Quick! . . . Mediate That Business Divorce!

One of the officers of a corporate client calls. You note the distress in his voice immediately. He tells you that a dispute has arisen between the major shareholder factions of the company, and he wants you to advise on what he and those in his faction can do to win this. And you can tell he expects you to talk “reason” to the other faction.

But you quickly realize that although for the moment knowledge of the dispute is restricted to people in the company, it will only be a short time before it gets out to the customers, suppliers, banks and others with whom the company does business, threatening the existence of the company.

You should consider recommending the factions mediate the dispute, if possible before litigation is filed.

Advantages of Mediation

Some advantages of mediation are:

No Publicity. No lawsuit is filed. The situation can be kept as confidential as the parties want.

Speed. Trial, or even a hearing for significant injunctive relief, will take months, if not years. And as soon as customers hear there is an internal dispute — and they will — they will take their business elsewhere, to a “stable” competitor. And this risk increases significantly if a lawsuit is filed. A mediation can begin immediately.

Continue reading »

Crowdfunding – Good and Not So Good

On November 3, 2011, with a bi-partisan 407-17 vote the U.S. House of Representatives passed the Entrepreneur Access to Capital Act (H.R. 2930 and the “Access to Capital for Job Creators Act” H.R. 2940) (the “Acts”). The bills will now go to the U.S. Senate for reconciliation.

This Acts amend the Securities Act of 1933 to essentially allow “general solicitation,” heretofore illegal, in small offerings of investments if they meet numerous other restrictions. The Acts allows an issuing company to offer and sell securities, without regard to the general solicitation–type methods of promotion used, to an unlimited number of purchasers, so long as no purchaser is allowed to spend more than the lesser of $10,000.00 or 10% of his or her net worth, and the total amount of securities purchased within any 12 month period is no greater than one million dollars. And purchasers need not be “accredited” (usually meaning having a net worth of no less than one million dollars or annual income of $200,000.00 or $300,000.00 if purchasing jointly with a spouse). (And, if the issuer provides potential investors with audited financial statements, the offering may be as much as two million dollars. This may be particularly important in light of the ease of auditing a newly formed issuer with no history of operations and earnings).

Also, the Acts allow entrepreneur issuers to utilize “intermediaries,” who need not be registered as broker-dealers with the SEC, to assist in finding investors. This is a significant change from the present law, albeit with many restrictions on the use of the intermediary.

This is a “sea change” in the law of private placements. Perhaps its greatest significance is the new ability of such issuers to use the internet in private offerings. Also, it allows many potential investors, not sufficiently affluent to be “accredited,” to participate in an admittedly limited method in the growth of entrepreneurial companies. And, of course, it opens to entrepreneurial companies’ access to a body of investors hereto for prohibited to them.

However, some of the “restrictions” on crowdfunding should cause some companies to select other methods of private placement, particularly those who can attract sufficient accredited investors. These negative factors should also cause the Senate, in its considerations, to consider improving this new exemption.

Continue reading »

Securities Law Enforcement Reacts to the Crisis: Congress, the Courts and the Regulators

I recently published an article discussing the reactions of each of the three branches of government to the economic crisis which became so evident in mid-2008 (Soraghan, Joseph, “Securities Law Enforcement Reacts to the Crisis: Congress, the Courts and the Regulators,” Inside the Minds, New Developments in Securities Litigation 55-76. Aspatore Books/Thomson-Reuters March 2010). The article points out that, not surprisingly, the economic crisis, highlighted by the names AIG, Lehman Brothers, Madoff and others, called to action Congress, the regulators, and possibly even the Supreme Court.

Brought before Congress since late 2008 have been proposals of huge B and not-so-huge B scope. (For example, the proposals would add more supervision and regulation of bank holding companies, the asset-backed securitization process, OTC derivative products and markets, private fund investment advisers and securities rating agencies, among many other functions.)  Most have since been adopted in bills passed separately by the Senate and the House of Representatives, and await review by joint conference committees. It is likely that most will be adopted in some form, after joint conference action, and signed into law. They will significantly affect the conduct of business in this country, and therefore how attorneys must advise their clients.

Continue reading »

The St. Louis Broker-Dealer: June 2010

To the St. Louis region small broker-dealers, compliance officers, legal officers and banks with securities related activities: We present the twelfth issue of our newsletter.

Social Media – Linked In, Facebook, Twitter, etc. have become a major method of communicating not only personal information, but also business information. And with so many possible clients utilizing it, small broker-dealers must consider using it in their business in order to just keep up with their competition.

But the characteristics of social media which are so positive – quickness and freedom of the user and of responses of third parties – cause difficulty in this industry, which requires control and supervision of all communications with the public. The Financial Industry Regulatory Authority (“FINRA”), in its January 2010 Regulatory Notice 10-06, guides – and restricts – broker-dealers in their use of social media.

I have asked a “guest writer” to advise on these issues: Cliff Campeau, a Partner with Evolutionize, LLC. Cliff’s statements and opinions in this piece are his, and are not necessarily mine or those of Danna McKitrick, P.C.

The “Business Memo” part of this newsletter continues the discussion of theories of, and avoidance of, liability of broker-dealers (“BDs”) and registered representatives (“RRs”). This time we analyze “unauthorized trading.”

If you would like copies of past issues or have any questions arising from the contents of this or past issues, please call or e-mail me, Joe Soraghan, at (314) 726-1000 or jsoraghan@dmfirm.com at no charge.

Continue reading »

You Should Exchange Your Briefs

Your pre-mediation briefs, that is.

It is generally agreed among lawyers that some amount of information must be possessed by both disputing parties to a mediation, if the mediation is to result in settlement. (Of course, theories on how much information is necessary, i.e. how much discovery, if any, differ with types of case and frequently from attorney to attorney.) I’ll write more about that in future memos.

Continue reading »

Business Memo: Defending Against Allegations of Unsuitability — Part II: The Period of Limitations

The most frequent allegation brought against broker-dealers and RRs is that of “unsuitability” of recommendations. We discussed avoiding unsuitable recommendations in our July 2003, February 2004 and September 2004 issues. We discussed in our last issue, July 2007, the defenses of ratification, waiver, estoppel and laches. In this issue we will discuss the statute of limitations, or more precisely, the period of limitations.

As now implemented, the cause of action for “unsuitability” in arbitration has become a sort of “malpractice” action against broker-dealers and registered representatives, similar to negligence and recklessness malpractice actions against lawyers and doctors. That development arose out of the recent movement of disputes out of courts and into arbitration over the past, say, thirty years. The roots of the unsuitability” action, even when resolved in arbitration, are actually in the court action of securities fraud. The action was created in state and federal statutes and rules (e.g., Rule 10b-5) and cases beginning early in the last century. And the roots of its period of limitations, not surprisingly, are in that same action of securities fraud.

Continue reading »

Amendments to Rules 144 and 145– A Source of Additional Revenues?

Rules 144 and 145, since 1990 providing a method for sales of restricted and control securities, were amended by the Securities and Exchange Commission (“SEC”) effective February 15, 2008.

Reasons for Expanding Rule 144 Business.

As discussed below, the amendments to Rules 144 and 145, on balance, significantly reduce requirements for sellers and broker-dealers in processing sales of “control” and “restricted” securities in Rule 144 transactions. As amended, the Rule 144 restrictions no longer apply to the sale of debt securities. Prior to amendment, the primary task for the broker-dealer was preparation (for the customer) of Form 144 both in transactions for affiliates and for non-affiliates. After amendment, the requirement to file Form 144 for non-affiliates has been eliminated. Also, prior to amendment, the broker-dealer had to assure that sales, even by non-affiliates, met the limitations (discussed below) on volume of securities sold and manner of sale. As amended, however, those limitations no longer apply to non-affiliate sales. The amendments should make the process of sale of control and restricted securities easier and less fraught with danger for the small broker-dealer processing the transaction.

Continue reading »

Holy Moses, Batman! They’ve Stolen Our Private Placement Exemptions!

The Basic Requirements: Early History

Any sale of a security to a Missouri resident must either be registered with the U.S. Securities and Exchange Commission (“SEC”) and the Missouri Securities Commission, or have at least one specific provable exemption from each of those two requirements.

In 1953, the U.S. Supreme Court ruled that the “private offering” exemption of §4(2) of the Securities Act of 1933 (the “1933 Act”) required that the issuer prove that all “offerees” (not only purchasers) had sufficient investment sophistication and financial well-being (hereinafter “investment suitability”) to establish that they did not “need the protection of registration” under the 1933 Act. SEC v. Ralston Purina, 346 U.S. 119 (1953) But because of the illusory definition of “offerees” as including possibly every person who learned of an offering (not just those receiving an “offer” in the contract sense), the availability and thus the usefulness of the private offering exemption of Section 4(2), was thereafter seriously curtailed.

Continue reading »

Early Stage Financing: Offerings Exempt From Registration Requirements

I. The Requirement for Registration or Exemption

Every offer and sale of a “security” must be registered or the issuing company must bear the burden of proving an exemption from the registration requirement is available under the federal Securities Act of 1933, §5, 15 U.S.C. §77(e), and under the Missouri Securities Act, Mo. Rev. State. §409.3-301. Prima facie case for plaintiff: that he was sold a security in a transaction which was not registered.

II. What is a Security?

A. STATUTORY DEFINITION – §2(1) of the Securities Act of 1933 defines a “security” as: Any note, stock, treasurer stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, . . .investment contract, …fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege or any security, …or, in general, any interest or instrument, commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. Missouri definition virtually identical. Mo. Rev. Stat. §409.1-102(28).

Continue reading »

Business Memo: Defending Against Allegations of Unsuitability – Part I

As pointed out in our July, 2003 issue, far and away the most frequent allegation brought against broker-dealers and RRs is alleged “unsuitability” of recommendations by RRs. As also pointed out in that issue, a claimant alleging unsuitability must show that the securities or investment program recommended were (1) unsuitable to the investor’s circumstances; and (2) that the broker-dealer and RR held sufficient “control” over the investor.

In that issue, we discussed what aspects of the RR’s recommendations could be unsuitable. In the next two issues, i.e., February, 2004 and September, 2004, we discussed what constituted “control” and what constituted a “recommendation.” In this issue we will discuss briefly the defenses available to a broker-dealer to a claim of unsuitability.

Continue reading »