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March 2013

March 2013
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor
In this issue...

Access to Capital: An Entrepreneur’s Guide to Incubators

By Theresa M. Mehringer, Burns, Figa & Will, P.C. and Kyle Newman, Freelance Journalist ©2013

Despite the worst economic downturn since The Great Depression, the state of Colorado—buoyed by local policymakers determined to spur economic growth through small business—is at the forefront of the quest to make capital more accessible to entrepreneurs.

Governor John Hickenlooper, speaking at an event sponsored by the Colorado Springs Business Alliance in January, asserted that he wants the state to be “relentlessly pro-business” in addition to ”[cutting] red tape and [increasing] access to capital.”

Hickenlooper also recently spoke at the Venture Capital in the Rockies Winter Conference in early March—yet another indication that the state is pushing, from the very top of the ranks, to be more entrepreneur-friendly.

Like Hickenlooper, who made his mark as a savvy businessman long before he stepped into the political arena, many Colorado entrepreneurs believe they have what it takes to get a startup company off the ground: a solid concept, a well thought-out business plan, and their own hard work and determination to see their vision through from inception to success.

But as was the case with Hickenlooper, who in the late 1980s struggled to find financing to construct his now-famous Wynkoop Brewing Company in Denver’s LoDo neighborhood, there is one key component entrepreneurs often lack to set the wheels in motion: access to capital.

In what is known as the access to capital dilemma, many startups find themselves smack dab in the middle of the “Death Valley Curve”—which, in layman’s terms, is defined by Investopedia as “the period of time from when a startup firm receives an initial capital contribution to when it begins generating revenues.”

Fortunately, there is an array of resources available for Colorado entrepreneurs seeking to get in front of potential investors.

For entrepreneurs who are unable to identify financial advisors or mentors, or for those who have absolutely no idea where to begin their search for funding, an appropriate starting point is to engage with a local incubator. There are nearly a dozen incubators based in Colorado, with each one bringing something different to the table depending on the kind of business the entrepreneur is starting.

Some incubators, such as The Business Incubator Center in Grand Junction, operate as a mixed-use facility where startups can rent office space, obtain guidance from business professionals, be around like-minded entrepreneurs and, of course, get in front of interested investors.

“We work with universities, but we really focus on every kind of business we can—mining companies, oil companies, office, energy, you name it,” says Jon Maraschin, Executive Director of The Business Incubator Center.

In order to be accepted into a mixed-use incubator like Maraschin’s, entrepreneurs need to have already laid the groundwork for their startup.

“You need to give us a statement of business concept, which is actually a pre-business plan,” Maraschin says. “You’ve got to be able to really communicate who you are, what you’re selling, what you’re doing, how you’re going to make money and your business model in very general terms.”

Once a company has been accepted into the incubator, it becomes part of a business network that eventually opens the door to funding. This funding could come through a variety of means, including loans from the incubator, venture capital funding or sweat equity.

And even if entrepreneurs have to resort to giving up partial ownership of their company, incubators such as The Business Incubator Center often give companies a chance to buy it back.

“The last thing in the world I would recommend to somebody who’s got a great company is to give ownership away,” Maraschin says, “so we typically push them to the loan side. If we do take equity, we do give them the option to purchase it back at a profit to the business within five years.” Another benefit of mixed-use incubators is the culture amongst its members—a culture that, in the end, often leads to a big payoff for entrepreneurs who are willing to invest the time and effort in building their startup from within the walls of the incubator.

For example, at Innovation Pavilion, a mixed-use incubator in the Denver Tech Center, entrepreneurs benefit from “productive collisions” that put them in contact with those most knowledgeable about the hunt for capital.

“You don’t really know who you’re going to meet, or what’s going to come from [your time in the incubator],” explains Josh Wrede, Investor Relations at Innovation Pavilion. “We just want to provide that ecosystem for entrepreneurs where you’re working alongside other entrepreneurs, convening and making great connections.”

In the case of Innovation Pavilion, entrepreneurs accepted into the program will find that the incubator removes much of the guesswork involved in the search for capital.

“Once a company comes in, we want them to get funded, and it happens very quickly, within four to six weeks,” Wrede says. “We take out of the equation all the due-diligence, all the legal structuring of deals, all of that so the [potential] investor doesn’t have to worry about it. Then we present the deal to the investor.”

There are also options for entrepreneurs who are gun-shy about having to physically move into an incubator. Virtual incubators, such as the Roaring Fork Business Center, provide much of the same support as brick-and-mortar incubators without the commitment of becoming an actual tenant.

Roaring Fork, which services entrepreneurs from Parachute to Aspen in the Colorado River valleys, is one of several virtual incubators in the state that work to get startups access to long-term capital.

“We recommend that our start-ups do a cash flow projection and/or a written business plan and that they [get capital] for the amount they’re going to need over a long period of time,” says Randi Lowenthal, founder and President of Roaring Fork, “because it’s difficult to keep going back to funders for small amounts of money.”

In addition to physical mixed-use incubators and virtual incubators, entrepreneurs with technology or research-driven startups should consider the services of high-tech incubators such as Innovation Center of the Rockies and Fort Collins-based Rocky Mountain Innosphere.

“We engage with university researchers [across Colorado] to explore the commercial potential of their research,” says Tim Bour, Executive Director of Innovation Center of the Rockies. “Also, if things are favorable, we can also facilitate the formation of new companies.”

Alternative resources include government agencies such as the Denver Office of Economic Development (OED), the Colorado Office of Economic Development and International Trade (OEDIT) as well as the Pueblo Economic Development Corporation.

Through the OED, which services companies based in the City and County of Denver, companies can receive loans, network with investors, and identify and access customers.

“We have about a $40 million loan portfolio for small businesses, and we loan about four to five million dollars annually,” says Paul Washington, Executive Director of OED. “We look to loan money to businesses that are going into areas that we are looking to redevelop or to catalyze. We are also looking for companies that are going to provide good, paying jobs for Denver citizens. And then finally we look to industries that are poised for growth in neighborhoods that need those types of jobs.”

Washington’s office is also working on developing a $20 million, privately-funded small business loan program as well as a privately funded angel capital fund.

“We are going to explore the development of a privately-funded angel capital fund and resource to help businesses navigate the Death Valley,” Washington says. “Typically, that’s financed by angel capitalists, but angel investors are hard to identify so we want to try to convene the angel capital community with some type of institutional fund or product so that it’s easy for businesses to access that type of capital.”

Additionally, the OEDIT will manage The Advanced Industries Accelerator Act, which is currently moving through the Colorado legislature as House Bill 1001—yet another indication of the state’s bipartisan effort to assist an entrepreneur in the quest for funding.

According to Governor Hickenlooper’s website, the economic development legislation will be aimed at seven advanced industries in the state and “will create new highly-skilled jobs, increase exports, drive innovation and capital investment, create stronger partnerships between educational institutions and industry, accelerate technology commercialization and promote Colorado’s research and development activities.”

Clearly, the journey to accessing capital is not a short or easy one for any entrepreneur. But by utilizing the wide range of startup resources available in the state of Colorado—from incubators to government economic offices to angel investor networks to venture capital groups—entrepreneurs can put themselves in a better position to raise funding and ultimately succeed in the marketplace.

View the complete list of Colorado incubators and other resources.

Exiting U.S. Distribution Agreements:
More Difficult Than You May Think

By Steve Suneson, Esq., Kavinoky Cook LLP

Foreign companies often enter into agreements with US distributors or dealers to better penetrate the US market and facilitate sales to US customers. Typically, such agreements are in writing and will have standard terms such as term, termination and the grounds for termination of the agreement. Foreign companies (and usually out-of-state companies) often assume that nothing—other than the terms of the distribution agreement”governs the severing or altering of the relationship with the distributor. Unfortunately, many state laws severely restrict termination of distribution agreements, and may require the manufacturer to repurchase unsold inventory maintained by the distributor or dealer.

These types of laws which exist in many states generally fall within two categories: (1) industry-specific laws and (2) franchise laws.

The first category refers to the myriad of statutes and regulations that regulate distribution relationships in certain industries and protect distributors. Such industries include, but are not limited to: agricultural equipment; machinery; industrial, forestry, construction and lawn and garden equipment. Many of these statutes provide that manufacturers cannot terminate, fail to renew or substantially alter the competitive circumstances of a distribution agreement without good cause and prior written notice. “Good cause” usually does not mean a change in the manufacturer’s business strategy, such as a desire to replace a distributor or withdraw from the market, or even the distributor’s failure to sufficiently penetrate the market without prior written notice of such expectations which must be reasonable. Instead, good cause usually refers to detrimental conduct, the failure to operate the business, a material performance failure, or other misconduct by the distributor. If good cause exists, the manufacturer is also mandated to provide prior written notice. The time period to provide the required notice varies from state to state. In Louisiana, for example, notice must be given 90 days prior to the termination date with a built-in 60-day period in which the distributor may cure the deficiency and avoid the termination. See LSA-R.S. 51:482 (2012). In Ohio, on the other hand, a distributor is not afforded a cure period (although the manufacturer is required to consider corrective actions taken by the distributor) and the manufacturer must provide 180 days’ notice. See Ohio R.C. § 1353.06 (2012).

The above examples illustrate the potential problems when a manufacturer desires to terminate a distribution agreement and the specific industry is subject to statutes and regulations that protect local dealers and distributors. The terms of the agreement may permit termination because the manufacturer desires to withdraw from the relevant market. Nevertheless, in many states where the specific industry is regulated, the manufacturer will be unable to terminate the agreement without statutory good cause and prior written notice.

Many statutes also require that manufacturers repurchase the inventory and other related items from the distributor within a certain period following the termination of the distribution agreement and at certain specified prices.

Many states (and federal law) also have franchise laws that could apply to distribution agreements. Manufacturers often assume that these complex and onerous franchise laws do not apply to distribution relationships because neither party intended their arrangement to constitute a franchise. However, franchise laws apply if the particular arrangement fits within the applicable statutory definitions. There is no uniform definition of a franchise and it varies from state to state.

Generally, however, a franchise exists when: (1) franchisor grants franchisee the right to use its trademark or service mark in connection with the sale or distribution of related goods or services; (2) the parties have either a “community of interest” (some expectation of mutual economic benefit) or some related marketing plan or system prescribed and controlled by franchisor and (3) the franchisee pays an initial or recurring fee (i.e., a franchise fee). The definition of a franchise under federal law is conceptually similar but not identical. The rule promulgated by the Federal Trade Commission (the “FTC Rule”) generally provides that the franchisor must: (1) promise to provide a trademark or other commercial symbol; (2) promise to exercise significant control or provide significant assistance in the operation of the business; and (3) require a minimum payment of at least $500 during the first six months of operations. 16 C.F.R. Part 436. Each jurisdiction generally also has a variety of definitional exclusions and exemptions.

Because distribution agreements generally do not require payment of franchise fees it would seem that franchise laws should not apply. However, sometimes fees and other charges in a distribution agreement, other than amounts paid for a reasonable quantity of goods sold at a bona fide wholesale price, can be deemed payment of indirect franchise fees. These include license fees, marketing contributions, or charges for training personnel or providing manuals. Moreover, some states do not even require payment of franchise fees for a commercial arrangement to constitute a franchise. If a state’s franchise law applies to a distribution agreement, it will, among other things, restrict the manufacturer’s right to terminate, non-renew, or substantially change the competitive circumstances of the relationship with the distributor. As with the industry-specific laws, this means that the manufacturer may need good cause, prior written notice and sometimes allow a cure period before attempting to terminate the agreement. If a cure period is mandated, the distributor may avoid the termination if it cures the deficiency. Because there generally is no private cause of action under the FTC Rule, noncompliance with the rule usually will not affect the terms of the distribution agreement. However, an action brought by the Federal Trade Commission for noncompliance may result in injunctions, civil penalties, fines or consumer redress.

To protect itself, a manufacturer should always consider these laws which may apply to, or supersede, the terms of its US distribution agreement. This will avoid a rude awakening if there later is a change in business strategy that requires the manufacturer to exit the distribution agreement.

Two Important Cases—Colorado Trust Fund Statute and Forum Selection Clauses for Securities Claims

By Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C.

On Feb. 4, the Colorado Supreme Court issued two important decisions for business lawyers. One addresses the impact of the Colorado Trust Fund Statute on the personal liability of an LLC manager, and the other upholds a forum selection clause requiring litigation to be brought in Texas even though the claims are under the Colorado Securities Act.

Yale v. AC Excavating, Inc., No. 10SC709 2013 CO 10 (Feb. 4, 2013)

In AC Excavating, Inc., the Court of Appeals held Donald Yale, a 44 percent owner of a limited liability company (“Antelope”), liable to an excavation contractor that had provided services to a real estate development. In doing so, the Court of Appeals applied the Colorado Trust Fund Statute (“CTFS,” found at C.R.S. § 38-22-127), which provides that any funds disbursed to a contractor must be held in trust for payment to subcontractors, laborers, or material suppliers who could place a lien on the property. Antelope had entered into an excavating contract with AC Excavating and paid AC Excavating $150,000 of the $190,680.30 AC Excavating had charged for its services. AC Excavating then performed additional work for which it charged (but did not receive) $7,707.50.

Mr. Yale was not manager of the LLC at that time, but soon replaced the former sole manager. Upon becoming manger, Mr. Yale realized there was $100,000 in Antelope’s bank account yet Antelope owed unpaid invoices exceeding $250,000, including the amount due to AC Excavating. In an effort to save the project, Mr. Yale loaned Antelope $157,500 of his own money and, as manager, applied the proceeds to general business expenses and some of the outstanding subcontractor invoices. While some of the money went to AC Excavating, the company was not paid in full. The Supreme Court noted that “the record establishes that Yale’s general practice over the years in lending money to the LLC was to finance general operations, not specific construction work,” and Mr. Yale’s advancement of the $157,500 was consistent with his prior practice of making loans to Antelope for its general business purposes.

AC Excavating sued Mr. Yale for violation of the CTFS, alleging that Mr. Yale had diverted funds from Antelope to repay himself (on Antelope’s loan obligations to him) and to make other non-CTFS expenditures. The trial court dismissed the action after finding the CFTS inapplicable because the funds were not disbursed on a construction project, but rather were a “survival loan” to capitalize the company. A panel of the Colorado Court of Appeals reversed, holding that Mr. Yale’s loans to the LLC were disbursed on a construction project and should have been held in trust pursuant to the CTFS.

The Colorado Supreme Court reversed the Court of Appeals, holding the funds Mr. Yale had deposited into the LLC’s bank account “were not trust funds under section 38-22-127(1) because, under the circumstances of this case, Yale’s voluntary injection of his own money as a “survival loan” to the LLC did not constitute “funds disbursed to any contractor … on [a] construction project.” The Supreme Court noted that a holding to the contrary would discourage developers from trying to save their companies with financial injections. Notably, the Supreme Court carefully limited its holding to “the circumstances of this case.” Attorneys should be aware there may be other cases where the managers of an LLC may find themselves liable under the CTFS for failing to hold money in trust for disbursement with respect to construction projects.

Cagle v. Mathers Family Trust, No. 11SC496 2013 CO 7 (Feb. 4, 2013)

This is another in the long line of cases involving joint venture interests in oil and gas drilling programs issued by HEI Resources, Inc. (some of which I have discussed previously in September 2012 and May 2012.) HEI was incorporated in Texas and is based in Colorado. In this case, plaintiffs from California, Illinois, and Vermont had entered into joint venture agreements with HEI for ventures in Alabama, Mississippi, and Texas. The agreements provided that any disputes would be resolved in Dallas, Texas, in accordance with Texas law.

Apparently concerned about whether Texas law would treat the joint venture interests as securities, the plaintiffs brought legal action against HEI and a number of other defendants in Colorado under the Colorado Securities Act, §§ 11-51-101, et seq., as well as the securities acts of California, Illinois and Vermont. (The complaint included other common law claims, as well, such as fraud, misrepresentation, concealment, negligence, and breach of fiduciary duties by the defendants.) HEI and the other defendants filed motions to dismiss on the grounds the plaintiffs’ lawsuit breached the forum selection clause in the joint venture agreement; the trial court granted the defendants’ motions. On appeal, a panel of the Colorado Court of Appeals reversed, holding the “anti-waiver” provision of the Colorado Securities Act (found at § 11-51-604(11)) voids any private agreements that waive compliance with the Colorado Securities Act.

In a long discussion, the Colorado Supreme Court (without dissent) found the anti-waiver provision was not applicable in this case and that the Colorado Securities Act does not require claims under the Colorado Securities Act be brought in Colorado. Instead, the Court held the anti-waiver clause applied to substantive rights under the Colorado Securities Act and not to procedural rights. In analyzing the validity of forum selection clauses, the Colorado Supreme Court discussed Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 482-483 (1989) in which the U.S. Supreme Court reasoned arbitration clauses were “in effect, a specialized kind of forum-selection clause” and held they should not be prohibited under the similar provision in Section 14 of the Securities Act of 1933 because “arbitration clauses did not undermine a substantive right under the Securities Act and parties did not waive compliance with the Securities Act by agreeing to an arbitration clause.”

Specifically addressing the validity of the forum selection clause, the Colorado Supreme Court discussed 14D Wright & Miller, Federal Practice & Procedure§ 3803.1 (citing the “substantial number” of cases holding that a forum selection clause is presumed valid) and Restatement (Second) of Conflict of Laws § 80. The Colorado Supreme Court also cited M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972) in which the U.S. Supreme Court stated forum selection “clauses are prima facie valid and should be enforced unless enforcement is shown by the resisting party to be ‘unreasonable’’ under the circumstances.” The U.S. Supreme Court’s conclusion was consistent with what the Colorado Supreme Court described as the prevailing trend in the law to honor the parties’ choice of forum unless that choice was unfair or unreasonable. The Colorado Supreme Court built on the Bremen Court’s conclusion that a forum selection clause is presumptively valid unless the party seeking to void the clause shows:

  1. The clause was unreasonable and unjust;
  2. The clause was the product of fraud or overreaching; or
  3. Enforcement of the clause would contravene a strong public policy of the forum in which suit is brought.

The Colorado Supreme Court accordingly reversed the Court of Appeals and ordered the Court of Appeals to return the case to the district court to reinstate its order granting the motion to dismiss.

Business Law Section Activities
Financial Institutions Subsection

CLE Luncheon Series: Business Bankruptcy from the Perspective of Debtor’s Counsel—Wednesday, April 17

Co-sponsored by the CBA Business Section and Financial Institutions Subsection

Attendees will learn what lenders need to know about business bankruptcy. Jeffrey Brinen of Kutner Miller Brinen, P.C., a bankruptcy practitioner with a wealth of experience, will provide you with the perspective of debtor’s counsel on pertinent areas of the law at this lunch and learn program.

The live program is at the CBA-CLE Classroom, 1900 Grant Street, Suite 300, Denver, or attend via webcast. The one-hour program begins at noon. One general CLE credit is available.

Click here for details and to register, or call 303-860-0608 (toll free 888-860-2531).

M&A and Securities Subsections

CLE Lunch Program: Current Issues in Insider Trading—Thursday, April 4

Co-sponsored by the M&A Subsection and the Securities Subsection of the CBA Business Law Section

This program will provide up-to-date trends and priorities in Department of Justice insider trading enforcement, updates regarding recent insider trading cases in the Southern District of New York and Colorado, a discussion of company and officer issues involving the selection of counsel and defense coordination, as well as an update on internal investigations. Presented by Gregory E. Goldberg, Holland & Hart LLP, and Robert N. Miller, Perkins Coie LLP.

The program is at the Warwick Hotel, 1776 Grant St, Denver, from noon to 1:15 p.m. Submitted for one general CLE credit.

RSVP via email at or call 303-860-1115 x727.

CBA-CLE Information

Unless otherwise noted, all programs are at the CBA-CLE offices, 1900 Grant St., Ste. 300, Denver

Starting a Colorado Business—Thursday, April 11

Whether you are newly-licensed or an experienced attorney who is expanding your practice to include the corporate area, or simply need a refresher, this program will provide practical advice on starting a Colorado business. This program is packed with seven credits of valuable information. The program materials will become a resource that you will reach for time and again when working with start-up businesses.

The program will be at the CBA-CLE Classroom, or via webcast, from 8:55 a.m. to 4:30 p.m. Seven general CLE credits including one ethics are available.

Click here to see the detailed agenda, the faculty list, and to register, or call 303-860-0608 (toll free 888-860-2531).

A Primer on Advising Nonprofit Organizations—Thursday, May 2

Co-sponsored by the Business and Taxation Law Sections of the CBA, the Colorado Nonprofit Association, and the Colorado Society of Association Executives

The 2013 Primer will introduce practitioners to general aspects of the laws governing the formation and operation of nonprofit organizations, obtaining and retaining tax-exempt status, the distinctions between public charities and private foundations, and operational issues for tax-exempt organizations.

The program will be at the CBA-CLE Classroom, or via webcast, from 8:55 a.m. to 12:45 p.m. Four general CLE credits are available.

Click here to see the detailed agenda, faculty list, and to register, or call 303-860-0608 (toll free 888-860-2531).

22nd Annual Institute on Advising Nonprofit Organizations—Friday, May 3

Co-sponsored by the Business and Taxation Law Sections of the CBA, the Colorado Nonprofit Association, and the Colorado Society of Association Executives

The 22nd Annual Institute will provide a comprehensive analysis of legal issues of concern to nonprofit organizations. The program will benefit attorneys and key representatives of nonprofit organizations, including board members, executive directors, chief financial officers, accountants, and representatives of governmental agencies.

The program will be held at the CBA-CLE Classroom, or via webcast, from 8:55 a.m. to 5 p.m. Eight general CLE credits are available.

Click here to see the detailed agenda, faculty list, and to register, or call 303-860-0608 (toll free 888-860-2531).

45th Annual Rocky Mountain Securities Conference—Live Only—Friday, May 10

Co-sponsored by the Securities and Exchange Commission and the Business Law Section of the Colorado Bar Association

The 45th Annual Rocky Mountain Securities Conference provides a line-up of presenters who are well-known throughout the securities profession and whose observations have earned the respect and attention of the investment community. Topics include enforcement; the perspective on defense; regulated entities; current issues in corporation governance; accounting and auditing standards and regulations; current issues in corporation finance; emerging growth company financing, Reg D, general solicitation, and crowd funding; and ethics.

The live program will be at the Denver Marriott City Center, 1701 California St, Denver, from 7:50 a.m. to 5:05 p.m. Ten general CLE credits including one ethics credit are available.

Click here to see the detailed agenda, faculty, and to register, or call 303-860-0608 (toll free 888-860-2531).

CBA-CLE Featured Publication

American Bar Association Business Law Book

Practitioner’s Guide to CO Business Organizations, Second Edition
Managing Editors: Lee Reichert and Allen E.F. Rozansky

This guide begins with basic topics that Colorado practitioners should consider in the choice-of-entity process. The book then presents detailed discussions of the numerous types of Colorado entities. Finally, chapters from authors from a wide range of practice areas and expertise address the various aspects of their practice areas that relate to Colorado business organizations.

For more information or to order books, call 303.860.0608 or 800.860.2531 or 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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