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May 2012

May 2012
From the Colorado Bar Association Business Law Section
Ed Naylor, Editor
To view this newsletter as a pdf, click here.
In this issue...
Crowdfunding Under the JOBS Act
By Jackie Benson, Moye White LLP

The April Edition of the Business Law Section Newsletter summarized Titles I, II, and IV–VI of the JOBS Act. This month, we take a look at the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012 (Act) in Title III of the JOBS Act. Aside from having one of the most tortured acronyms in SEC history, the Act has elicited both strong support from the entrepreneurs and significant concern from regulators.

For many years, the arts community has sought donations for particular projects or endeavors through online crowdfunding solicitations. These solicitations generally do not raise the specter of state or federal securities laws since no interest in the project or future returns are promised. In contrast, any sale of securities must either be registered or exempt from registration. The Act provides for a new exemption from registration for offerings by domestic non-reporting companies (but not investment companies) for offerings up to $1,000,000 during a twelve month period. The offerings must be conducted either by a registered broker or through a special online portal.

The Act is not effective until the issuance of final SEC regulations. The Act contemplates that the SEC will issue regulations within 270 days of enactment of the Act; however, based on the number of other outstanding rule releases and the complexity of the issues raised by the Act, it is likely that the final regulations will be delayed.

Both accredited and unaccredited investors can participate in Crowdfunding offerings with total investments up to the following limits within a twelve month period:

  • Investors with a net worth or annual income less than $100,000 can invest up to the greater of $2000 or 5% of the investor’s annual income or net worth.
  • Investors with a net worth or annual income in excess of $100,000 can invest up to 10% of the investor’s annual net income or net worth up to $100,000.

Crowdfunding securities will be subject to a one year holding period, with exceptions for sales to the issuer, accredited investors, family members or pursuant to a registered offering. Advertising will generally not be permitted, except for notices directing potential investors to the applicable funding portal or broker.

Disclosure Requirements

The Act contemplates some basic disclosure requirements, including:

  • Basic information about the business: name, legal status, address, website, description of the business and business plan;
  • Names of the officers, directors and holders of 20% or more of the outstanding shares and a description of the issuer’s capital structure;
  • The financial condition of the company including scaled disclosure depending on the size of the raise. For offerings of $100,000 or less, the issuer must provide tax returns for the most recent year and financial statements certified by the principal executive officer. For offerings over $100,000 up to $500,000, the issuer must provide reviewed financial statements. For offerings over $500,000, the issuer must provide audited financials; and
  • Basic information about the offering itself: the purpose and use of proceeds of the offering, target and minimum offering amounts, progress of the offering, the price of the shares, description of the securities being offered, and risks of the offering and the shares.

It is likely that the forthcoming regulations will expand upon these requirements to ensure that all prospective investors have sufficient information to make a fully informed investment decision.


The online portal concept is new and not clearly defined by the statute. The Act contemplates that the broker or portal (called “Intermediaries” in the statute) will be responsible for the following:

  • Ensuring that each investor has reviewed investor education materials, understands the risks of the offering, understands the risks of startups and emerging businesses and understands the illiquidity of their investments;
  • Providing the disclosures required by regulation;
  • Running a background check on officers, directors and 20% shareholders (the regulations will likely include “Bad Boy” provisions similar to those in Regulation A that prevent certain people with a history of fraud or other bad acts from utilizing the Crowdfunding exemption);
  • Providing offering materials to the SEC and investors at least 21 days before closing
  • Ensuring that offering proceeds are held in escrow until the minimum offering amount is met
  • Providing for required rescission rights
  • Protecting investor confidentiality
  • Ensuring that no compensation is paid to promoters, finders or lead generators
  • Prohibiting its officers, directors or partners from having a financial interest in the issuer companies

Interestingly, the statute gives the Intermediaries some responsibility for providing disclosures to investors, rather than just obligating the issuers. Further SEC regulations will likely enhance and expand these obligations, including defining registration requirements for portals, disclosure obligations to investors, rescission rights, background checks and other issues. The rules will also provide for an exemption from the broker-dealer registration requirements for online portals.

On May 7, 2012, the SEC issued some FAQs about Intermediaries. The FAQs confirm that funding portals are not legal until the issuance of final regulations and that the portals will be required to register with both FINRA and the SEC.

What to Expect Next

Many clients are excited about the possibility of raising money through the Crowdfunding provisions, but it is important to remind them that Crowdfunding remains illegal until the issuance of final SEC regulations. In the meantime, the SEC has begun issuing FAQs and other guidance with respect to the JOBs Act on its website.

Clients should also consider whether the costs of raising funds in small increments outweigh the benefits. It is more expensive for a company to administer 100 shareholders each owning 5 shares than 1 shareholder with 500 shares and the risks of potential litigation may be higher with unaccredited, unsophisticated investors. Clients should anticipate preparing an offering memorandum with at least the disclosures required under Rule 506 for unaccredited investors to ensure that investors have sufficient information to understand the offering.

It remains to be seen whether investors embrace the Act or still rely primarily on Regulation D with respect to private offerings. In the meantime, I anticipate a significant amount of debate regarding any rule proposals.

JOBs Act links generally

Joint Venture Interests as Securities
By Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C.

On May 10, 2012, the Colorado Court of Appeals issued its opinion reviewing a cease and desist order issued by Fred Joseph, the Colorado Securities Commissioner, pursuant to C.R.S. § 11-51-606(1.5). Joseph v. Meika Corporation, 2012 COA84 (Colo.App. 5/10/2012). At issue was whether joint venture/general partner interests are securities, and whether Colorado should adopt a federal common law presumption that such interests are not securities. The Court of Appeals agreed with Commissioner Joseph that there was ample evidence to support a decision that these interests were indeed investment contracts (securities), and also ruled it was unnecessary to adopt a presumption that general partner interests are not securities.

Commissioner Joseph issued an order to show cause involving sales of unregistered securities against Mieka Corporation and several of its principals in March 2011. Mieka Corporation formed a joint venture under Texas law to conduct oil and gas drilling operations. Mieka offered and sold joint venture interests to persons who represented that they were sophisticated persons with the ability to make their own decisions about the drilling operations. The administrative hearing panel (consisting of members of the securities board) and the Commissioner found that the respondents sold unregistered securities and were acting as unlicensed sales representatives (and in the Commissioner’s order, unlicensed broker-dealers) in violation of the Colorado Securities Act, and the Court of Appeals affirmed on all grounds, and found that the procedural errors raised in the appeal by the respondents were either not errors or were not available in an administrative proceeding.

For business lawyers, the most significant part of the case is the manner in which the Court of Appeals dealt with the presumption that interests in general partnerships are NOT securities. This presumption derives from Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981) which, as noted by the Commissioner and the Mieka panel (at ¶18), has not been expressly adopted by an appellate court in Colorado. Over the Commissioner’s objection, trial Judge Morris Hoffman did discuss and apply the Williamson case in Joseph v. HEI Resources, Inc. (Case no. 09CV7181, op dtd Jan 6, 2011).

In Williamson, the Fifth Circuit held that the presumption that a general partnership interest is not a security can be overcome, and an interest in a general partnership can be a security, if the investor can establish any one of three factors:

  1. The agreement among the parties leaves so little power in the hands of the partner that the arrangement in fact distributes power as would a limited partnership;
  2. The partner is so inexperienced and unknowledgeable in business affairs that he is incapable of exercising his partnership powers; or
  3. The partner is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager of the enterprise or otherwise exercise meaningful partnership powers.

The Court of Appeals in the Mieka case declined the opportunity to determine whether the Williamson presumption is applicable in Colorado. The Court of Appeals said, “[w]e need not address this contention because, contrary to the respondents’ contention, we conclude the Commissioner’s refusal to apply the Williamson presumption was not dispositive.” (Mieka at ¶22) The earlier Securities Board hearing panel had determined that the joint venture interests at issue were securities under an economic realities analysis (discussed in Joseph v. Viatica Mgmt, LLC, 55 P.3d 264, 266 (Colo. App. 2002) and Toothman v. Freeborn & Peters, 80 P.3d 804, 811 (Colo. Ct. App. 2003)). The key question in performing an economic realities analysis is whether the enterprise is promoted primarily as an investment or as a means whereby participants could pool their own activities, money, and the promoter’s contributions. Toothman, 80 P.3d at 811. In the former case, a security would be involved; in the latter case, arguably not.

The administrative hearing panel then “explained that its conclusion would have been the same if the [Williamson] presumption had applied.” (Mieka at ¶25) Because of the alternative theory, the Court of Appeals determined that the question whether the Williamson presumption applied in Colorado was “not ripe for judicial resolution.” (Mieka at ¶25)

It can be expected that the Commissioner will continue to oppose application of the Williamson presumption on the basis that the presumption increases the Commissioner’s burden of proof that a participation in a general partnership entity (including in some cases a joint venture) is a security. On the other hand, the Williamson presumption is a rational approach toward determining whether a transaction involves a security. The Williamson factors are also relevant to performing an economic realities analysis. Since the burden of proof should be on the Commissioner when bringing an enforcement action in a civil or administrative setting, whether or not the Williamson presumption applies does not shift the Commissioner’s ultimate burden of proof.

From the Office of the Colorado Secretary of State
Colorado Secretary of State Gessler Releases First Quarterly Economic and Business Indicators Report

The Secretary of State’s Office has launched a new service for Colorado’s businesses using business filing and related data to produce economic forecasts. Secretary Gessler’s office runs Colorado’s central business registry. That means the office sits on an ocean of business data—information about new business start-ups, trademarks, and dissolved businesses. With help from the Business Research Division at the University of Colorado, the SOS Office has analyzed this data and just published its first quarterly report to give public policy and business leaders better insight into Colorado’s economic trends.

First, the SOS Office reached out to the Business Research Division, which is part of the Leeds School of Business at The University of Colorado. It provides high quality economic and fiscal analysis, market research, and customized research projects. The Business Research Division is a trusted source of information in Colorado, so it was an obvious partner.

Second, the SOS compared business filings with other types of economic data, to see whether they could predict any economic trends. As a result, they found a correlation with employment. For example, when business filings increase, more employment usually follows.

Now, these findings will be published quarterly—at no charge. This information is one more tool business leaders can use when making important decisions, like hiring new employees.

The SOS is pleased to announce its first report indicates job growth for 2012 in Colorado.

For access to the full report, and to sign up to receive future reports by email, please visit Click here for the report itself.

Business Law Section Activities
Securities Subsection Luncheons

Executives’ Potential Misuse of Rule 10b5-1 Trading Plans—June 28th
Event Co-sponsored with the NASPP Rocky Mountain Chapter

The speakers will discuss empirical and anecdotal evidence that suggests some corporate executives avail themselves of strategic loopholes within Rule 10b5-1 trading plans. The speakers will also discuss current best practice guidance, how to develop expert witness cases and techniques to avoid revealing insider trade patterns that might help support allegations of inappropriate trading.

RSVP: Click here or call 303-860-1115 x727. Please note: To register online, you must be logged into the website.

Part 2: The JOBS Act: Private Placements and Related Issues—July 19

Please join us for Part 2 of an overview of the recently enacted JOBS Act. Part 2 will focus primarily on the provisions relating to Regulation A+, Regulation D and Crowdfunding.

RSVP: Click here or call 303-860-1115 x727. Please note: To register online, you must be logged into the website.

Financial Institutions Subsection

Monthly Luncheons—Beginning in July

The Subsection will begin hosting monthly CLE lunches on the 3rd Wednesday of the month beginning July 18. Call 303-860-0608 or 800-860-2531 for more information.

2012 Business Law Institute—October 18–19

To be held at the Four Seasons Hotel in Denver. Call 303-860-0608 or 800-860-2531 for more information.

CBA-CLE Information

Federal Contracts 2012: Acquisition, Performance and Compliance Fundamentals—Thursday, June 14

Federal contracts remain a significant source of potential revenue for Colorado businesses. Attend this practical and useful program to get an overview of federal government contract law important for any company considering or currently performing federal contract work. Submitted for six general credits. Click here for more information.

Piercing the Corporate and LLC Veil – The Law and the Proof—Wednesday, June 20

Piercing the veil of a corporation allows a court to hold equity owners liable for the obligations of the entity. Courts make clear that disregarding the corporate form should be considered a drastic remedy, and that corporate veils should be pierced only reluctantly and cautiously.

You know the basic parameters of the law, but do you know how to prove or defend an alter ego case with the necessary and relevant facts and burden of proof, from both legal and forensic accounting perspectives? Submitted for three general CLE credits. Click here for more information.

Business Valuation Fundamentals: Applications and Models, and Critical Issues and Hot Topics—Thursday, June 21

Applications and Models (morning program) includes:

  • Introduction to business valuation including the various purposes and uses of business valuation services and reporting
  • Standards and premises of value and their impact on the value conclusion
  • The three standard valuation approaches and methodologies
  • Normalizing financial statements
  • Discounts and premiums and their impact on the value conclusion

Critical Issues and Hot Topics (afternoon program) includes:

  • Evaluation of continuing attacks by the IRS on family limited partnerships
  • Buy/sell agreement war stories and how to prevent or minimize the battle
  • Uses and Abuses of the Joint Expert
  • Valuations of S corporations and other pass through entities
  • Valuation issues in family law matters
  • Key issues in valuation of intellectual property

Attend either or both programs. Each program is submitted for three general CLE credits. Click here for more information.

Bankruptcy Update 2012—Friday, June 22

The past year, bankruptcy practitioners have had to incorporate a plethora of new federal rules requirements and respond to continually changing legal interpretations set forth in recent case law. In addition, for the first time, Colorado has two Chapter 13 Trustees, each of whom have their own unique approach to Chapter 13 case administration.

Attend this year’s Bankruptcy Law Update and participate in the following discussions:

  • Learn about the unique approaches brought by each of the Chapter 13 Trustees. What are the differences that will affect your practice? Does it matter which Chapter 13 Trustee is assigned to your case?
  • Hear an update from the Clerk’s Office regarding current bankruptcy filing statistics, new pacer upgrades and other dos and don’ts that may assist you in your practice.
  • What about the courtroom? Whether it’s for a plan confirmation hearing or arguing a motion for relief from stay, find out about the relevant evidentiary issues and how to properly present your case.
  • While Chapter 11 has been traditionally used for more complex corporate reorganizations, it is possible for an individual to take advantage of the debtor-friendly rules of Chapter 11. Discover the current issues in individual Chapter 11 cases.
  • Listen in on the perspectives of judges from the U.S. Bankruptcy Court.
  • Attend the reception following the day’s events.

Submitted for seven general CLE credits. Click here for more information.

CBA-CLE Featured Publications

Practitioner’s Guide to CO Business Organizations, Second Edition (Includes CD-ROM)

Managing Editors Allen Rozansky and Lee Reichert, along with a number of leading business law attorneys in Colorado, have written a comprehensive two-volume guide that covers the legal aspects of forming start-up entities in Colorado, with references to federal law as well. It includes sample forms, tables, and appendices to augment the text; and an easy subject index and tables of authorities. The Guide is designed to provide attorneys with a complete resource for forming and advising start-up business entities during their initial period of business operations, a single reference that addresses issues typically faced by transactional business law attorneys practicing in Colorado. A new chapter on “Trade Secrets,” by Mike Drapkin and David Wilson is also included, and finally, a searchable CD-ROM containing the entire Guide.

The 2011 supplement to The Practitioner’s Guide to Colorado Business Organizations includes new chapters on:

  • Privacy,
  • Reclamation and other rights of unsecured trade creditors in bankruptcy, and;
  • Rights of non-residential real property landlords in bankruptcy.

Important case law updates include analysis of Lucht’s Concrete Plumbing v. Horner (non-compete agreements), and the corporate veil piercing cases of McCallum Family LLC v. Wagner and Sheffield Services v. Trowbridge. The effects of the FTC’s Red Flag Rules; the Tax Relief, Unemployment Insurance Authorization, and Job Creations Act; the Uniform Limited Cooperative Association Act; and the Dodd-Frank Act are also highlighted in this supplement. To order or to find out more click here.


Contributions for future newsletters are welcome –
Contact Ed Naylor at or 303-292-2900

This newsletter is for information only and does not provide legal advice.

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