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Protecting Business Information

Employees and independent contractors will often need access to a business’ confidential information in order to perform their job. However, misuse of this information can cause problems. One way to protect your business’ sensitive information is to have every employee and independent contractor agree in writing to keep that information confidential and to only use this information for the benefit of your business. Such agreements are often referred to as “non-disclosure agreements” or “NDAs”.

Sometimes one of the best ways to keep confidential information private is to document with those who have access to it that they have a duty to protect this information. In most cases, merely having a non-disclosure agreement in place is enough to keep an individual from divulging confidential information.

If a person chooses not to honor the terms of the non-disclosure agreement, then the business can bring a breach of contract claim or seek an injunction against this person. A common provision of most non-disclosure agreements is that the person violating the agreement will be responsible for paying the legal costs associated with violating the terms of the agreement.

When it comes to protecting your sensitive business information, non-disclosure agreements are a simple and affordable preventative measure that can save a lot of unnecessary problems and legal expense.

For more information about protecting business information, contact Eric Davis at eric@elliott-davis.com.

Small Business Crowdfunding

A new trend for raising capital is a talking point for small business owners. Small business owners express tremendous interest in using small business crowdfunding platforms to raise capital by selling shares in the business or by selling debt securities like a note or bond.

What is driving all of this interest? The 2013 JOBS Act and the regulations that the Securities and Exchange Commission has issued about that act.

Selling securities is heavily-regulated. Current laws are designed to protect investors by requiring companies that want to sell securities to disclose all of the information a prudent investor would need to know in order to make an informed decision to buy. The most important law, the big Kahuna, is the Securities Act of 1933 (The 33 Act). The 33 Act requires a company issuing the securities to put together a detailed offering document containing extensive, specific information about the company, including financial information (which must be audited by independent accountants); this document must be filed or “registered” with the SEC and reviewed by its staff before any securities can be sold. The staff of the SEC insists that all of the information in the document is clear and complete. Usually, the securities are sold with the assistance of an underwriter. This process is very expensive and is out of reach for most small businesses.

Most small business owners look at the other options available. There are exemptions from the registration requirements of the 33 Act for sales of securities to folks who don’t need the protection created by preparing a big, reviewed and audited disclosure document. That is where the JOBS Act has created some buzz.

One of the most interesting exemptions available is set out in Rule 506(c) of the 33 Act. This rule (part of which was created by the JOBS Act) permits companies to sell securities using the internet to wealthy, sophisticated investors (accredited investors). In this case, there is no need to register the offering under the 33 Act and that makes it much less costly to raise the money. Investment crowdfunding! What a concept! Hence the tremendous interest.

BUT!!

(You knew it was coming, didn’t you?)

The exemptions that permit investment crowdfunding only exempt the company issuing the securities from the registration requirements of the 33 Act. They do NOT exempt the company from another, really big part of the 33 Act: what we securities lawyers call “the anti-fraud” provisions.

“Now, hold on a minute,” you say. “I’m not going to commit fraud while my company sells securities!” And, I know what you mean. Of course, you don’t intend to defraud and, lacking the requisite intent, cannot commit fraud.

But hold on: “Fraud” under the 33 Act does not involve intent to defraud at all. Nope! The 33 Act’s antifraud provisions require that the company selling the securities tells a prospective buyer everything the buyer needs to know in order to make an intelligent decision to invest. So, the company cannot say anything that is not true about the company or not say (omit to say) anything that is important to a prospective investor.

To learn more about the limitations and benefits of selling securities as a small business owner, connect with us here.

Time To Consult A Lawyer – Part 2

Last week, I wrote about an old Fram® Oil Filter television commercial—the one where the auto mechanic says at the end that he doesn’t care; you can pay him now (for a new oil filter) or pay him later (to replace the car’s engine). I promised to provide you with some examples of how this tagline plays out between small business owners and their business lawyers.

FYI: “Pay me later” is always lots more expensive than “pay me now.”

In the past, I represented the owner of a personal training business. She was successful and had a good clientele of steady, consistent training clients. She had other trainers working out of her rented facility who paid her a modest percentage of their training fee income. She sold supplements to her clients and the others who visited the gym. At the time, business was good.

After five years, she grew tired of the business and wanted out. She didn’t realize how draining it would be to have to work the three, simultaneous jobs of all entrepreneurs. She sought business, trained the clients and ran the business. It was more work than she ever anticipated.

She met with one of the other trainers whom she trusted and shared the idea of selling the business to him. He was interested and the two began to discuss the general terms upon which a deal could be made.

Neither consulted a lawyer at this stage of the process (Author’s note: This would be the “PAY ME NOW” moment), although both confessed thinking about and deciding against it. Instead, they discussed the price for the business. Although they had differing views of what the sale price should be, the owner assumed the pricing was close enough and trusted the buyer.
Unfortunately, the buyer didn’t have the funds on hand to purchase the business at the price she intended. This was not a problem to our two transaction partners. They agreed that he would begin to operate the business as if he owned it and then he would begin paying her the purchase price (still not agreed to) out of the operating profits of the business and give her the money to pay the rent during this “interim” arrangement. She would assist him in the transition of the business and its relationships with its customers, other trainers, suppliers, bank, credit card processor and landlord. He would take over her training clients and she would begin to enjoy life after owning a personal training business.

They decided to worry about all of the “details” later when they both had time and money to spend on lawyers. (The business lawyers in the audience are all shaking their heads about now.)

Fast forward:
During the first few months, it never generated the money that both parties expected.

The buyer woke up to the realities of marketing and administrative demands that business ownership entails and he began to have second thoughts about buying the business. He also missed a rent payment and my client had to pay the landlord out of savings rather than operating profits since those were now for the account of the buyer. She is still obligated on the lease since the “details” weren’t addressed. Also, the buyer was not very good with the training clients and several of them left the facility altogether amid complaints about missed and tardy training appointments. He alienated the training supplement vendors, all of which had been great sellers for the business, and several pulled their products.

Finally, the buyer made a decision. He walked away from the deal, leaving my client in the lurch, and took his training clients along with invaluable knowledge of various financial matters about my client’s business to another gym. My client rushed back into the business to discover the mess and that there was a discrepancy in the supplement inventory. The buyer was selling inventory and “forgot” to pay for it when the invoices came due. On top of what already seems like a terrible situation, several items of exercise equipment were missing.

Finally, she came to see me and dumped this messy story on my conference room table (Author’s note: This is the “PAY ME LATER” part), asking for my help to pick up the pieces and put things back together again.

Have you ever wondered when to consult a lawyer? Pay attention to that thought and trust it. Don’t push it away. Pay a lawyer now, save a bundle later.

Time To Consult A Lawyer

In 1972, Fram® Oil Filters began to air a TV commercial that featured an automobile mechanic in greasy overalls, wiping his hands on an oily rag while standing in front of an older car with the hood open. The mechanic, pointing to the engine compartment of the car says, “You see this? This guy needs a new engine. That’s about $1,400 dollars .” Fram Oil Filter

The mechanic picks up a new Fram® Oil Filter and says, “This is a Fram® Oil Filter. It’s about $4.00. If this guy [pointing again at the car] had gotten regular oil changes and used Fram® Oil Filters [lifting the oil filter], he wouldn’t need a new engine.”

The mechanic shrugs and says, “Me? I don’t care. You can pay me now [holding up the oil filter again] or you can pay me later [once again pointing at the car’s engine].”

Pay me now or pay me later. This is a common story in the world of a business attorney. Clients routinely consult a lawyer when they have a legal mess that could have been avoided if only the client sought legal advice earlier.

I know. Trust me, I get it. Growing small business owners are focused almost exclusively on sales and getting cash in the door. The very survival of their business depends on this. They postpone addressing anything else until the business is up and running and has the cash and breathing room to hire the professionals who can address these matters.

In short, business owners elect to, “pay me later.” They choose to consult a lawyer at a time when they feel more ready, more able. The mindset that often accompanies this election can be summarized with saying, “It’s better to ask for forgiveness than permission.” While there are situations where opting for “pay me later” or planning to ask for forgiveness rather than permission make sense, in my experience these situations are the exception rather than the rule.

In the posts that follow, I will share some of the messes that I have helped clean up, along with some of the solutions that could have been implemented had the client opted to, “pay me now” and consult a lawyer earlier. I will demonstrate that business owners need to establish a relationship with a business lawyer sooner rather than later.

If you have any questions about when to consult a lawyer or the pay me now or pay me later method you can contact me, Mark Sullivan.

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