “Reasonable Efforts to Maintain Secrecy” Standard  12.85
      • 6.  Duration of Trade Secret Protection  12.86
      • 7.  Protective Steps Required
        • a.  Procedures to Avoid Unintentional Disclosure
          • (1)  Proprietary Information Agreements  12.87
          • (2)  Personnel Department Procedures  12.88
          • (3)  Document Identification  12.89
          • (4)  Form: Label for Trade Secret Material  12.90
          • (5)  Faxes  12.91
          • (6)  Visitors to Company Premises  12.92
          • (7)  Review of Information Disclosed to Customers in Product Materials, Speeches, and Scientific Literature  12.93
        • b.  Procedures to Avoid Intentional Disclosure  12.94
        • c.  Document Destruction  12.95
        • d.  Perils of Electronic Transmission of Information
          • (1)  Internet and Intranets  12.96
          • (2)  E-Mail  12.97
      • 8.  Employees Who Create Trade Secrets  12.98
      • 9.  California Labor Code Limitations on Assignment of Inventions  12.99
      • 10.  Protection Against Disclosure by Former Employees
        • a.  Agreement Not to Disclose Trade Secrets  12.100
        • b.  Noncompetition Clause for Clients With Multistate Operations  12.101
        • c.  Exit Interviews  12.102
        • d.  Follow-Up Letters to Former Employee and New Employer  12.103
      • 11.  Avoiding Sham Trade Secret Litigation  12.104
      • 12.  Trade Secret Status of Customer Lists  12.105
      • 13.  Protection Against Disclosure by Consultants, Vendors, Joint Venturers, and Licensees
        • a.  Negotiation Stage  12.106
        • b.  Definitive Agreement Stage  12.107
        • c.  Vendors  12.108
        • d.  Tracing Leaks  12.109
        • e.  Recovery of Loaned Information  12.110
        • f.  Effect of Other Laws on Trade Secrets  12.110A
      • 14.  Protection Against Disclosure by Federal Government
        • a.  Marking Confidential Documents Furnished to Federal Government  12.111
        • b.  Including Appropriate Federal Acquisition Regulations in Contracts With Federal Government  12.112
  • II.  CHECKLIST: PROCEDURES FOR PROTECTING CONFIDENTIAL AND TRADE SECRET INFORMATION  12.113
  • III.  FORMS
    • A.  Form: Proprietary Information and Inventions Agreement for Employees
      • 1.  Form: Introductory Clause  12.114
      • 2.  Form: Effective Date  12.115
      • 3.  Form: Confidential Information Defined  12.116
      • 4.  Form: Protection of Confidential Information  12.117
      • 5.  Form: Noncompetition During Employment  12.118
      • 6.  Form: Prior Knowledge and Inventions  12.119
      • 7.  Form: Prior Commitments  12.120
      • 8.  Form: Proprietary Information or Trade Secrets of Others  12.121
      • 9.  Form: Assignment of Employee Inventions
        • a.  Form: Disclosure  12.122
        • b.  Form: Assignment of Inventions  12.123
      • 10.  Form: Power of Attorney  12.124
      • 11.  Form: Termination of Employment
        • a.  Form: Delivery of Documents and Data  12.125
        • b.  Form: Obligations of Employee After Termination of Employment  12.126
      • 12.  Form: Injunctive Relief  12.127
      • 13.  Form: Attorney Fees  12.128
      • 14.  Form: Material Condition of Employment  12.129
      • 15.  Form: Amendment and Binding Effect  12.130
      • 16.  Form: Governing Law  12.131
      • 17.  Form: Entire Understanding  12.132
      • 18.  Form: Cumulative Remedies  12.133
      • 19.  Form: Severability  12.134
      • 20.  Form: Employment at Will  12.135
      • 21.  Form: Caution to Employee  12.136
      • 22.  Form: Signature Clause  12.137
      • 23.  Form: Employee Statement (Schedule A)  12.138
      • 24.  Form: Termination Certificate (Schedule B)  12.139
      • 25.  Form: Written Notification to Employee (Schedule C)  12.140
    • B.  Form: Copyright Assignment  12.141
    • C.  Form: Notice to Employees Regarding Information Security  12.142
    • D.  Form: Visitor Confidentiality Agreement  12.143
    • E.  Form: Termination Certificate  12.144
    • F.  Form: Letter to Former Employee  12.145
    • G.  Form: Letter to Former Employee’s New Employer  12.146
    • H.  Form: Nondisclosure Agreement for Negotiations With Consultants, Joint Venturers, or Licensees  12.147

13

Cybersecurity

  • I.  TYPES OF CYBERATTACKS  13.1
  • II.  LEGAL LANDSCAPE  13.2
    • A.  Federal Legislation
      • 1.  Computer Fraud and Abuse Act
        • a.  Overview  13.3
        • b.  As Applied to Spam  13.4
        • c.  As Applied to Conduct Exceeding Terms of Use  13.5
          • (1)  Violations of Terms of Use  13.5A
          • (2)  Sharing Single-User Password  13.5B
          • (3)  Access After Cease and Desist Letter  13.5C
        • d.  As Applied to Tracking Software  13.6
        • e.  As Applied to Improper Use of E-mail  13.7
        • f.  As Applied to Wireless Networks  13.7A
      • 2.  Electronic Communications Privacy Act
        • a.  Overview of Title I and Title II  13.8
        • b.  Title I, Wiretap Act  13.8A
          • (1)  As Applied to Cookies  13.9
          • (2)  As Applied to Tracking Software  13.10
          • (3)  As Applied to Unauthorized Wireless Access  13.10A
        • c.  Title II, Stored Communications Act  13.11
          • (1)  Authorized Versus Unauthorized Access  13.11A
          • (2)  E-Mails and “Electronic Storage”  13.11B
      • 3.  USA Patriot Act  13.12
      • 4.  Digital Millennium Copyright Act  13.13
      • 5.  Other Federal Statutes  13.14
      • 6.  Cybersecurity Guidance for Companies  13.14A
    • B.  State Legislation
      • 1.  Shine the Light Law (Civil Code §§1798.80–1798.84); Notice of Security Breach  13.15
      • 2.  Obligation to Maintain Security (CC §1798.81.5)  13.15A
      • 3.  Penal Code §502: Computer Crimes  13.16
      • 4.  Ransomware  13.16A
      • 5.  Wireless Devices  13.16B
    • C.  Trespass to Chattels  13.17
      • 1.  eBay Inc. v Bidder’s Edge, Inc.  13.18
      • 2.  Register.com, Inc. v Verio  13.19
      • 3.  Intel Corp. v Hamidi  13.20
      • 4.  Ticketmaster Corp. v Tickets.com, Inc.  13.21
      • 5.  Thrifty-Tel, Inc. v Bezenek  13.21A
  • III.  HOW TO RESPOND TO AN ATTACK
    • A.  General Considerations  13.22
    • B.  Checklist: Responding to a Cyberattack  13.23

14

Licenses, Permits, and Registrations

Lynne A. Carmichael

  • I.  OVERVIEW
    • A.  Identifying Required Licenses, Permits, and Registrations
      • 1.  Gathering Information About the Business  14.1
      • 2.  Disclosing Client’s Personal and Potentially Confidential Information  14.2
      • 3.  Permits for Businesses Not Planning Physical Development  14.3
      • 4.  Permits for Businesses Planning Physical Development  14.4
      • 5.  Permits for Businesses Planning Manufacturing and Land Use Development  14.5
      • 6.  Permits for Acquisition of Existing Businesses or Assets  14.6
      • 7.  Sources for Information on Required Permits and Licenses  14.7
    • B.  Obtaining Necessary Licenses, Permits, and Registrations
      • 1.  Basic Licenses, Permits, and Registrations  14.8
        • a.  Federal Tax Registration  14.9
        • b.  Local Business Tax Licenses and Permits  14.10
        • c.  Employment Development Department Registration  14.11
        • d.  Seller’s Permit  14.12
        • e.  Fictitious Business Name Statement  14.13
        • f.  Qualification as Foreign Entity  14.14
      • 2.  Zoning and Special or Conditional Use Permits  14.15
      • 3.  Permits for Renovation, Manufacturing, and Development
        • a.  Renovation  14.16
        • b.  Manufacturing Facilities  14.17
        • c.  Land Use Development and Environmental Clearances  14.18
  • II.  CHECKLISTS  14.19
    • A.  Checklist: General Licenses, Permits, and Registrations for Business Start-Up and Operations  14.20
    • B.  Checklist: Licenses, Permits, and Registrations Required for Manufacturing Facilities  14.21
    • C.  Checklist: Construction and Development Permit Requirements  14.22
    • D.  Chart: Licenses, Permits, and Registrations Needed for Specific Businesses, and Where to Obtain Them  14.23

15

Tax and Accounting Elections

Brian M. Katusian

Lawrence S. Branton

  • I.  OVERVIEW
    • A.  Elections Affect Tax Liability and Documentation  15.1
    • B.  Delegating Responsibility for Elections  15.2
    • C.  Election of Accounting Method  15.3
      • 1.  Cash Method  15.4
      • 2.  Accrual Method  15.5
      • 3.  Limited Use of Cash Method  15.6
      • 4.  Businesses With Inventories  15.6A
      • 5.  Other Accounting Methods  15.7
      • 6.  Adoption and Change of Accounting Method  15.8
    • D.  Election of Accounting Period  15.9
    • E.  Other Elections Applicable to All Businesses  15.10
      • 1.  Depreciation  15.11
      • 2.  Bonus Depreciation  15.12
      • 3.  Expensing of Certain Depreciable Assets  15.13
      • 4.  Research and Experimental Costs  15.14
      • 5.  Work Opportunity Tax Credit  15.15
      • 6.  Business Start-Up Expenses  15.16
      • 7.  Capitalization  15.17
      • 8.  IRC §83 Election
        • a.  When IRC §83 Applies  15.18
        • b.  When IRC §83 Election Is Beneficial  15.19
        • c.  30-Day Period to Make IRC §83 Election  15.20
      • 9.  Miscellaneous Elections  15.21
    • F.  Elections Applicable to Partnerships and LLCs
      • 1.  Classification Under Check-the-Box Regulations  15.22
        • a.  Disregarded Entities  15.22A
        • b.  California Classification; State Taxes and Fees  15.22B
        • c.  Out-of-State LLCs  15.22C
        • d.  Single-Member LLCs  15.22D
      • 2.  Exclusion From Partnership Tax Treatment  15.23
      • 3.  Organization and Syndication Fees  15.24
      • 4.  Partnership Elections Made by Partners  15.25
      • 5.  IRC §754 Election  15.26
      • 6.  Election Out of Partnership Audit and Adjustment Rules (IRC §6221(b))  15.27
    • G.  Elections Applicable to All Corporations
      • 1.  Organizational Expenditures  15.28
      • 2.  IRC §338(g) Election  15.29
      • 3.  IRC §338(h)(10) Election  15.30
      • 4.  Non-Recently-Purchased Stock  15.31
      • 5.  Water’s Edge Election  15.32
    • H.  S Corporation Election  15.33
      • 1.  Corporations Eligible for S Election  15.34
      • 2.  Filing IRS Form 2553  15.35
      • 3.  Shareholder Consent  15.36
      • 4.  S Corporations for Federal Purposes Must Be S Corporations for California Purposes  15.37
      • 5.  Qualified Subchapter S Trust Election  15.38
      • 6.  Electing Small Business Trusts  15.39
      • 7.  Election to Terminate S Corporation’s Tax Year if Shareholder’s Interest in S Corporation Terminates  15.40
    • I.  Corporation Consolidated Return Election  15.41
  • II.  FORMS
    • A.  Form: IRC §83(b) Election  15.42
    • B.  Form: IRC §83(i) Election  15.42A
    • C.  Form: Election by a Small Business Corporation (IRS Form 2553)  15.43

16

Tax Compliance

Lawrence S. Branton

Brian M. Katusian

  • I.  OVERVIEW  16.1
    • A.  Importance of Tax Compliance  16.2
    • B.  Role of Attorney and Accountant  16.3
    • C.  Notifying Taxing Authorities  16.4
      • 1.  Notifying IRS  16.5
      • 2.  Notifying California Employment Development Department  16.6
      • 3.  Notifying California Franchise Tax Board  16.7
      • 4.  Notifying California Department of Tax and Fee Administration  16.8
      • 5.  Notifying Local Taxing Authorities  16.9
    • D.  Establishing Recordkeeping Procedures
      • 1.  Organizing Information  16.10
      • 2.  Single- and Double-Entry Bookkeeping Methods  16.11
      • 3.  How Long Records Are Kept  16.12
      • 4.  Collecting Employee/Payee Information  16.13
        • a.  Employees  16.14
        • b.  Other Payees  16.15
      • 5.  Electronic Storage of Data, Electronic Filing  16.16
    • E.  Types of Taxes  16.17
      • 1.  Income Taxes and Estimated Tax Payments
        • a.  Sole Proprietorships  16.18
        • b.  C Corporations
          • (1)  C Corporations: Federal Filings  16.19
          • (2)  C Corporations: California Filings  16.19A
        • c.  S Corporations
          • (1)  S Corporations: Federal Filings  16.20
          • (2)  S Corporations: California Filings  16.20A
        • d.  Partnerships  16.21
        • e.  Limited Liability Companies  16.22
      • 2.  Withholding and Employment Taxes
        • a.  Who Withholds and Pays Employment Taxes?
          • (1)  Federal Withholding  16.23
          • (2)  California Withholding  16.23A
        • b.  Calculation of Withholding and Employment Taxes
          • (1)  Federal Calculation of Withholding  16.24
          • (2)  California Calculation of Withholding  16.24A
        • c.  Deposits of Federal Employment Taxes  16.25
          • (1)  Monthly Deposits  16.26
          • (2)  Semiweekly Deposits  16.27
          • (3)  One-Day Rule  16.28
          • (4)  Reporting Deposits  16.29
        • d.  Deposits of California Employment Taxes  16.30
        • e.  Penalties for Failure to Withhold, Deposit, or Pay Taxes  16.31
      • 3.  California Sales and Use Tax
        • a.  Sales Tax Coverage and Exemptions
          • (1)  Retailers Pay Sales Tax  16.32
          • (2)  Tax Measured by Gross Receipts  16.33
          • (3)  Tax on Tangible Personal Property  16.34
          • (4)  Use Tax on Consumption or Storage of Property  16.35
          • (5)  Tangible Personal Property Not Subject to Sales Tax  16.36
          • (6)  Resale Exemption  16.37
          • (7)  Occasional Sale Exemption  16.38
        • b.  Sales Tax on Transfers of Property to Start-Up; Mergers  16.39
        • c.  Sales and Use Tax Returns and Payment
          • (1)  Due Dates of Returns and Payments  16.40
          • (2)  California Department of Tax and Fee Administration Tax Returns  16.41
          • (3)  Prepayment of Sales and Use Tax  16.42
        • d.  Penalties  16.43
      • 4.  Property Taxes
        • a.  Property Tax Coverage and Exemptions  16.44
          • (1)  Real Property  16.45
          • (2)  Personal Property  16.46
        • b.  Assessment of Tax  16.47
        • c.  Filing Property Statements  16.48
        • d.  Payment of Tax  16.49
        • e.  Purchase and Change in Ownership  16.50
          • (1)  Transfers of Property Between Legal Entities  16.51
          • (2)  Transfers of Ownership Interests in Legal Entities  16.52
        • f.  Protesting or Adjusting Assessed Values [Deleted]  16.53
      • 5.  Documentary Transfer Tax
        • a.  Assessment of Transfer Tax  16.54
        • b.  Tax Rate  16.55
      • 6.  Local Business Taxes  16.56
      • 7.  Excise and Miscellaneous Taxes
        • a.  Which Businesses Pay Excise and Miscellaneous Taxes
          • (1)  Federal Excise Taxes  16.57
          • (2)  California Miscellaneous Taxes  16.57A
        • b.  Federal Excise Tax Compliance  16.58
    • F.  Information Returns and Reporting Obligations
      • 1.  Activities and Payments That Must Be Reported; Required Forms  16.59
        • a.  Wages  16.60
        • b.  Individual Retirement Information  16.61
        • c.  Dividends  16.62
        • d.  Interest  16.63
        • e.  Service Fees, Commissions, Rentals, and Royalties  16.64
        • f.  Retirement Plan Distributions  16.65
        • g.  Real Estate Transactions  16.66
        • h.  Brokers and Barter Exchanges  16.67
        • i.  Restaurants, Tips  16.68
        • j.  Cash Transactions  16.69
        • k.  Report of Foreign Bank and Financial Accounts (FBAR)  16.69A
        • l.  Other Transactions  16.70
      • 2.  Failure to File Information Returns  16.71
  • II.  TABLES AND LISTS
    • A.  Taxes Imposed on Different Forms of Business Entities  16.72
    • B.  Tax Forms Commonly Used by Business Entities  16.73
      • 1.  Sole Proprietorship Income Tax Forms  16.74
      • 2.  Corporation Income Tax Forms  16.75
      • 3.  Partnership and LLC Income Reporting Forms  16.76
      • 4.  Business Activities Reporting Forms  16.77
      • 5.  Employment Tax Forms  16.78
      • 6.  California Sales and Use Tax Forms  16.79
      • 7.  Excise Tax Forms  16.80
      • 8.  Miscellaneous Tax Forms  16.81
    • C.  IRS Tax Compliance Publications
      • 1.  General Guides  16.82
      • 2.  Guides for Specific Transactions or Businesses  16.83
  • III.  FORMS
    • A.  Form: Business Property Statement (BOE Form 571-L)  16.84
    • B.  Form: Separate Ownership of Real Property and Improvements  16.85
    • C.  Form: State, Local, and District Sales and Use Tax Return (BOE Form BOE-401-A2)  16.86
  • IV.  COMBINED FEDERAL/CALIFORNIA TAX CALENDAR
    • A.  Introduction
      • 1.  Standard Filings for Calendar-Year Taxpayers  16.87
      • 2.  Filings and Payment Obligations Without Fixed Due Dates
        • a.  Filings Triggered by Event  16.88
        • b.  Recurring Monthly/Semiweekly Employment Tax Deposit Obligations  16.89
        • c.  Formation and Qualification Fees and Taxes  16.90
    • B.  Tax Calendar
      • 1.  January  16.91
      • 2.  February  16.92
      • 3.  March  16.93
      • 4.  April  16.94
      • 5.  May  16.95
      • 6.  June  16.96
      • 7.  July  16.97
      • 8.  August  16.98
      • 9.  September  16.99
      • 10.  October  16.100
      • 11.  November  16.101
      • 12.  December  16.102

17

The Decision to Make a Public Offering

Peter M. Menard

  • I.  INTRODUCTION
    • A.  Scope of Chapter  17.1
    • B.  Statutes and Regulatory Materials  17.2
  • II.  OTHER FINANCING METHODS TO CONSIDER  17.3
  • III.  FEASIBILITY
    • A.  Company’s Characteristics and Business  17.4
    • B.  Internal Problems and Considerations  17.5
    • C.  External Factors  17.6
  • IV.  TAX CONSIDERATIONS  17.7
  • V.  ADVANTAGES OF PUBLIC OWNERSHIP  17.8
    • A.  Limitations on Liquidity
      • 1.  Lock-Up Periods  17.9
      • 2.  Exemptions From Registration for Resales of Securities  17.10
  • VI.  DISADVANTAGES OF PUBLIC OWNERSHIP  17.11
    • A.  Dilution  17.12
    • B.  Other Shareholder Rights Issues  17.12A
    • C.  Market Risks  17.13
    • D.  Disclosure and Reporting
      • 1.  Offering Materials  17.14
      • 2.  Periodic Reporting  17.15
      • 3.  Shareholders’ Meetings  17.16
      • 4.  Insider Reporting  17.17
    • E.  Offering Expenses
      • 1.  Direct Expenses
        • a.  In General  17.18
        • b.  Underwriting Expenses  17.19
        • c.  Accounting Fees  17.20
        • d.  Attorney Fees  17.21
        • e.  Printing Fees  17.22
        • f.  Insurance  17.23
      • 2.  Continuing Expenses  17.24
    • F.  Changes in Goals and Operations
      • 1.  Management Goals  17.25
      • 2.  Public Responsibility  17.26
    • G.  Potential Liabilities  17.27
      • 1.  Initial Offering  17.28
      • 2.  Continuing Liability  17.29
        • a.  Disclosure Obligations
          • (1)  Rule 10b–5  17.30
          • (2)  Insider Trading  17.30A
          • (3)  Regulation FD  17.30B
          • (4)  Safe Harbor for Forward-Looking Statements  17.30C
        • b.  Periodic Reports  17.31
        • c.  Short-Swing Profits  17.32
        • d.  Significant Enforcement Legislation  17.33
        • e.  Payments and Recordkeeping  17.34

18

Preparing for a Public Offering

Peter M. Menard

  • I.  INTRODUCTION
    • A.  Importance of Early Planning  18.1
    • B.  FINRA  18.1A
  • II.  UNDERWRITING
    • A.  Decision to Use Underwriter
      • 1.  Underwriter’s Role  18.2
        • a.  Firm-Commitment Underwriting  18.3
        • b.  Best-Efforts Underwriting  18.4
      • 2.  Direct Public Offerings  18.5
      • 3.  Direct Listings  18.5A
    • B.  Selecting the Underwriter  18.6
      • 1.  Types of Underwriters  18.7
      • 2.  Screening Procedure  18.8
    • C.  Negotiating With Prospective Underwriters  18.9
    • D.  Underwriting Compensation and Arrangements  18.10
      • 1.  General Limitations  18.11
      • 2.  Elements of Compensation  18.12
        • a.  Discount or Commission  18.13
        • b.  Expense Allowance  18.14
        • c.  Stock, Options, and Warrants  18.15
          • (1)  Amount and Terms  18.16
          • (2)  Registration Rights  18.17
        • d.  Preferential Rights  18.18
        • e.  Overallotment (“Green Shoe”) Option  18.19
        • f.  Right to Nominate Director  18.20
        • g.  Indemnification  18.21
    • E.  Underwriting Documentation  18.22
      • 1.  Letter of Intent
        • a.  Purpose  18.23
        • b.  Form: Letter of Intent  18.24
      • 2.  Underwriting Agreement  18.25
      • 3.  Agreement Among Underwriters and Selling Group  18.26
  • III.  PREPARATION FOR OFFERING  18.27
    • A.  Fundamental Changes
      • 1.  Corporate Structure
        • a.  Domicile and Reincorporation  18.28
        • b.  Reorganization  18.29
        • c.  Recapitalization
          • (1)  Authorized Capitalization and Outstanding Shares  18.30
          • (2)  Additional Class of Stock  18.31
      • 2.  Corporate Name  18.32
      • 3.  Employee Benefit Plans  18.33
    • B.  Corporate Examination  18.34
      • 1.  Legal Opinions  18.34A
      • 2.  Procedure
        • a.  Articles of Incorporation  18.35
        • b.  Bylaws  18.36
        • c.  Minute Books  18.37
        • d.  Other Documents  18.38
        • e.  Table: Primary Sources of Information  18.39
      • 3.  Matters to Consider
        • a.  Valid Incorporation, Good Standing, and Qualification  18.40
        • b.  Corporate Control Devices  18.41
        • c.  Board of Directors
          • (1)  Membership  18.42
          • (2)  Committees  18.43
        • d.  Officers  18.44
        • e.  Indemnification  18.45
        • f.  Shareholders’ Meetings  18.46
        • g.  Securities
          • (1)  Signatures and Transfer Arrangements  18.47
          • (2)  Outstanding Shares  18.48
          • (3)  Authorization  18.49
            • (a)  Valid Issuance  18.50
            • (b)  Full Payment  18.51
            • (c)  Assessability  18.52
            • (d)  Compliance With Securities Laws  18.53
            • (e)  Release of Restrictions  18.54
        • h.  Conflicts of Interest  18.55
        • i.  Registration Rights  18.55A
        • j.  Material Contracts and Agreements  18.56
  • IV.  STRUCTURE OF OFFERING
    • A.  Type of Security  18.57
      • 1.  Stock  18.58
      • 2.  Debentures  18.59
      • 3.  Warrants  18.60
      • 4.  Units  18.61
    • B.  Size and Nature of Offering  18.62
    • C.  Pricing
      • 1.  Methods and Procedure  18.63
      • 2.  Regulatory Limitations  18.64

19

Accessing the Public Markets

Peter M. Menard

  • I.  INTRODUCTION
    • A.  Background  19.1
    • B.  Scope of Chapter  19.2
    • C.  JOBS Act  19.2A
  • II.  REGISTERED OFFERINGS  19.3
  • III.  REGULATION A OFFERINGS  19.4
    • A.  Comparison With Other Methods  19.5
      • 1.  Relative Simplicity  19.6
      • 2.  Processing Time  19.7
      • 3.  Liabilities  19.8
      • 4.  Costs  19.9
    • B.  Availability of Exemption  19.10
      • 1.  Size of Offering; Integration  19.11
      • 2.  Issuers and Securities  19.12
    • C.  Disqualifying Provisions  19.13
    • D.  Federal Procedure and Related Activities
      • 1.  Preliminary Matters  19.14
      • 2.  Preparing Documents: Offering Statement  19.15
        • a.  Part I—Notification  19.16
        • b.  Part II—Offering Circular  19.17
        • c.  Part F/S—Financial Statements  19.18
        • d.  Part III—Exhibits  19.19
      • 3.  Filing  19.20
      • 4.  FINRA Review  19.21
      • 5.  SEC Processing  19.22
      • 6.  Amendment Procedures  19.23
      • 7.  Acceleration  19.24
      • 8.  Offering
        • a.  Commencement  19.25
        • b.  Solicitations of Interest, Advertising  19.26
        • c.  Organizing Underwriting Syndicate and Selling Group  19.27
        • d.  Distribution of Offering Circulars  19.28
        • e.  Suspended or Abandoned Offerings  19.29
        • f.  Offering Circular Supplements  19.30
      • 9.  Postoffering Procedure
        • a.  Closing and Sales  19.31
        • b.  Reporting  19.32
      • 10.  Suspension of Exemption  19.33
    • E.  California Qualification
      • 1.  When Required  19.34
      • 2.  Method of Qualification  19.35
      • 3.  Preparing and Filing Application  19.36
      • 4.  Processing  19.37
      • 5.  Preeffective Offers  19.38
      • 6.  Effectiveness  19.39
      • 7.  Posteffective Matters
        • a.  Advertising  19.40
        • b.  Secondary Trading  19.41
        • c.  Semiannual Reporting  19.42
    • F.  Other States  19.43
  • IV.  INTRASTATE OFFERINGS  19.44
    • A.  Comparison With Other Methods  19.45
    • B.  Availability of Exemptions  19.46
      • 1.  Effect of Amended Rule 147: Safe Harbor  19.47
      • 2.  Effect of Rule 147A: No Safe Harbor  19.47A
      • 3.  Transactions  19.48
      • 4.  Integration
        • a.  Statutory Exemption  19.49
        • b.  Amended Rule 147 and Rule 147A  19.50
      • 5.  Issuer Residence
        • a.  Statutory Exemption  19.51
        • b.  Amended Rule 147  19.52
        • c.  Rule 147A  19.52A
      • 6.  Issuer “Doing Business” in State
        • a.  Statutory Exemption  19.53
        • b.  Amended Rule 147 and Rule 147A  19.54
      • 7.  Offerees and Purchasers
        • a.  Statutory Exemption  19.55
        • b.  Amended Rule 147 and Rule 147A  19.56
      • 8.  Reoffers and Resales
        • a.  Statutory Exemption  19.57
        • b.  Amended Rule 147 and Rule 147A  19.58
      • 9.  Precautionary Measures
        • a.  Statutory Exemption  19.59
        • b.  Amended Rule 147 and Rule 147A  19.60
    • C.  Effect of Noncompliance  19.61
    • D.  Offering  19.62
    • E.  California Qualification  19.63
  • V.  RULE 504 OFFERINGS
    • A.  Background  19.64
    • B.  Comparison With Other Methods  19.65
    • C.  Availability of Exemption
      • 1.  Size of Offering  19.66
      • 2.  Issuer  19.67
      • 3.  Disqualifying Provisions  19.68
      • 4.  Effect of Noncompliance  19.69
    • D.  Integration  19.70
    • E.  Resales  19.71
    • F.  Offering  19.72
    • G.  Notice Filing  19.73
    • H.  California Qualification  19.74
    • I.  Other States  19.75
  • VI.  OFFSHORE OFFERINGS
    • A.  Background  19.76
    • B.  Regulation S  19.77
      • 1.  Availability  19.78
        • a.  Issuers  19.79
        • b.  General Conditions  19.80
      • 2.  Issuer Safe Harbor  19.81
        • a.  Category 1  19.82
        • b.  Category 2  19.83
        • c.  Category 3  19.84
      • 3.  Resale Safe Harbor  19.85
      • 4.  Resale Limitations  19.86
      • 5.  Integration  19.87
    • C.  Offering  19.88
    • D.  California Qualification  19.89
    • E.  Other States  19.90
  • VII.  PUBLIC SHELLS AND BLANK CHECK COMPANIES
    • A.  Background  19.91
    • B.  Public Shells  19.92
    • C.  Blank Check Companies; SPACs  19.93
    • D.  Spin-offs and Other Variations  19.94

20

Registering a Public Offering

Peter M. Menard

  • I.  REGISTERED OFFERINGS  20.1
  • II.  FEDERAL REGISTRATION PROCEDURE AND RELATED ACTIVITIES
    • A.  General Considerations  20.2
    • B.  Responsibility and Timing
      • 1.  Function of Counsel  20.3
      • 2.  Scheduling
        • a.  Preliminary Meeting  20.4
        • b.  Form: Sample Time and Responsibility Schedule  20.5
    • C.  Preparing Registration Statement
      • 1.  Selection of Form  20.6
      • 2.  Part I: Prospectus
        • a.  Responsibility for Drafting  20.7
        • b.  Basic Format  20.8
        • c.  Nonfinancial Disclosures  20.9
        • d.  Financial Statements
          • (1)  Periods Covered  20.10
          • (2)  Age of Financial Statements
            • (a)  As of Filing Date  20.11
            • (b)  As of Anticipated Effective Date  20.12
          • (3)  Form and Content  20.13
      • 3.  Part II: Additional Information  20.14
    • D.  Due Diligence Investigation  20.15
    • E.  Prefiling Conferences With SEC Staff  20.16
    • F.  Prefiling Activities  20.17
    • G.  Filing  20.18
    • H.  Shelf Registration  20.19
    • I.  Processing Registration Statement  20.20
    • J.  Waiting Period Activities  20.21
      • 1.  Offering Activities; Information on Company Websites  20.22
      • 2.  Distribution of Preliminary Prospectus in Paper or Electronic Form  20.23
      • 3.  Syndication
        • a.  Generally  20.24
        • b.  Internet Road Shows  20.25
      • 4.  Market Activities  20.26
      • 5.  FINRA Review  20.27
      • 6.  Blue Sky Clearance  20.28
    • K.  Response to SEC Comments  20.29
    • L.  Amendments
      • 1.  Types of Amendments
        • a.  Delaying Amendments  20.30
        • b.  Substantive Amendments  20.31
        • c.  Pricing Amendments  20.32
      • 2.  Procedure  20.33
    • M.  Abandonment and Withdrawal  20.34
    • N.  Effectiveness  20.35
    • O.  Posteffective Activities
      • 1.  The Offering
        • a.  Underwriting Arrangements  20.36
        • b.  Commencement of Offering  20.37
        • c.  Distribution and Market Activities  20.38
        • d.  Offering Materials  20.39
        • e.  Closing Procedure  20.40
        • f.  Form: Sample Closing Memorandum  20.41
      • 2.  Posteffective Filings  20.42
      • 3.  Posteffective Amendments and Supplements  20.43
    • P.  Public Trading  20.44
  • III.  CALIFORNIA REQUIREMENTS
    • A.  Need for Qualification  20.45
    • B.  Securities Exempt From Qualification  20.46
    • C.  Qualification by Coordination
      • 1.  When Permitted  20.47
      • 2.  Application  20.48
      • 3.  Filing  20.49
      • 4.  Shelf Registration  20.50
      • 5.  Pre-effective Procedure
        • a.  Processing Application  20.51
        • b.  Imposition of Conditions  20.52
        • c.  Amendments  20.53
        • d.  Offering Price, Discount, and Commission Statement  20.54
        • e.  Offers and Advertising  20.55
      • 6.  Withdrawal or Abandonment  20.56
      • 7.  Effectiveness  20.57
      • 8.  Posteffective Procedure
        • a.  Notification and Filing Requirements  20.58
        • b.  Period of Qualification  20.59
        • c.  Advertising  20.60
        • d.  Semiannual Reports  20.61
        • e.  Secondary Trading  20.62
  • IV.  REQUIREMENTS OF OTHER STATES
    • A.  Preliminary Considerations  20.63
    • B.  Blue Sky Survey  20.64
    • C.  State Regulation
      • 1.  Form of Regulation  20.65
      • 2.  Procedures  20.66

21

Securities Law Citations

CEB Staff

  • I.  SECURITIES LAW CITATIONS  21.1

FINANCING AND PROTECTING CALIFORNIA BUSINESSES

(1st Edition)

February 2019

TABLE OF CONTENTS

 

File Name

Book Section

Title

CH02

Chapter 2

The Business Plan

02-020

§2.20

Checklist: Essential Contents of Executive Summary

02-021

§2.21

Checklist: Management and Organization

02-022

§2.22

Checklist: Principals and Key Members of Management Team

02-023

§2.23

Checklist: Product or Service

02-024

§2.24

Checklist: The Market and Marketing

02-025

§2.25

Checklist: Specific Areas to Address About the Competition

02-026

§2.26

Checklist: Financial Information

02-027

§2.27

Checklist: Presenting Business Plan to Investors

02-028

§2.28

Confidentiality Agreement

02-029

§2.29

Disclosure Agreement re Confidential Information

CH03

Chapter 3

Agreements Among Founders

03-027

§3.27

Transfer and Assignment of Intellectual Property

03-029

§§3.29–3.67

Preamble

 

§3.30

Recitals

 

§3.31

Definitions

 

§3.32

Permitted Transfers

 

§3.33

Transfers Under Shareholder Agreement

 

§3.34

Involuntary Transfers

 

§3.35

Events Triggering Purchase

 

§3.36

Repurchase

 

§3.37

Corporation to Insure Specified Shareholders

 

§3.38

Optional Purchase of Life Insurance by Shareholders

 

§3.39

Determination of Fair Market Value

 

§3.40

Payment Terms

 

§3.42

“Shotgun” Buyout Provisions

 

§3.43

Legend on Shares

 

§3.44

After-Acquired Shares

 

§3.45

Will or Trust Provisions

 

§3.46

Separation or Divorce Affecting Shareholders Who Are Married or Have a Domestic Partner

 

§3.47

Notice of Transfer or Prohibition on Ineligible Transfer

 

§3.48

Right of First Refusal

 

§3.49

Transfer Not Permitted Is Void

 

§3.50

Limitations on Corporation

 

§3.51

Shareholder Vote

 

§3.52

Distributions While S Corporation

 

§3.53

Accounting Closing

 

§3.54

Voting Agreement

 

§3.55

Optional Order of Purchase for C Corporation

 

§3.56

Optional Personal Guaranty

 

§3.57

Covenant Not to Compete

 

§3.58

Deferred Compensation in Event of Disability (Optional)

 

§3.59

Termination

 

§3.60

Conflicts of Interest

 

§3.61

Nonrepresentation

 

§3.63

Notice to Successor

 

§3.64

Binding on Successors

 

§3.65

Signatures

 

§3.67

Calculation of Fair Market Value

CH05

Chapter 5

Forms of Securities

05-003

§5.3

Basic Stock Certificate

05-005

§5.5

Restrictions by Issuer

05-007

§5.7

Promotional Shares

05-008

§5.8

Other Restricted Shares

05-010

§5.10

Private Offerings

05-011

§5.11

Intrastate Offerings

05-015

§5.15

Statement of Preferences

05-016

§5.16

Shares Subject to Redemption

05-017

§5.17

Convertible Shares

05-022

§5.22

Basic Provisions

05-024

§5.24

Prepayment Without Premium

05-025

§5.25

Prepayment With Premium

05-026

§5.26

Reference to Underlying Agreement

05-028

§5.28

Subordination

05-036

§§5.36–5.44

Face of Debenture

 

§5.38

Reference to Indenture

 

§5.39

Subordination

 

§5.40

Conversion

 

§5.41

Redemption

 

§5.42

Default

 

§5.43

Modifications

 

§5.44

Conversion Notice

05-048

§§5.48–5.85

Basic Common Stock Purchase Warrant

 

§5.49

Definitions

 

§5.50

Registration Rights

 

§5.51

Exercise, Transfer, and Exchange Restrictions

 

§5.52

Exercise

 

§5.53

Delivery of Stock Certificate

 

§5.55

Stock Splits and Combinations

 

§5.56

Reclassifications, Exchanges, and Substitutions

 

§5.59

Earlier Sale at Higher Price Not Recognized

 

§5.60

Earlier Sale at Higher Price Recognized

 

§5.61

Consideration for Stock

 

§5.62

Consideration for Stock Dividends

 

§5.63

Convertible Securities, Options, and Rights

 

§5.64

Record Date

 

§5.65

Exempt Issuances

 

§5.66

Sale Below Market Price

 

§5.67

Reorganizations, Mergers, Consolidations, or Sale of Assets

 

§5.69

Prior Notice

 

§5.70

No Dilution or Impairment

 

§5.71

Notice of Adjustments

 

§5.72

No Change in Warrant

 

§5.73

Reservation of Stock

 

§5.74

Listing on Stock Exchange

 

§5.75

Replacement

 

§5.76

Exchange and Transfer

 

§5.77

Warrant Agent

 

§5.78

No Rights as Shareholder

 

§5.79

Negotiability

 

§5.80

Modification

 

§5.81

Governing Law

 

§5.82

Expiration

 

§5.83

Date and Signatures

 

§5.84

Subscription

 

§5.85

Assignment

CH05A

Chapter 5A

Issuing Common Shares to Founders and Investors

05A-016

§5A.16

Board Resolutions Authorizing Common Share Issuance to Specific Persons

05A-017

§5A.17

Board Resolutions Authorizing Private Offering of Common Shares

05A-017A

§5A.17A

Board Resolutions Approving Private Placement Memorandum and Employment of Brokers

05A-018

§5A.18

Certificate of Investment Intent

05A-019

§§5A.19–5A.25

Introductory Language and Recitals

 

§5A.20

Purchase and Sale of Securities

 

§5A.21

Purchase Price and Closing

 

§5A.22

Company’s Representations and Warranties

 

§5A.23

Purchaser’s Representations and Warranties

 

§5A.24

General Provisions

 

§5A.25

Signatures

05A-026

§5A.26

Investor Questionnaire

05A-027

§5A.27

Officers and Directors Questionnaire

05A-028

§§5A.28–5A.37

Subscription

 

§5A.29

Investment Conditions

 

§5A.30

Issuer’s Representations and Warranties [and Covenants]

 

§5A.31

Purchaser Representations and Warranties

 

§5A.32

Indemnification

 

§5A.33

Choice of Law

 

§5A.34

Subscription for Shares

 

§5A.35

Title to Shares

 

§5A.36

Securities Legends

 

§5A.37

Completion and Acceptance of Subscription

05A-038

§5A.38

Restrictive Legend (Federal)

05A-039

§5A.39

Investment Representation Letter

05A-040

§5A.40

Memorandum to Client Regarding Procedures for Private Offering

05A-042

§5A.42

Bad Actor Questionnaire (Individuals)

05A-043

§5A.43

Bad Actor Questionnaire (Entities)

CH06A

Chapter 6A

Drafting a Private Placement Memorandum Under Regulation D

06A-006

§6A.6

Sample Engagement Letter Clauses

06A-009

§6A.9

Step 5: Legal Review

06A-015

§6A.15

Rule 502(B) Checklist

06A-018

§6A.18

Notice to Investors

06A-022

§6A.22

Forward-Looking Statements

06A-024

§6A.24

Offering Price; Capitalization; Dilution

06A-037

§6A.37

SEC Position re Indemnification

06A-040

§6A.40

Financial Statements; Financial Forecasts

06A-043

§6A.43

Sample Confidential Private Placement Memorandum

CH07

Chapter 7

Investor Agreements

07-007

§§7.7–7.33

Introduction

 

§7.8

Outline of Financing and Valuation

 

§7.9

Post-Financing Fully Diluted Capitalization

 

§7.10

Dividend Preference

 

§7.11

Liquidation Preference

 

§7.12

Redemption Rights

 

§7.13

Conversion Rights

 

§7.14

Antidilution Protection

 

§7.15

Voting Rights

 

§7.16

Board of Directors

 

§7.17

Protective Provisions

 

§7.18

Information Rights

 

§7.19

Registration Rights

 

§7.20

Transfer of Rights

 

§7.21

Right of Participation

 

§7.22

Right of First Refusal and Co-Sale

 

§7.23

Market Standoff

 

§7.24

Issuances to Employees

 

§7.25

Confidential Inventions and Assignment Agreement

 

§7.26

Auditors

 

§7.27

Directors’ and Officers’ Liability Insurance

 

§7.28

Key Person Life Insurance

 

§7.29

Confidentiality

 

§7.30

Nonsolicitation

 

§7.30A

Expenses

 

§7.31

Binding Nature; Governing Law

 

§7.32

Purchase Agreement

 

§7.33

Signatures

07-034

§7.34

Chart: Competing Interests of Investors and Company

07-037

§§7.37–7.48

Introduction; Name and Purpose of Corporation

 

§7.38

Authorized Capital

 

§7.39

Rights, Preferences, Privileges, and Restrictions of Capital Stock

 

§7.40

Dividend Preference

 

§7.41

Liquidation Preference

 

§7.42

Voting Rights

 

§7.43

Conversion Rights

 

§7.44

Redemption Rights

 

§7.45

Covenants

 

§7.46

Residual Rights

 

§7.47

Liability and Indemnification

 

§7.48

Miscellaneous Provisions; Signatures

07-049

§7.49

Chart: Competing Interests of Investors and Company

07-052

§§7.52–7.61

Introduction

 

§7.53

Recitals

 

§7.54

Purchase and Sale of Securities

 

§7.55

Definitions

 

§7.56

Representations and Warranties of Company

 

§7.57

Representations and Warranties of Investors

 

§7.58

Legends

 

§7.59

Conditions of Investors’ Obligations at Closing

 

§7.60

Conditions of the Company’s Obligations at Closing

 

§7.61

Miscellaneous Provisions; Signatures

07-062

§7.62

Chart: Competing Interests of Investors and Company

07-064

§§7.64–7.88

Introduction

 

§7.65

Recitals

 

§7.66

Definitions

 

§7.67

Financial Statements and Reports

 

§7.68

Additional Information

 

§7.69

Inspection

 

§7.70

Investor Representation

 

§7.71

Right of Participation

 

§7.72

Other Covenants of the Company

 

§7.73

Termination of Covenants

 

§7.74

Demand Registration

 

§7.75

Piggyback Registration

 

§7.76

Expenses of Registration

 

§7.77

Termination of Registration Rights

 

§7.78

Registration Procedures and Obligations

 

§7.79

Information Furnished by Holder

 

§7.80

Indemnification

 

§7.81

Limitations on Registration Rights

 

§7.82

Transfer of Rights

 

§7.83

Market Standoff

 

§7.84

Opinion of Counsel

 

§7.85

Reports

 

§7.86

Termination

 

§7.87

Miscellaneous Provisions

 

§7.88

Signatures

07-090

§§7.90–7.103

Introduction

 

§7.91

Recitals

 

§7.92

Transfer of Shares by Founders

 

§7.93

Definitions

 

§7.94

Agreements Among the Company, Investors, and Founders

 

§7.95

Assignments and Transfers; No Third Party Beneficiaries

 

§7.96

Ownership

 

§7.97

Legend

 

§7.98

Escrow

 

§7.99

Change in Company’s Capital Structure

 

§7.100

Term

 

§7.101

Miscellaneous Provisions

 

§7.102

Signatures

 

§7.103

Consent of Spouse or Domestic Partner

07-105

§§7.105–7.115

Introduction

 

§7.106

Recitals

 

§7.107

Shares Subject to Agreement

 

§7.108

Election of Directors and Related Matters; Certain Voting Rights

 

§7.109

Drag-Along Rights

 

§7.110

Legends

 

§7.111

Irrevocable Proxy

 

§7.112

Additional Parties to This Agreement

 

§7.113

Term

 

§7.114

Miscellaneous Provisions

 

§7.115

Signatures

07-117

§§7.117–7.131

Introduction

 

§7.118

Recitals

 

§7.119

Definitions

 

§7.120

Indemnity of Indemnitee

 

§7.121

Additional Indemnity

 

§7.122

Contribution in the Event of Joint Liability

 

§7.123

Advancement of Expenses

 

§7.124

Procedures and Presumptions for Determination of Entitlement to Indemnification

 

§7.125

Remedies of Indemnitee

 

§7.126

Nonexclusivity; Survival of Rights; Insurance; Subrogation

 

§7.127

Exception to Right of Indemnification

 

§7.128

Duration of Agreement

 

§7.129

Notice by Indemnitee

 

§7.130

Miscellaneous

 

§7.131

Signatures

CH08

Chapter 8

Loan Financing

08-012

§§8.12–8.88

Preamble

 

§8.13

Term Loan (Promissory Note)

 

§8.14

Revolving Loan (Promissory Note)

 

§8.15

Revolving Loan (Borrowing Base and Loan Account)

 

§8.16

Fluctuating Interest Rate

 

§8.17

Fees

 

§8.19

Security Agreement Required

 

§8.20

Guaranty Required

 

§8.20C

Deprizio Waivers

 

§8.21

Introductory Clause

 

§8.22

Opinion of Counsel

 

§8.23

Corporate Resolutions

 

§8.24

Evidence of No Substantial Financial Change

 

§8.25

Notes, Guaranty, and Security Agreement

 

§8.26

Certificate of Incumbency

 

§8.28

Representations and Warranties

 

§8.29

Introductory Clause

 

§8.30

Existence and Qualification

 

§8.31

Subsidiaries

 

§8.32

Corporate and Other Authority

 

§8.33

Corporate/Limited Liability Company Action

 

§8.34

Incumbency of Officers

 

§8.35

Agreement Valid and Binding

 

§8.36

No Contrary Bylaw, Agreement, or Statute

 

§8.37

Clear Title

 

§8.38

Pending Litigation

 

§8.39

No Event of Default

 

§8.40

Accuracy of Financial Statements

 

§8.41

Validity of Liens

 

§8.42

ERISA

 

§8.42A

Anti-Terrorism Representation

 

§8.43

Introductory Clause

 

§8.44

Use of Loan Proceeds

 

§8.45

Working Capital

 

§8.46

Tangible Net Worth

 

§8.47

Debt to Net Worth Ratio

 

§8.48

Notices to Be Given

 

§8.49

Financial Information

 

§8.50

Corporate/Limited Liability Company Existence, Business, and Properties

 

§8.51

Payment of Taxes and Other Liabilities

 

§8.52

Insurance

 

§8.53

Accounting Practices

 

§8.54

Sales of Fixed Assets

 

§8.55

Compensating Balances

 

§8.55A

Depository Relationship

 

§8.55B

Patriot Act Compliance

 

§8.55C

Further Assurances

 

§8.57

Introductory Clause

 

§8.58

Payment of Dividends

 

§8.59

Purchase of Shares

 

§8.60

Liquidation or Dissolution

 

§8.60A

Mergers or Acquisitions

 

§8.61

Limitations on Indebtedness

 

§8.62

Limitations on Liens

 

§8.63

Sale of Assets

 

§8.63A

Sales of Receivables

 

§8.64

Capital Expenditures

 

§8.66

Introductory Clause

 

§8.67

Nonpayment

 

§8.68

No False Representation or Warranty

 

§8.69

Judgments

 

§8.70

Voluntary Bankruptcy Proceedings

 

§8.71

Involuntary Bankruptcy Proceeding

 

§8.72

Default Under Other Agreement

 

§8.73

Cross-Default

 

§8.74

ERISA

 

§8.75

Guarantor’s Impairments

 

§8.76

Guaranty

 

§8.77

Change of Ownership

 

§8.78

Material Adverse Change

 

§8.79

Catch-All Default

 

§8.80

Remedies

 

§8.81

Addresses

 

§8.82

Successors and Assigns

 

§8.83

Delay and Waivers

 

§8.84

Expenses

 

§8.85

Counterparts

 

§8.86

Venue, Jurisdiction, and Process

 

§8.88

Execution

CH09

Chapter 9

Letters of Credit

09-005

§9.5

Many Uses of Standby Letters of Credit

CH10

Chapter 10

Equipment Leasing

10-028

§10.28

Notice of Intended Sale and Leaseback

10-029

§10.29

Commitment Letter

10-031

§§10.31–10.67

Parties, Date, and Recitals

 

§10.32

Lease

 

§10.33

Term

 

§10.34

Rent

 

§10.35

Nature of Transaction

 

§10.36

Lessee’s Inspection and Certification

 

§10.37

Lessor’s Right to Inspection

 

§10.38

Reports Concerning Equipment

 

§10.39

Financial Reports

 

§10.40

Licensing, Registration, and Taxes

 

§10.41

Location, Use, and Maintenance

 

§10.42

Insurance, Loss, and Damage

 

§10.43

Disclaimer of Warranties

 

§10.44

Lessee’s Representations, Warranties, and Covenants

 

§10.45

Conditions Precedent to Lessor’s Obligations

 

§10.46

Surrender of Equipment

 

§10.47

Holding Over

 

§10.48

Events of Default

 

§10.49

Remedies

 

§10.50

Cumulative Remedies

 

§10.51

Costs and Attorney Fees

 

§10.52

Present Value Rate

 

§10.53

Restriction on Assignment by Lessee; Successors and Assigns

 

§10.54

Assignment by Lessor

 

§10.55

General Provisions

 

§10.56

Assumptions

 

§10.57

Lessee’s Representations, Warranties, and Covenants

 

§10.58

Loss of Tax Benefits

 

§10.59

Amount of Indemnification

 

§10.60

Computations

 

§10.61

Right to Contest

 

§10.62

Attorney Fees and Costs

 

§10.63

Usury Savings Clause

 

§10.64

Security Deposits

 

§10.65

Governing Law; Venue

 

§10.66

Entire Agreement Between the Parties; No Modifications

 

§10.67

Signatures

10-068

§10.68

Equipment Lease Schedule

10-069

§10.69

Certificate of Acceptance

CH12

Chapter 12

Intellectual Property Protection

12-090

§12.90

Label for Trade Secret Material

12-113

§12.113

Checklist: Procedures for Protecting Confidential and Trade Secret Information

12-114

§§12.114–12.140

Introductory Clause

 

§12.115

Effective Date

 

§12.116

Confidential Information Defined

 

§12.117

Protection of Confidential Information

 

§12.118

Noncompetition During Employment

 

§12.119

Prior Knowledge and Inventions

 

§12.120

Prior Commitments

 

§12.121

Proprietary Information or Trade Secrets of Others

 

§12.122

Disclosure

 

§12.123

Assignment of Inventions

 

§12.124

Power of Attorney

 

§12.125

Delivery of Documents and Data

 

§12.126

Obligations of Employee After Termination of Employment

 

§12.127

Injunctive Relief

 

§12.128

Attorney Fees

 

§12.129

Material Condition of Employment

 

§12.130

Amendment and Binding Effect

 

§12.131

Governing Law

 

§12.132

Entire Understanding

 

§12.133

Cumulative Remedies

 

§12.134

Severability

 

§12.135

Employment at Will

 

§12.136

Caution to Employee

 

§12.137

Signature Clause

 

§12.138

Employee Statement (Schedule A)

 

§12.139

Termination Certificate (Schedule B)

 

§12.140

Written Notification to Employee (Schedule C)

12-141

§12.141

Copyright Assignment

12-142

§12.142

Notice to Employees Regarding Information Security

12-143

§12.143

Visitor Confidentiality Agreement

12-144

§12.144

Termination Certificate

12-145

§12.145

Letter to Former Employee

12-146

§12.146

Letter to Former Employee’s New Employer

12-147

§12.147

Nondisclosure Agreement for Negotiations With Consultants, Joint Venturers, or Licensees

CH13

Chapter 13

Cybersecurity

13-023

§13.23

Checklist: Responding to a Cyberattack

CH14

Chapter 14

Licenses, Permits, and Registrations

14-020

§14.20

Checklist: General Licenses, Permits, and Registrations for Business Start-Up and Operations

14-021

§14.21

Checklist: Licenses, Permits, and Registrations Required for Manufacturing Facilities

14-022

§14.22

Checklist: Construction and Development Permit Requirements

14-023

§14.23

Chart: Licenses, Permits, and Registrations Needed for Specific Businesses, and Where to Obtain Them

CH15

Chapter 15

Tax and Accounting Elections

15-042

§15.42

IRC §83(b) Election

15-042A

§15.42A

IRC §83(i) Election

CH16

Chapter 16

Tax Compliance

16-085

§16.85

Separate Ownership of Real Property and Improvements

CH18

Chapter 18

Preparing for a Public Offering

18-024

§18.24

Letter of Intent

CH20

Chapter 20

Registering a Public Offering

20-005

§20.5

Sample Time and Responsibility Schedule

20-041

§20.41

Sample Closing Memorandum

 

Selected Developments

February 2019 Update

Start-up Financing; Private Placements

A discussion of Simple Agreements for Future Equity (SAFEs) has been added to chap 4. See §4.25A. See also §17.3.

The form of Stock Purchase Agreement in chap 5 has been amended to include a more lengthy representation and warranty concerning the status of the stock as qualified small business stock under IRC §1202. See §5A.22.

In SEC v Schooler (9th Cir, Sept. 26, 2018, No. 16-55167) 2018 US App Lexis 27449, the Ninth Circuit ruled that a series of offerings of general partnership interests made over a period of more than 30 years were integrated, even though they were not made at the same time; the offerings therefore failed to qualify for a Securities Act exemption. See §6.11.

In July 2018, the SEC adopted an amendment to Rule 701 increasing the dollar threshold that triggers the disclosure requirement from $5 million to $10 million. See Securities Act Release No. 33–10520 (July 18, 2018). See §6.26.

Issuers filing a notice on Form D with the commissioner in lieu of a Notice of Transaction may file by mail or electronically either through the California Department of Business Oversight’s DOCQNET (Document Quality Network) at https://docqnet.dbo.ca.gov or through the North American Securities Administrators Association, Inc. (NASAA) online electronic filing depository (EFD) (see §6.43). Cal Comm’r Corps Release No. 120-C (rev May 18, 2018); 10 Cal Code Regs §260.102.14(a)(2). See §§6.35, 19.74.

Fries v Northern Oil & Gas, Inc. (SD NY 2018) 285 F Supp 3d 706 is a good example of a court’s unwillingness to impose Rule 10b–5 liability for omissions of material facts that are not necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. See §6A.2.

Smaller Reporting Companies

Paragraph (d) of Item 303 (17 CFR §229.303)(d)) provides that a smaller reporting company, as defined by §229.10(f)(1), may provide the information required in paragraph (a)(3)(iv) of Item 303 for the last 2 most recent fiscal years of the registrant if it provides financial information on net sales and revenues and on income from continuing operations for only 2 years. A smaller reporting company is not required to provide the information required by paragraph (a)(5) of Item 303. See §§6A.28, 6A.30.

Regulation S-K, Items 301–302 (17 CFR §§229.301–229.302) guide the drafter to include designated financial information for each of the last 5 fiscal years (or for the life of the company and its predecessors, if less) and, if applicable, any additional fiscal years necessary to assure that the information is not misleading. However, if the company qualifies as a smaller reporting company, as defined in 17 CFR §229.10(f)(1), the company is not required to provide the information required by this item. A smaller reporting company is defined in Item 10(f)(1) of Regulation S-K (17 CFR §229.10(f)(1)) to mean an issuer that is not an investment company, an asset-backed issuer (as defined in 17 CFR §229.1101), or a majority-owned subsidiary of a parent that is not a smaller reporting company and that

  • Had a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter, computed by multiplying the aggregate worldwide number of shares of its voting and nonvoting common equity held by nonaffiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity; or

  • In the case of an initial registration statement under the Securities Act or Exchange Act for shares of its common equity, had a public float of less than $75 million as of a date within 30 days of the date of the filing of the registration statement, computed by multiplying the aggregate worldwide number of such shares held by nonaffiliates before the registration plus, in the case of a Securities Act registration statement, the number of such shares included in the registration statement by the estimated public offering price of the shares; or

  • In the case of an issuer whose public float as calculated under paragraph (i) or (ii) of this definition was zero, had annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available. 17 CFR §229.10(f)(1).

Whether or not an issuer is a smaller reporting company is determined on an annual basis. 17 CFR §229.10(f)(2). Additional exceptions to this disclosure requirement are provided for emerging growth companies, as defined in Rule 405 of the Securities Act of 1933 or Rule 12b–2 of the Securities Exchange Act of 1934. See §6A.40.

In June 2018, the SEC revised the definition of “smaller reporting company” to include companies with a public float of greater than $75 million but less than $250 million. This amendment increased the number of companies that benefit from the scaled disclosure accommodations available to SRCs. The amendment did not, however, change the threshold to qualify as an “accelerated filer” as defined in Exchange Act Rule 12b–2 (17 CFR §240.12b–2). Consequently, a company with $75 million or more of public float that qualifies as a smaller reporting company will be subject to the requirements that apply to an “accelerated filer” as long as its public float is greater than $75 million, including the accelerated deadlines for filing periodic reports and the requirements that it provide the auditor’s attestation of management’s assessment of the effectiveness of internal controls over financial reporting required by §404(b) of the Sarbanes-Oxley Act (15 USC §7262), its Internet address and disclosure regarding the availability of its filings required by Items 101(e)(3) and (4) of Regulation S-K (17 CFR §§229.101(e)(3) and (4)), and the disclosure required by Item 1B of Form 10-K about unresolved staff comments on its periodic or current reports. On August 10, 2018, the SEC published a helpful guide for smaller reporting companies, titled A Small Entity Compliance Guide for Issuers, available at https://www.sec.gov/corpfin/amendments-smaller-reporting-company-definition. See §17.14.

Lending Transactions; Usury Issues

If the London Interbank Offered Rate (LIBOR), rather than the bank’s reference rate, is the index rate used by the bank, ensure there are provisions that address the phase-out of LIBOR expected to occur by 2021. The promissory note or loan agreement should address how interest will be calculated when LIBOR is no longer available and how the transition to an alternate rate will be achieved. See §8.16.

If the person nominally making the loan does not have its own money at risk because another unlicensed person has committed to buy the loan, in some circumstances the other person may be treated as the “lender” for usury and other purposes. See Consumer Fin. Protection Bureau v CashCall, Inc. (CD Cal, Aug. 31, 2016, No. CV 15-7522-JFW (RAOx)) 2016 US Dist Lexis 130584. See §8.16.

In addition to potential usury issues for a lender, the interest rate on a loan, if too high, can be unconscionable under the standard tests for unconscionability. See De La Torre, et al. v CashCall, Inc. (2018) 5 C5th 966. In that case, the California Supreme Court held that the interest rate on certain consumer loans can render loans unconscionable under Fin C §22302. A loan found to be unconscionable is a violation of the California Financing Law (Fin C §§22000–22780) and is subject to the remedies specified in the California Financing Law. In addition, a violation of the California Financing Law could trigger a claim under California’s Unfair Competition Law (Bus & P C §§17200–17210) as was claimed in CashCall. See §8.16.

Even though foreign parties to a contract may voluntarily choose California law for the resolution of their disputes and a party to the contract cannot later claim forum non conveniens, a court has the statutory authority to decline to exercise its jurisdiction in circumstances where California has no public interest in burdening its courts in an action that lacks any identifiable connection to the state. See Quanta Computer Inc. v Japan Communications Inc. (2018) 21 CA5th 438, 444. See §8.86.

A comprehensive chart of the California usury law exemptions has been added to chap 8. See §8.89.

Insurance Issues

Because CGL policies typically do not provide coverage for professional negligence claims, they often contain exclusions for loss resulting from the rendering of or failure to render professional services. Energy Ins. Mut. Ltd. v Ace Am. Ins. Co. (2017) 14 CA5th 281, 292. See §11.14.

If an insurer has denied coverage or breached its duties, it may not be able to rely on a consent condition as a coverage defense. See, e.g., Teleflex Med. Inc. v National Union Fire Ins. Co. (9th Cir 2017) 851 F3d 976, 986 (“when a primary insurer wrongfully denies coverage, unreasonably delays processing a claim, or refuses to defend an action against the insured as required by the policy, the insured is entitled to make a reasonable settlement of the claim in good faith and then sue for reimbursement, even though the policy prohibits settlements without the consent of the insurer” (citations omitted)). See §11.21.

A liability policy is presumed to include a duty to defend unless the carrier can introduce undisputed evidence that there is no potential for coverage. Street Surfing, LLC v Great Am. E&S Ins. Co. (2014) 752 F3d 853, 857. However, the facts known or alleged must “fairly apprise” the insurer that the suit is or could be one on a covered claim; there is no duty to defend if the potential for liability is “tenuous and farfetched.” All Green Elec., Inc. v Security Nat’l Ins. Co. (2018) 22 CA5th 407, 416 (no duty to defend; no allegations or extrinsic facts that could give rise to liability). See §11.41.

In Pulte Home Corp. v American Safety Indem. Co. (2017) 14 CA5th 1086, 1113, the court ruled that the existence of a duty to defend turns on facts known by insurer at the inception of the third party lawsuit. See §11.41.

A detailed discussion of cyberinsurance has been added to chap 11. See §11.58.

Cybersecurity

Ransomware is a type of malicious software that infects and locks down access to a computer to deny the owner’s use until a ransom is paid. Ransomware typically infects the host computer through phishing e-mails and exploits unpatched security vulnerabilities in software. See https://www.us-cert.gov/sites/default/files/publications/Ransomware_Executive_One-Pager_and_Technical_Document-FINAL.pdf. In 2017, Microsoft estimated that the “Wanna Cry” ransomware variant was found in over 150 countries and infected over 300,000 computers across 100,000 businesses in multiple industries including retail, manufacturing, transportation, healthcare, and finance. See https://enterprise.microsoft.com/en-us/articles/industries/health/wannacry-ransomware-attack-lessons-learned. See §13.1.

In In re Facebook Internet Tracking Litig. (ND Cal 2017) 263 F Supp 3d 836, the court dismissed class action litigation accusing Facebook of tracking its users’ Internet activity. Plaintiffs alleged that Facebook’s cookies allowed it to identify users and correlate their identities with their browsing activity even when they were logged out of Facebook. The court held that Title II of the Electronic Communications Privacy Act of 1986 (18 USC §§2701–2712), known as the Stored Communications Act (SCA), did not apply to Facebook’s cookies because they are information in local storage on a user’s computer, rather than information that is temporarily stored “‘incident to [the] transmission’ of a communication.” 263 F Supp 3d at 845. In addition, the court held that personal computers are not “facilities” under the SCA through which an electronic communications service is provided. 263 F Supp 3d at 845. See §13.11.

The National Institute of Standards and Technology (NIST) has provided guidance on security and privacy controls for devices connected to the Internet (the so-called Internet of Things) in both the public and private sectors. It has listed technical and procedural safeguards designed to protect individuals, organizations, and systems when creating or operating “smart” devices. See https://csrc.nist.gov/csrc/media/publications/sp/800-53/rev-5/draft/documents/sp800-53r5-draft.pdf. Due to the lapse in government funding, csrc.nist.gov and all associated online activities will be unavailable until further notice. See §13.14A.

Tax Matters

If a patent holder exercises control over a transferee corporation with the result that there is no effective transfer of all substantial rights in the patent, the requirements of IRC §1235 are not met, even if the documents describing the transfer formally assign all substantial rights. “The key inquiry remains whether, as a practical matter, the transferor shifted all substantial rights to the recipient.” Cooper v Comm'r (9th Cir 2017) 877 F3d 1086, 1092 (taxpayer did not transfer all substantial rights to patents to corporation because taxpayer retained right to retrieve ownership of patent at will). See §3.8.

Practitioners should note that as a result of the 2017 Tax Cuts and Jobs Act, research and experimental costs paid or incurred in tax years beginning in 2022 may no longer be deducted as current expenses and must instead be amortized over a 5-year period. There is an exception for research and experimental costs attributable to foreign research (within the meaning of IRC §41(d)(4)(F)), which must be amortized over a 15-year period. See §15.14.

The 2017 Tax Cuts and Jobs Act added a provision, under IRC §83(i), that allows a qualified employee to elect to defer the inclusion in income of the amount of income attributable to qualified stock transferred by the employer to the employee. Specifically, if qualified stock is transferred to a qualified employee and the employee timely makes an IRC §83(i) election with respect to the stock, then the income with respect to the stock is included in the employee’s income in the tax year that includes the earliest of the following (rather than included in income when required by IRC §83(a)):

  • The first date the qualified stock becomes transferable (including, solely for this purpose, becoming transferable to the employer);

  • The date the employee first becomes an excluded employee (defined below);

  • The first date on which any stock of the corporation that issued the qualified stock becomes readily tradable in an established securities market;

  • The date that is 5 years after the first date the employee’s rights in the stock are transferable or aren’t subject to a substantial risk of forfeiture, whichever occurs earlier; or

  • The date on which the employee revokes (at the time and in the manner that the IRS provides) the IRC §83(i) election with respect to the stock.

See IRC §83(i)(1)(B)(i)–(v). See §§15.18, 15.20.

A form for making the IRC §83(i) election has been added to chap 15. See §15.42A

On June 21, 2018, the United States Supreme Court issued its decision in South Dakota v Wayfair, Inc. (2018) 585 US ___, 138 S Ct 2080. Under Wayfair, a retailer may have a substantial nexus with California without having a physical presence in the state. The California Department of Tax and Fee Administration (CDTFA) since inadvertently posted a notice on its website containing new tax collection rules for retailers, with collection threshholds similar to those adopted in South Dakota. The draft CDTFA notice indicated that, effective August 1, 2018, retailers whose cumulative sales of tangible personal property for delivery in California exceed $100,000, or who engage in 200 or more separate transaction sales of tangible personal property for delivery in California, are required to collect California use tax. See draft notice (no longer posted at the CDTFA website) located here: http://src.bna.com/Alh. Although the CDTFA subsequently indicated that posting of the draft document was inadvertent, practitioners should be on the alert for official CDTFA guidance in response to Wayfair shortly. See §16.35.

Reporting Obligations; Going Public Transactions

Effective September 10, 2018 (per SEC Release No. 33–10513), financial statements for the earliest of the 3 years before an acquisition may be omitted if the net revenues of the acquired business in the most recent fiscal year are less than $100 million. This threshold was raised from $50 million. In recent years, the SEC has also begun to grant waivers more liberally for target company financial statements that are difficult or impossible to obtain. See §17.5.

A detailed discussion of direct listings, a technique that Spotify Technology S.A. used to go public on April 3, 2018, has been added to chap 18. See §18.5A.

The 2018 voting guidelines of Institutional Investor Services Inc. (ISS), the influential proxy advisory company, provide that ISS will recommend a vote “against” or a “withhold from non-independent directors” when

  • Independent directors comprise 50 percent or less of the board;

  • The nonindependent director serves on the audit, compensation, or nominating committee;

  • The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or

  • The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee.

See the ISS United States Proxy Voting Guidelines at https://www.issgovernance.com/file/policy/active/americas/US-Voting-Guidelines.pdf at 9. Glass, Lewis & Co. (Glass Lewis) has similar voting guidelines. See the 2018 U.S. proxy voting guidelines of Glass Lewis at http://www.glasslewis.com/wp-content/uploads/2018/01/2018_Guidelines_UNITED_STATES.pdf. See §18.42.

The Economic Growth, Regulatory Relief, and Consumer Protection Act (Pub L 115–174, 132 Stat 1296), which became law on May 24, 2018, directs the SEC to amend Regulation A (1) to allow reporting companies to offer securities in accordance with Regulation A and (2) to allow reporting companies utilizing Tier 2 offerings to satisfy Regulation A’s periodic reporting obligations by complying with their reporting obligations under Exchange Act §13 or §15(d). See §§19.12, 19.32.

The requirements for financial statements of businesses acquired or to be acquired are in Rule 3–05 and Art 11 of Regulation S-X (17 CFR §210.3–05). In September 2018, the SEC stated that financial statements for the earliest of the 3 years before an acquisition may be omitted if the net revenues of the acquired business in the most recent fiscal year are less than $100 million. Securities Act Release No. 33–10513 (June 28, 2018). In recent years, the SEC has also begun to grant waivers more liberally for target company financial statements that are difficult or impossible to obtain. See §20.13.

About the Authors

STEVEN T. ANAPOELL received his LL.M (Taxation) from Georgetown University Law Center, his J.D. from the University of California, Hastings College of the Law, and his B.S. in Business Administration from the University of California, Berkeley. He is a Managing Partner and the General Counsel of BridgeForth Holdings LLC, a private equity firm, where he focuses on structuring and providing alternative financing solutions to companies seeking capital. Prior to forming BridgeForth, Mr. Anapoell was a founding shareholder of the Orange County office of Greenberg Traurig, P.C., where he focused his practice on forming private equity, distressed debt, real estate, venture capital, and special strategy funds, mergers and acquisitions, private securities offerings, debt and equity investments and financings, and structuring and negotiating complex corporate transactions. Mr. Anapoell has been selected numerous times by Los Angeles Magazine as one of Southern California’s “Super Lawyers” in the areas of Securities & Corporate Finance, Business/Corporate, and Tax. He also holds a rating of preeminent in his field by Martindale-Hubbell. Mr. Anapoell is the former chair of the Limited Partnerships and Limited Liability Companies Committee, State Bar of California Business Law Section and is currently a member of CEB’s Business and Intellectual Property Law Advisory Committee. He is the author of Chapter 6A (Drafting a Private Placement Memorandum Under Regulation D). Mr. Anapoell gratefully acknowledges the review and comment provided by Christopher Chen, a corporate securities associate with Greenberg Traurig, P.C.

LAWRENCE S. BRANTON received his J.D. from the University of California, Hastings College of Law in 1970 and his B.S. from Indiana University in 1967. He is president of Branton & Wilson, APC, in San Diego, and specializes in taxation. Mr. Branton is a Certified Specialist in Taxation Law through the State Bar of California Board of Legal Specialization. He was named one of the “Best Attorneys” in San Diego in The Best Lawyers in America. Mr. Branton has published numerous articles on tax law. He is a former instructor at the University of San Diego School of Law and a former chair of the Taxation Section of the San Diego County Bar Association. Mr. Branton is the author of Chapter 16 (Tax Compliance).

NEAL H. BROCKMEYER received his J.D. degree from the University of California, Berkeley, School of Law in 1963 and his A.B. degree from Stanford University in 1960. He is of counsel to Locke Lord Bissell & Liddell LLP, Los Angeles, and practices in the areas of corporate and securities law. He has served as chair of the Corporations Committee, State Bar Business Law Section, and as chair of the Business and Corporations Law Section Executive Committee, Los Angeles County Bar Association, and as a member of the Committee on Federal Regulation of Securities of the American Bar Association’s Business Law Section. Mr. Brockmeyer is the author of Chapters 1 (Seeking Capital: Sources and Strategy), 4 (Structuring a Financing Transaction), 5 (Forms of Securities), 17 (The Decision to Make a Public Offering), 18 (Preparing for a Public Offering), 19 (Accessing the Public Markets), and 20 (Registering a Public Offering).

MARY CRAIG CALKINS received her J.D. degree from Loyola University School of Law, Los Angeles, cum laude, in 1981, and her B.A. from the University of California, Los Angeles, in 1972. She is a partner in the Insurance Recovery Group at the Los Angeles office of Howrey LLP, where she advises and represents corporations, partnerships, directors, officers and individuals seeking coverage under various forms of insurance policies. In February 2005, Ms. Calkins was selected by Los Angeles magazine as one of Southern California’s “Super Lawyers” in the area of insurance coverage. She is currently appointed to the Task Force on Attorney Relations for the Insurance Coverage Litigation Committee of the Section of Litigation, American Bar Association, and has been honored as Outstanding Committee Chair for 2003–2004 and 2004–2005. Ms. Calkins is the author of Chapter 11 (Business Insurance).

LYNNE A. CARMICHAEL received her J.D. in 1978 from the University of California, Berkeley, School of Law, and her B.A. in 1965 from Occidental College, Los Angeles. Ms. Carmichael is a partner with the firm of Hinman & Carmichael LLP, San Francisco, which specializes in the law relating to alcoholic beverage production and sales. She is a member of the International Wine Lawyers Association, Women for Wine Sense, and the San Francisco Professional Food Society. Ms. Carmichael is the author of Chapter 14 (Licenses, Permits, and Registrations).

LINDA M. DeMELIS received her J.D. in 1994 from the University of California, Hastings College of the Law, where she was a member of Order of the Coif, and her B.A. in 1975 from Radcliffe College (Harvard University). She is Associate Editor of TheCorporateCounsel.net, an educational service that provides practical guidance on legal issues involving corporate and securities regulation and corporate governance practices, as well as many other areas impacting today’s corporate practitioner. In 2003, she participated in the Model Documents project for preferred stock financings sponsored by the National Venture Capital Association. Ms. DeMelis is the author of Chapter 7 (Investor Agreements).

SUSAN R. GOLDFARB received her J.D. from Georgia State University College of Law in 2000, cum laude; her M.A. in Law and Diplomacy from the Fletcher School of Law and Diplomacy at Tufts University in 1996; and her B.A. from the University of California, Berkeley, cum laude, in 1984. She is a corporate associate with Proskauer Rose LLP in Los Angeles, and practices in the areas of corporate finance, corporate, and securities law. She is a member of the Financial Lawyers Conference in Los Angeles and the American Bar Association’s Business Law Section. Ms. Goldfarb is the author of Chapter 8 (Loan Financing).

CHRISTOPHER J. HUSA received his J.D. degree from Cornell Law School in 1983 and his B.A. degree from the University of Southern California in 1979. He is of counsel with Locke Lord Bissell & Liddell LLP in Los Angeles and practices in the areas of corporate and securities law. Mr. Husa has served as a member of the State Bar of California, Business Law Section’s Education Committee and as a member of the Executive Committee of the Business and Corporations Law Section of the Los Angeles County Bar Association, and is a former managing editor of the State Bar of California Business Law Section’s Business Law News. Mr. Husa is the author of Chapter 6 (Private Placements).

DAVID L. KELIGIAN received his J.D. and M.B.A. degrees in 1980 from the University of Southern California and his B.S. degree in accounting in 1977 from the University of Southern California. He practices tax law with The Busch Firm in Irvine, where his practice focuses on tax and business planning for entrepreneurs. He is also a CPA. His articles have appeared in numerous publications, including the Journal of Taxation and The Practical Tax Lawyer, and he has served as a CEB panelist, consultant, and author on business and tax topics. Mr. Keligian is a frequent speaker for programs on corporate and partnership tax law sponsored by the Tax Sections of the State Bar of California and the Los Angeles County Bar Association. Mr. Keligian is the author of Chapters 3 (Agreements Among Founders) and 15 (Tax and Accounting Elections).

DAVID M. LYNN is a partner with Morrison & Foerster LLP, where he is the co-chair of the firm’s Corporate Finance practice. Before joining the firm, he served as Chief Counsel of the Division of Corporation Finance at the U.S. Securities and Exchange Commission. Mr. Lynn is a highly respected securities advisory counsel who provides guidance to clients ranging from Fortune 500 to newly public companies on securities law compliance, as well as counseling on corporate governance, executive compensation, and disclosure best practices. As Chief Counsel of the Securities and Exchange Commission’s Division of Corporation Finance, Mr. Lynn led the rulemaking team that drafted sweeping revisions to the SEC’s executive compensation and related party disclosure rules. He is currently the co-editor of TheCorporateCounsel.net, CompensationStandards.com, and The Corporate Counsel. He received his undergraduate and MSF degrees from the Loyola College in Maryland and his J.D. from the University of Maryland School of Law. Mr. Lynn is the co-author of Chapter 6B (Equity Crowdfunding).

CLARA RUYAN MARTIN received her J.D. degree from the University of Michigan Law School in 1989 and her B.A. degree from the University of California, Berkeley, in 1985. She is a founding partner of the Los Angeles law firm, Cadence Law Group LLP. She specializes in structuring, drafting, negotiation, and implementation of corporate and technology transactions. Her corporate work includes mergers and acquisitions, joint ventures, corporate finance, and venture representation. Her technology practice is broad, ranging from software licensing and development to strategic alliances and e-commerce. Ms. Martin currently serves on the Cyberlaw Committee of the Business Law Section of the State Bar of California and is a frequent lecturer on topics such as software licensing agreements, Internet-related agreements, complex joint ventures, venture finance, and mergers and acquisitions. Ms. Martin is co-author of Chapter 13 (Cybersecurity).

DAVID B. OSHINSKY received his J.D. degree from Columbia Law School in 1996, where he was a member of the Columbia Law Review, and his B.A. degree from Yale University in 1991. He is a founding partner of the Los Angeles law firm, Cadence Law Group LLP. Mr. Oshinsky works with many start-up and early stage companies, for which he provides counsel regarding their early operational, financing, and intellectual property requirements. He regularly assists clients with venture capital financing, technology transactions, and mergers, acquisitions, and related corporate transactions. In particular, his practice involves the structuring, drafting, and negotiating of technology licenses, website policies and agreements, software development agreements, and strategic alliances. Mr. Oshinsky has written and lectured on a broad range of technology topics, including website development agreements, strategic alliances, intellectual property issues in mergers and acquisitions, and Internet law in California. Mr. Oshinsky is co-author of Chapter 13 (Cybersecurity).

JOHN M. RAFFERTY is a partner with Morrison & Foerster LLP, where his practice focuses on a broad range of corporate and securities law matters. Mr. Rafferty’s practice includes public and private mergers, tender offers, going private transactions, and strategic and financial investments. Additionally, Mr. Rafferty counsels boards of directors of public companies on corporate governance issues and fiduciary duty matters. He also advises emerging growth companies backed by venture capital and private equity firms on all corporate, transactional, and financing matters. Notable transactions handled by Mr. Rafferty include RE/MAX’s initial public offering for $220 million and Restoration Hardware’s initial public offering at $124 million. Mr. Rafferty received his undergraduate degree from the Arizona State University and his law degree from the New York University School of Law. Mr. Rafferty is the co-author of Chapter 6B (Equity Crowdfunding).

JACOB C. REINBOLT received his J.D. from the University of Michigan Law School in 1984, and his B.S. in Business (Finance and Economics), magna cum laude, from Miami University (Ohio) in 1981. He is a partner with the San Diego-based firm of Procopio, Cory, Hargreaves & Savitch LLP, and the leader of the firm’s intellectual property team. Mr. Reinbolt was selected as one of the top four intellectual property law attorneys in San Diego by San Diego Magazine and is special legal counsel to the City of San Diego for intellectual property, Internet, and e-government matters. His practice is focused on computer law, intellectual property, Internet law, licensing, mergers and acquisitions, and corporate law. Mr. Reinbolt is the author of Chapters 2 (The Business Plan) and 12 (Intellectual Property Protection).

PAUL S. TURNER received his J.D. from Harvard Law School and his B.A. from the University of California, Los Angeles. He consults on letter of credit and banking and commercial legal matters in Los Angeles. He is a retired Assistant General Counsel of Occidental Petroleum Corporation. Mr. Turner’s books include Standby and Commercial Letters of Credit (Aspen Law and Business) (co-author) and the Law of Payment Systems and EFT (Aspen Law and Business). He writes frequently on banking and commercial legal issues and is a regular contributor to Documentary Credits Insight (ICC Paris). Mr. Turner is the author of Chapter 9 (Letters of Credit).

RUSSELL J. WOOD received his J.D. from Case Western Reserve School of Law in 1994 and a bachelors of philosophy from Miami University (Ohio) in 1988. He is a partner in the Corporate Group at the San Francisco office of Winston & Strawn LLP, representing public and private corporations and investors in corporate, securities, and venture capital transactions. Mr. Wood served as an appointed co-chair of the Corporations Committee of the State Bar of California and has been a member of that committee since 2001. He previously served on the American Bar Association’s Subcommittee on Securities Law Opinions and served as liaison to the American Bar Association’s Presidential Task Force on Attorney-Client Privilege. Mr. Wood is the author of Chapter 5A (Issuing Common Shares to Founders and Investors). He wishes to acknowledge the efforts of Catherine Pollina and Josephine Chan of Winston & Strawn LLP, who also contributed to Chapter 5A.

About the 2019 Update Authors

STEVEN T. ANAPOELL received his LL.M. (Taxation) from Georgetown University Law Center, his J.D. from the University of California, Hastings College of the Law, and his B.S. in Business Administration from the University of California, Berkeley. He is a Managing Partner and the General Counsel of Bridgeforth Holdings LLC, a private equity firm, where he focuses on structuring and providing alternative financing solutions to companies seeking capital. Before forming Bridgeforth, Mr. Anapoell was a founding shareholder of the Orange County office of Greenberg Traurig, P.C., where he focused his practice on forming private equity, distressed debt, real estate, venture capital, and special strategy funds, mergers and acquisitions, private securities offerings, debt and equity investments and financings, and structuring and negotiating complex corporate transactions. Mr. Anapoell has been selected numerous times by Los Angeles Magazine as one of Southern California’s “Super Lawyers” in the areas of Securities & Corporate Finance, Business/Corporate, and Tax. He also holds a rating of preeminent in his field by Martindale-Hubbell. Mr. Anapoell is the former chair of the Limited Partnerships and Limited Liability Companies Committee, State Bar of California Business Law Section. He is the author and 2019 update author of Chapter 6A (Drafting a Private Placement Memorandum Under Regulation D) and the 2019 update author of Chapter 5A (Issuing Common Shares to Founders and Investors).

LAWRENCE S. BRANTON received his J.D. from the University of California, Hastings College of the Law in 1970 and his B.S. from Indiana University in 1967. He is of counsel with Seltzer Caplan McMahon Vitek, a law corporation in San Diego, and specializes in taxation. Mr. Branton is a Certified Specialist in Taxation Law through the State Bar of California Board of Legal Specialization. He was named one of the “Best Attorneys” in San Diego in The Best Lawyers in America. Mr. Branton has published numerous articles on tax law. He is a former instructor at the University of San Diego School of Law and a former chair of the Taxation Section of the San Diego County Bar Association. Mr. Branton is the author and 2019 co-author of Chapter 16 (Tax Compliance) and the 2019 update co-author of Chapter 15 (Tax and Accounting Elections).

SUSAN R. GOLDFARB received her J.D. from Georgia State University College of Law in 2000, cum laude; her M.A. in Law and Diplomacy from the Fletcher School of Law and Diplomacy at Tufts University in 1996; and her B.A. from the University of California, Berkeley, cum laude, in 1984. She is a corporate associate with Proskauer Rose LLP in Los Angeles, and practices in the areas of corporate finance, corporate, and securities law. She is a member of the Financial Lawyers Conference in Los Angeles and the American Bar Association’s Business Law Section. Ms. Goldfarb is the author and 2019 update author of Chapter 8 (Loan Financing).

CHRISTOPHER J. HUSA received his J.D. from Cornell Law School in 1983 and his B.A. from the University of Southern California in 1979. He is of counsel with Locke Lord LLP in Los Angeles and practices in the areas of corporate and securities law. Mr. Husa has served as a member of the State Bar of California, Business Law Section’s Education Committee and as a member of the Executive Committee of the Business and Corporations Law Section of the Los Angeles County Bar Association, and is a former managing editor of the State Bar of California Business Law Section’s Business Law News. Mr. Husa is the author and 2019 update author of Chapter 6 (Private Placements).

BRIAN M. KATUSIAN received his LL.M. (Taxation) and J.D. from the University of San Diego School of Law in 2007 and his B.S. in Management Science from the University of California, San Diego, in 2004. He is a California Certified Legal Specialist in Taxation Law and a shareholder of the law firm Seltzer Caplan McMahon Vitek, in San Diego, where he practices in the areas of tax law, tax-exempt organizations, business law, and employee benefits. At the University of San Diego School of Law, Mr. Katusian was a student attorney at the University’s Low Income Taxpayer Clinic, a Graduate Law Merit Scholar, and a member of the Irving R. Kaufman Securities Law Moot Court Team. Mr. Katusian is the 2019 update co-author of Chapters 15 (Tax and Accounting Elections) and 16 (Tax Compliance).

PETER M. MENARD received his J.D. from the University of Michigan Law School in 1979, his M.S. in Mathematics from the University of Michigan in 1976, and his B.S. from Santa Clara University in 1974. He is a partner of Sheppard Mullin Richter & Hampton LLP in Los Angeles, where he practices in the areas of corporate and securities law. He has been a Lecturer on securities regulation at the University of Southern California Gould School of Law, editor-in-chief of the Business Law News, published by the Business Law Section of the State Bar of California, and co-chair of the Corporations Committee of the Business Law Section of the State Bar of California. Mr. Menard is the 2019 update author of Chapters 17 (The Decision to Make a Public Offering), 18 (Preparing for a Public Offering), 19 (Accessing the Public Markets), and 20 (Registering a Public Offering).

KIRK A. PASICH received his J.D. from Loyola Law School, Los Angeles, in 1980 and his B.A. from the University of California, Los Angeles, in 1977. He is the managing partner of Pasich LLP in Los Angeles. Mr. Pasich conducts an active trial, arbitration, and appellate practice. He has negotiated many large insurance recoveries for his clients and has served as lead trial counsel in many jury trials. In addition, he has handled substantial commercial litigation matters and has served as an arbitrator and as an expert witness on insurance and ethical issues. He has been named by Chambers USA as one of the top 12 policyholder lawyers in the United States and by Best Lawyers as the 2018 Los Angeles Litigation—Insurance Lawyer of the Year. Mr. Pasich is the 2019 update author of Chapter 11 (Business Insurance).

FREDERICK K. TAYLOR received his J.D. from Golden Gate University School of Law in 1991 and his B.A., with honors, from the University at Buffalo in 1988. He is a partner in the San Diego-based firm of Procopio, Cory, Hargreaves & Savitch LLP. Mr. Taylor has a Martindale-Hubbell AV Preeminent Rating and was selected as a 2014 and a 2015 Top Lawyer by San Diego Magazine. His practice is focused on litigation in the areas of intellectual property, financial institutions, complex commercial litigation, and Native American issues. He has served as counsel in over 20 jury trials and five bench trials and is experienced in arbitrations, mediations, and appellate matters. He has lectured on a variety of intellectual property topics and has served as an adjunct professor at the Thomas Jefferson School of Law. Mr. Taylor is the 2019 update author of Chapter 12 (Intellectual Property Protection).

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