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Got Foreign Investors? What you need to know about Regulation S

Raising Money Abroad

Picture this – your start-up is ready to raise seed money; you think your business has international appeal and you want to open the round up to foreign investors. This might be the right strategy for your business, but have you thought about securities compliance? Will you also open the round to US investors? How will you attract the investors? Will the prospective investors purchase securities with transfer restrictions? These are all important questions to ask when you’re considering taking on foreign investors and you want your securities to be exempt from registration requirements.

Reg S

Regulation S of the Securities Act of 1933 (“Reg S”) provides an exemption from registration for “offers and sales of securities outside of the United States.” Companies issuing securities pursuant to Reg S must comply with certain restrictions on their offerings. Such restrictions are put in place to ensure that the exemption is not being used to improperly circumvent registration requirements and sell unregistered securities in the US. Reg S is comprised of five rules:

  • Rule 901: General statement of regulation
  • Rule 902: Definitions
  • Rule 903 and 904: Safe harbor rules
  • Rule 905: Resale limitations on equity securities issued pursuant to Reg S exemption

The focus of this post is the Category 3 safe harbor rule provided by Rule 903, which is available to US companies issuing securities to foreign purchasers. To qualify the following conditions must be satisfied:

  1. It must be an offshore transaction.”

Rule 902 defines “offshore transaction” as an “offer not made to a person in the United States…and at the time the buy order is originated, the buyer is outside the United States, or the seller and any person acting on its behalf reasonably believe that the buyer is outside the United States.”

  1. There cannot be any “directed selling efforts” in the United States.

Rule 902 defines “directed selling efforts” as “any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the securities being offered in reliance on…Reg S.” This restriction is primarily focused preventing any advertising or offering of the securities in the US when the securities are being offered pursuant to Reg S. This ensure that the unregistered securities are only offered and sold to foreign purchasers and that a US purchaser will not learn of the issuance through any kind of public advertisement or publication in the US.

  1. The securities will be subject to a distribution compliance period and future sales will be restricted.

Finally, securities issued pursuant to the Category 3 safe harbor of Rule 903 are required to observe multiple transfer restrictions. Such securities are subject to a distribution compliance period, the length of which is dependent on whether the offering is for debt (forty days) or equity (one year) securities. During the compliance period, the securities cannot be re-sold to a US purchaser (with limited exception, discussed below). Further, any sale made prior to the end of the distribution compliance period is required to comply with the following requirements:

  1. The purchaser must certify that it is not a US person or that it is a US person purchasing the securities pursuant to an exemption from registration under the Act;
  2. The purchaser of the securities agrees that it will only re-sell the securities pursuant to Reg S or another qualifying exemption under the Act;
  3. The purchase agrees not to engage in a hedging transaction;
  4. The security instruments bear restrictive legend clearly stating the above-mentioned restrictions on transfer; and
  5. One or more of the charter documents of the issuer, i.e., its Operating Agreement or Articles of Organization, must explicitly state the transfer limitations to which its securities are subject.[1]

Raising money is a complex process but taking the time to do it properly is critical. Failure to comply with securities regulations can lead to complex and costly enforcement actions with consequences ranging from fines to criminal charges. The good news is that these consequences can be avoided by creating a fundraising strategy that addresses securities regulations and complies with the applicable requirements.

[1] 17 C.F.R. 230.903(b)(3)(iii)(B)(1-4)

Colorado is leading the way in cooperative law

There are lots of reasons to love Colorado – the sunshine, the mountains, Colfax Avenue and all its splendid weirdness, just to name a few. While those things are all great, the coolest thing about Colorado is that it’s leading the way in innovative uses of the cooperative structure, in no small part thanks to our incredibly flexible cooperative statutes. Any business can be a cooperative in Colorado. This means that when we talk with a new client about entity formation, in addition to discussing the merits of traditional business structures, we also get to educate them about cooperatives and help them decide if it might be the right structure for them. While that in itself is pretty cool, Colorado is one of the few states that has adopted the Uniform Limited Cooperative Association Act (“ULCAA”). The ULCAA gives cooperatives the flexibility that is most commonly associated with LLCs, including having investors that exclusively make capital contributions. Having an investor member class can make the cooperative structure feasible for companies that would normally have to forgo it because they need to raise outside capital on more flexible terms. As lawyers, this means we get to collaborate with our clients and come up with creative solutions for structuring the investor class, creating profitable exits when there is no public offering or sale on the horizon, and attracting investors – all while keeping the cooperative mission at the forefront. Basically, it equates to a lot of intellectual gymnastics and brainstorming sessions, which is when being a lawyer is the most fun and where we offer the most value to our clients. If I’ve piqued your interest, my colleagues, Linda and Jason, have written a wonderful blog that breaks down in more detail why Colorado is leading the way in cooperative law. A big thank you to Fifty by Fifty for publishing the blog and producing great content to advance employee ownership.

GDPR is Almost Here – Are you Prepared?

On May 25, 2018, the European Union’s new data protection legislation, the General Data Protection Regulation (GDPR), will take effect. This law heralds a new era of rigorous data privacy and security and makes data privacy a fundamental right for EU citizens. Of course, all EU companies and many multinational companies doing business in the EU have to be fully compliant with this legislation on Friday. What is important to note is that some U.S.-based businesses, even those without employees or offices within the EU, may also be required to comply with the GDPR.

Does my U.S.-based business need to comply with this law?

If your business processes and/or holds personal data of individuals residing in the EU (including employees) or you are marketing/selling products to consumers in the EU, then your business must comply with GDPR. In a broad sense, the GDPR requires businesses to understand what data they are collecting, be able to articulate why they are collecting it and which of the six categories of lawful processing its purpose falls into, what the business’s strategy is in the event of a data breach, what the timeline for retention of personal data is, and how such data is destroyed when the purpose for collecting and retaining the data no longer exists. There is a record keeping exception that companies with less than 250 employees may qualify for.

But what is ‘personal data’ and what do you mean by ‘processing’?

Personal data’ is any information related to a person that could be used to identify such a person. This includes the person’s name, identification number, location data or online identifier, email addresses, bank information, social media posts, or other factors specific to the physical, genetic, physiological, economic, mental, cultural, or social identity of that person. The EU is taking a very broad approach to defining ‘personal data’ so it is best to consider almost any information you collect about an EU citizen to be personal data.

Processing‘ means any operation performed on personal data, such as collection, recording, organization, structuring, storage, adaptation, alteration, retrieval, consultation, use, disclosure by transmission, dissemination or otherwise making available, alignment, combination, restriction, erasure or destruction.

Most, if not all of us, have a website and if a German resident stumbles upon our website, the GDPR will likely not apply just because that person found the website. However, if you are actively encouraging EU residents to visit your website, ship your products to the EU, market or translate your webpage in a language of an EU country, or if you engage with EU residents and process their personal data in any other way (for example track and collect information on webpage users from the EU to analyze online behavior), the GDPR may be applicable to your business.

The GDPR requires all businesses to protect the personal data of EU citizens, and specifically prescribes how this should be done.

How do I ensure compliance before May 25?

There is a “quick fix” that you can implement before Friday: add a cookie banner to your website that allows your business to ask permission before processing an EU resident’s data and also allows you to stop collecting data from any IP address from an EU country if they do not consent.

For the permission or consent to be valid in terms of GDPR, be sure not to use legal jargon or to bury the consent in fine print. Consent needs to be specific, in plain language, explain what you will be using the personal data for, and positive (i.e. the person must opt in to allow you to process the data).

Is there more to it?

Yes, the GDPR’s requirements are far-reaching and ensuring full compliance may take a bit more time.

One of the biggest and most important tasks is to map your data, i.e. figure out what personal data you store and collect in your databases (online, on computers, tablets and phones, and on paper), how that data is being used, and how long the data is being stored.

Once you have an idea of your data collection and retention practices, you need to determine what data relates to EU residents.

All EU residents need to consent (i.e. opt in) to your processing of their data, so the business will have to reach out to these residents to obtain consent or, alternatively, destroy the data.

Another key step is to update your data privacy policy and ensure that your business puts the necessary controls in place to adequately process personal data going forward. This policy should be in writing and become part of your existing and future service contracts with third parties.

What if my business doesn’t comply?

The penalties for non-compliance are quite steep: 4% of your company’s worldwide annual turnover of the preceding financial year or € 20 million, whichever is greater, for serious infringements of the GDPR; 2% or € 20 million, whichever is greater, for less serious infringements.

 

Contact us to schedule a consultation.

Tonya Price (tonya@jrwiener.com)

Francisca Pretorius (francisca@jrwiener.com

Giving Employees the Right Vacation Time

Are you following Colorado law when it comes to paying for vacation time when an employee leaves your company? What if you lump together vacation time, sick time and other time off into “Paid Time Off” (PTO)? What follows is a discussion of whether your current employee policies regarding PTO are following Colorado law, especially with regard to the limitation on the amount of time an employee can accrue PTO.

Colorado law states that employers do not have to offer their employees paid time off for vacations or sick leave. If you do offer vacation time or PTO and employee leaves, you are expected to pay the employee for any time that has “accrued”. So what happens if you have great employees who never take vacation? You are allowed to place restrictions on the amount of vacation pay an employee receives. For example, an employee earns 10 days a year of PTO. But the employee only uses 5 days and the other 5 days get forwarded to the next year. You can create a policy that an employee cannot accumulate more than 20 days of PTO. The Courts look at vacation time as a contract issue between a company and its employees. An employee handbook acts as a contract for purposes of this discussion. The Colorado Department of Labor provides: “An employer may establish a vacation policy in writing or by custom and practice. Employees must be made aware of the employer’s policy. Employers and employees must follow established policy unless and until that policy is changed.”

So, as an employer, you can provide in your employee handbook that an employee can accrue no more than 3 years of PTO (or a certain number of days). You have to make sure your employees are aware of the policies and usually employees sign acknowledgements that they have received copies of the handbook.

Here’s another example. Say an employee earns PTO each week. In other words, depending on seniority (some earn more PTO than others), an employee receives at least 3 hours each pay period for PTO. Putting a restriction on the amount of PTO time that can be accumulated is perfectly within the right of your company. A court case from 1998 that has not been overturned or received negative treatment has discussed this issue (City of Lamar v. Koehn, 968 P.2d 164 (Colo.App. 1998)). The case determined whether vacation time was to be included in the definition of “wages” for purposes of workers compensation. The Court state the following:

Both vacation and sick leave were subject to forfeiture if claimant accrued a specified maximum number of leave days. However, claimant did not forfeit any vacation leave under this policy and was paid his full entitlement. [The reason he did not forfeit any vacation was because he had not yet reached the maximum number of leave days.]

In this case, the Court discussed a prior decision where vacation time was looked at as a type of leave that had a reasonable, present-day, cash equivalent value, and that claimant had a reasonable expectation of receiving the benefits under appropriate reasonable circumstances. However, this Court found that because the employer policy had vacation time as capped and subject to forfeiture, it was not proper to be included in the definition of “wages” for determining workers compensation benefits.

Colorado wage law states that vacation pay (which would include PTO for purposes of this discussion), earned in accordance with the terms of any agreement, is classified as wages or compensation. If an employer provides paid vacation (or PTO) for an employee, the employer must pay, upon termination of employment, all vacation pay earned and determinable in accordance with the terms of any agreement between the employer and the employee. So take a look at your vacation and PTO policies. Are they similar to the following?

PTO Yearly Carry Over

Employees may carry up to two full years of accrued PTO leave into the following calendar year. This will allow employees the benefit to carrying up to three (3) years accrued PTO in their PTO banks. Any overage of PTO at the end of the year will be forfeited.

Payment for PTO Overages

If an employee accumulates more than 3 years of PTO and a calendar year is ending within 30 days, PTO for the final two pay periods of the calendar year shall be adjusted such that an employee can only earn 25% of the PTO that has accumulated over the 3-year cap for PTO for that employee. There will be no further accruals of PTO following the end of the calendar year until employee uses some of the accrued PTO. Upon retirement, termination or death during the year, the employee or his or her heirs or estate shall be paid for any accrued, but unused PTO.

The carry-over provisions in the second paragraph above may be a little complicated but they are perfectly within an employer’s rights. The company can cap vacation and PTO time to three years. This prevents a huge buildup of a company liability that will be incurred when an employee leaves the company. If an employee is not taking their earned PTO during the year, then management needs to encourage or force time off for those employees.

This is just one example of how employers can create vacation or paid time off benefits for their employees but everyone should be aware of the responsibilities employers have for properly structuring their vacation policies. Please give us a call if you would like us to review your employee manuals or handbooks about this issue.