Tuesday, July 22, 2014

Will you still be an “accredited investor”?

The Securities and Exchange Commission (SEC) is considering changing the accreditation standards used to determine eligibility of investors to participate in private offerings. The current definition of accredited investor was created in 1982 and states that an individual must meet one of the three following criteria:

1. Have had an individual annual income of $200,000 for the past two years with an expectation that it will continue;

2. Have had a household annual income of $300,000 for the past two years with an expectation that it will continue; or

3. Have a net worth of at least $1 million, excluding a primary residence.

Since 1982, the SEC has made two changes to the requirements listed above. In 1988, the SEC added the $300,000 household annual income qualification, and in 2011, the SEC added the exclusion of one’s primary residence to the $1 million net worth threshold. If the current levels of income are adjusted for inflation, then an accredited investor would need (i) an annual income of approximately $500,000, (ii) a household with an annual income of approximately $700,000, or (iii) a net worth of approximately $2.5 to $3 million in assets.

Under the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC must review the definition of “accredited investor” every four years.  The SEC uses the income and net worth thresholds as a measurement for whether an individual has the ability to understand the inherent risks of investing in a private company. There seems to be an ongoing debate on the SEC’s role in regulating who can and cannot invest in private offerings. Should the SEC’s role not go beyond fraud? Is the SEC going too far and actually trying to protect investors from themselves?

Many in the capital raising community are against any changes to the current accreditation standards, and even some argue that there should be an additional qualification solely based upon one’s education or work experience. There are others who argue that there shouldn’t be any qualifications based upon income and net worth; rather we should allow individuals to make their own financial decisions regardless of whether they currently meet the standards or not. Their argument is based on the premise that one’s net worth isn’t directly connected to one’s financial sophistication. 

A change in the qualifications of an accredited investor could significantly decrease the number of eligible investors, and thus render capital raising for businesses much more onerous. According to the CEO of Mission Markets, Ken Marienau, approximately 7% of the United States population currently qualifies as an accredited investor. The General Accounting Office and the SEC estimate that an inflation-based adjustment to net worth would eliminate approximately 60% of the current accredited investors. Consequently, only approximately 3% (a 57% reduction) of the US population would qualify under the new accreditation standards. Increasing the income and net worth qualifications of an accredited investor could have a detrimental impact on startups, jobs, and the economy.

If you are interested in commenting on how or whether the SEC should revise the definition of “accredited investor”, click here

Tuesday, July 15, 2014

Peeping Drones and Google Glass—What’s Next? Get Your Free Guide to Privacy and Data Security

A Legal Guide to Privacy and Data Security, a new book offering guidance on a wide variety of privacy and data security laws and how those laws may impact your business, is now available from the Minnesota Department of Economic Development (DEED) and Gray Plant Mooty. The Guide, the product of a collaborative effort between DEED and Gray Plant Mooty, may help you to navigate more easily the complex and unpredictable legal landscape of privacy laws and regulations.

Google Glass, drones the size of a butterfly, secure microchips replacing magnetic stripes on credit cards, sensors the size of a grain of sand, automobiles that drive themselves, “Big Data,”  the so-called “Internet of Things”—all of these are already pushing the limits of privacy advocates, regulators, consumers, lawyers, and the businesses adopting these new technologies.

In 1890 Louis Brandeis wrote, in his seminal Harvard Law Review article entitled “The Right to Privacy,” that privacy is the “right to be left alone.”  Brandeis wrote this in response to the then-new and intrusive technology known as photography and the sensational and scandalous articles being written by journalists. 

Fast-forward to 2014.  Recently, the United States Supreme Court determined that police must obtain a warrant to search the vast amount of information on a suspect’s cellphone. In his opinion in Riley v. California, Chief Justice John Robert writes that cellphones “are now such a pervasive and insistent part of daily life that the proverbial visitor from Mars might conclude they were an important feature of human anatomy.”  

So how far have we come from a time when cameras alone were seen as intrusive to the current concerns of privacy advocates over drones and Google Glass?   

Minnesota businesses of all sizes collect, store, and share personal information about individuals. While new technology and access to information allows for greater innovation and delivery of products and services, it also creates a challenge. How does a business optimize the information available and remain in compliance with the evolving and ever-changing legal landscape? How does a business not compromise consumer privacy as more and more information is shared and collected? What about privacy rights of employees and prospective employees?

High profile data breach incidents such as those experienced by Target and other national retailers exemplify the need for businesses to take a serious look at data privacy and security issues and how they fit within their business operations. 

While it is impossible to become expert in all of the laws related to data privacy and security, it is important to understand what specific privacy laws apply to your business and to implement best practices appropriate for your business.

A Legal Guide to Privacy and Data Security is available without charge from DEED or Gray Plant Mooty. Or download an electronic version here http://www.gpmlaw.com/portalresource/A_Legal_Guide_to_Privacy_and_Data_Security.pdf

Thursday, July 10, 2014

Cutting Your Kids Out of $300MM: That Stings a Little

Legendary rock artist Sting recently acknowledged that his fortune of approximately $300MM will not be passing to his six children.  In a recent interview with the U.K.’s Daily Mail, Sting said that he told his children not to expect much of this, because he would be spending it.  He also mentioned that he appreciates that his children work and don’t ask for much, and that he doesn’t want the inherited wealth to disrupt their lives.

Though this is a large and public example, Sting’s philosophy on estate planning is not that unusual.  I tell clients that their first estate planning option is to spend it all.  That is not necessarily a good financial plan, and often we need most of our estates in the very last few years of our lives, but my point is that they don’t have to feel like it is their absolute responsibility to stockpile wealth for the next generations at the expense of their own.  

I am assuming that much of Sting’s “spending” will be on charitable endeavors.  This is another philosophy shared by many.  Not only is giving to charity during your lifetime a decent tax planning option, but it is also a tremendous way to see your money work for the greater good.  Your children enjoy the advantages of growing up with wealth: good schools, no debt, etc.  They are already starting out ahead.

On the other hand, first generation wealth accumulation, like Sting’s, can make a family financially advantaged for many generations.  Leaving a legacy like that is powerful too.

It is a tough balance between empowering your children and grandchildren and enabling them to do nothing. A well prepared estate plan, and some family education, can perhaps do both.

Tuesday, July 8, 2014

What: Charles A. Beard, An Economic Interpretation of the Constitution of the United States (reprint, Free Press, 1986)

Why: A classic but controversial study emphasizing the role played by enlightened economic self-interest in the framing of the Constitution.

I write this in a nearly empty office on the day before Independence Day. Most of my colleagues (and clients) have already escaped their labors for at least a four-day weekend, ostensibly in celebration of our long-ago separation from the mother country and establishment as a new country founded on Enlightenment notions of “life, liberty and the pursuit of happiness.” (For another take on this historical event, see here.)

For most of us, the annual 4th of July celebration brings to mind the courageous, high-minded and selfless principles that guided our founding fathers in declaring American independence and thereafter shaping the mechanical structure of a working republican democracy.

I’m not here to say that this isn’t an accurate perception, but almost a century ago Charles A. Beard, a historian at Columbia University, presented a far more nuanced picture of the birth of our country in what was then a groundbreaking study (and which is now at best a golden oldie), An Economic Interpretation of the Constitution of the United States.

Don’t misunderstand me—this is not light beach reading. But for those with an entrepreneurial viewpoint, it is an eye-opening (albeit controversial) study in economic power and enlightened self-interest. I won’t spoil the details for you (it will take, shall we say, a fair amount of scholarly dedication and a couple of Red Bulls to plow through this book), but consider some of Beard’s conclusions:

The drive behind developing the Constitution was essentially economic: “Large and important groups of economic interests were adversely affected by the system of government under the Articles of Confederation, namely, those of public securities, shipping and manufacturing, money at interest; in short, capital as opposed to land.”

The Constitution was “an economic document drawn with superb skill by men whose property interests were immediately at stake; and as such it appealed directly and unerringly to identical interests in the country at large.”

At bottom, the Constitution is based “upon the concept that the fundamental private rights of property are anterior to government and morally beyond the reach of popular majorities.”

Some pretty heady stuff, most definitely.  

Whether or not you buy into Beard’s analysis completely, and there is much scholarship that does not (including Forrest McDonald’s equally groundbreaking We the People: The Economic Origins of the Constitution), no one will quibble with you if you come to see the Constitution as a masterpiece of enlightened self-interest—including economic self-interest—on the part of those who created the framework by which we are still governed a couple of hundred years and change later.

Monday, June 30, 2014

SEED CAPITAL ReVIEW: Fall 2013 Survey of Angel Financings

If you’ve been following the activities of the Entrepreneurial Services Group at Gray Plant Mooty, you may know that we just completed the first ever installment of our SEED CAPITAL ReVIEW report. We created this report, and the survey underlying the findings detailed in it, to try and help companies and investors who are raising seed capital to have a better handle on what’s “market” in early stage private financings in Minnesota.

Earlier this year, we surveyed investors and companies about private financing activity completed in the second half of 2013. We didn’t know exactly what kind of response to expect, given that we were launching this completely new initiative. We were pleasantly surprised to have received responses relating to 126 separate early-stage capital financings from the second half of last year in Minnesota—probably a pretty representative sample. Either everyone really wanted to be entered in the drawing for the $250 Amazon gift card we were offering for participation or, more likely, investors and companies raising capital agreed with us that there could be real value in this type of information. 

If you’re interested in the full report (and who wouldn’t be—it’s at least as fascinating as the most recent posts by all of your “friends” on Facebook), you can find it here. If you’re too busy trying to raise capital to even click on that link, here are a few of the interesting findings:

In an era when generating revenue seems to be more frequently required by investors in deals, 46% of the deals reported in the survey were pre-revenue. 

Not surprisingly, having revenues correlated strongly with higher valuations—17% of pre-revenue companies reported pre-money valuations of over $5 million, while 42% of companies generating revenues had valuations in this range.

68% of the reported financings involved sales of equity, with the remaining 32% being debt. 

Over 70% of the equity financings were common equity, maybe not a surprise given that so many of these financings are early stage.

The Minnesota Angel Tax Credit was utilized in over half of the financings. While the popularity of the program doesn’t make this seem surprising, it is a little surprising because the credit had run out in early May last year.

It was great to see such robust participation in our first survey. We plan to circulate our second survey (for the first half of 2014) in July for a report to follow later this year. 

While we hope the initial data is useful to those involved in early-stage financings, we anticipate that comparative analysis of future surveys will help us identify trends as they develop in the market for private capital.

In case you were curious, the survey respondent who won the Amazon gift card was a Angel investor who invested in a cleantech/biotechnology company durign the second half of last year.

Friday, June 27, 2014

Tips for Budding Real Estate Entrepreneurs, Part Two

Marcus LeBeof continues his list of six steps to entrepreneurial happiness in the residential real estate market. (Missed Part One?: Check it out here.)

Step #4: Do the House Flipping Math

When doing your initial house flipping analysis, you can do a little “napkin math” to estimate if the house is a winner. The first thing you need to do is determine the potential selling price of the house when it’s all fixed up – this is what’s known as After Repair Value (or ARV). Then simply subtract the purchase price, repairs and all your monthly carrying costs. What you have left over is your profit.

If all this initial math points to profitability, then you may have an excellent flip opportunity on your hands and you should consider purchasing the house.

Step #5: Manage the Rehab Tightly

Once you do purchase the house, don’t just rely on your contractor to handle and supervise all the repairs. Make sure you manage this process tightly if you are on your own, but better yet hire a professional contractor to oversee all the rehabilitation, especially if the rehab is extensive. Make sure you personally supervise the repairs to ensure that they are being carried out properly and on budget.

In the end, your profit largely depends on what you pay for the house initially, but making sure that the repair costs stay within your budget is equally if not more important. Likewise, overextending yourself by doing more than your budget allows on the rehab or taking your eye off the ball and allowing your contractor to run free are two of the quickest ways to ensure that your make profits will go up in smoke.

Step #6: Work Fast, Make a Profit

Time is of the essence when flipping houses for profit. It’s a race against the clock because the longer the rehab takes, or the longer the house sits on the market once it’s done, the less profit you make. Soft costs such as financing payments, insurance payments, town taxes, utilities and other carrying costs, all of which have to be paid at regular intervals, add up to diminish your profits the longer you own the house.

It’s simple—the shorter the time you hold onto your investors’ money, the better your profits will be, so make your improvements fast. Do the job well, but do it fast. Make sure your contractors do the job on budget and on time and hire good real estate agents who help you price the final product so it sells quickly. In all of our house flips, we estimate six months from purchase to sale, but factor in a few additional months of expenses to make sure we profit on each and every flip we do.

I constantly remind my mentees to be intentional in everything that they do. If you want a certain type of job, you need to network with the people who hold the position you aspire to so that you may learn their path and avoid pitfalls. If you want to attend a certain institution, you need to identify the members of the admissions committee and find ways to appeal to their interests so as to stand out from the crowd. With investing, be it in real estate or otherwise, it is always wise to take on a mentor (or two) so that you may benefit from the collective wisdom of those who have gone before you. And you need to assemble the right team of advisors to ensure that you can navigate the inevitable problems efficiently and successfully.

Monday, June 23, 2014

A rose by any other name…

It is rare that items from the United States Patent and Trademark Office are “breaking news” or even make general news headlines.  But it happened Wednesday (6/18/14) with the announcement that the Trademark Trial and Appeal Board (TTAB) – the administrative tribunal within the USPTO – decided in favor of the Native Americans who had petitioned to cancel six trademark registrations owned by Pro Football, Inc. (Dan Snyder) for use in connection with the operation of the Washington Redskins  professional football team.  In rendering its decision, the TTAB found that “Redskins” was disparaging of Native Americans as used in the subject marks at the time of their various registrations.  

The administrative ruling isn’t really a surprise.  The name of this team has been an issue for more than 20 years.  In fact, a similar ruling was issued by the TTAB years ago, but was reversed on appeal for technical reasons.  And while the USPTO at one time refused applications for marks containing “Redskin(s)” based on confusing similarity to the football marks, it has more recently refused  applications for the registration of such marks as REDSKINS HOG RINDS and WASHINGTON REDSKIN POTATOES (not for potatoes) on the grounds that the marks are disparaging.

The TTAB administrative decision is a big deal, but not necessarily for its direct consequences.

Despite some headlines claiming that the TTAB ruling cancelled the “Redskins” trademarks, the TTAB only has the power to cancel the trademark registrations.  If this decision stands (is not appealed or confirmed on appeal), the owner of the Washington Redskins will lose the benefits that come from its U.S. registrations, but in the scheme of things, such advantages may be relatively minor at this point.

The team has been operating under the name “Redskins” since 1932 and has well-established common law rights based on long-term use and fame.   These proceedings will not determine if Dan Snyder can legally continue to use the team name – he can.  As to whether or not he should continue to use the name—well, that game was over a long time ago and the TTAB decision (and public reaction) merely emphasizes that he is missing the opportunity to be a graceful loser.   

Trademark rights are all about reputation and goodwill.  Whether or not “Redskins” is determined to be legally disparaging really doesn’t matter.  A reasonable segment of the population not only doesn’t like the brand, but they also think it is disrespectful, racist, mean-spirited, clueless or any number of other things that don’t exactly suggest good brand value.  The team name is tarnished and there is nothing that Dan Snyder can ever do to rehabilitate this brand.

One has to seriously wonder why he continues to insist that he will NEVER change the team name.  There should be little negative effect from a change – he has a regional monopoly and true fans of the team will not abandon it just because of a name change.

And really, how financially astute can he be if he doesn’t see the increased merchandise sales that would go along with a name change?