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April 2013

April 2013
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor
In this issue...

Funding a Small Business with Retirement Funds? Think Twice

By Alex Wenzel, Burns, Figa & Will, P.C.

If you have listened to AM radio in the last three years, you may have heard advertisements for arrangements by which small business owners could use tax-deferred funds to inject some capital into their small business from their retirement funds. The IRS refers to these arrangements as Rollovers as Business Start-Ups (or “ROBS”), although the scheme is not limited to start-ups.

Structure of ROBS

One may be able to understand how the IRS feels about these arrangements by the acronym it has chosen for them. The ROBS arrangement is a fairly simple tax work-around that takes funds from an existing tax-deferred retirement account, rolls-over those funds to a new tax-deferred retirement account (the “ROBS Plan”) that has but one client (the business owner) and one investment (the small company). The ROBS Plan would acquire shares of stock in the company as an “investment”by making a nice tax-deferred injection of capital into the company. While this arrangement may be acceptable to the IRS in a narrow set of circumstances, there are some dangers to this type of funding.

Items of Concern

The IRS is most concerned with two aspects of these arrangements: (i) violations of nondiscrimination requirements of retirement plans; and (ii) faulty valuations of the small business stock traded for the capital injection.

Non-discrimination Issue: The Internal Revenue Code prohibits contributions or benefits provided under a qualified retirement plan from discriminating in favor of highly compensated employees—those who either own at least 5 percent of the company, or receive more than $80,000 in salary. The Treasury Regulations also provide that the benefits, rights, and features of a qualified retirement plan (including, in this case, the ROBS Plan) cannot be discriminatory in effect. That is, employees must be able to invest in the ROBS Plan, not just the business owner.

As is often the case, employees may not even know of the existence of a ROBS Plan, much less be able to participate in it. If either the business owner or the ROBS Plan holds more than 5 percent of the company’s equity and employees are not permitted to participate in the ROBS Plan, the ROBS Plan is in danger of violating the non-discrimination requirement.

Valuation Issue: The IRS is also concerned that the valuation of the stock issued to the ROBS Plan may be inflated. The business owner may not want to lose control of the business ownership to the ROBS Plan and may seek to sell a small percentage of the shares to the ROBS Plan at a high price not supportable by the company’s operations or financial condition. Any such transaction should be supported by a well-documented appraisal. Additionally, if the company’s only asset is the capital injected, the investment may be characterized as a “prohibited transaction” which may result in a 15 percent tax on the transaction, or even 100 percent tax if not promptly corrected.

Dangers abound with ROBS Plans, and it may be wise to pursue other avenues of funding a small business before using those hard-earned retirement funds.

SEC Issues Report on Social Media Disclosures

By Trevor A. Crow, Dufford & Brown P.C.

The Securities and Exchange Commission (SEC) recently issued a report of its investigation relating to a Facebook post by Reed Hastings, the CEO of Netflix, which stated Netflix’s monthly online viewing had exceeded 1 billion hours. The SEC’s investigation was to determine whether Hastings or the Company violated Regulation FD under the Securities Exchange Act through the posting of this information.

In general, Regulation FD prohibits public companies, or persons acting on their behalf, from selectively disclosing material, nonpublic information to certain securities professionals, or shareholders, where it is reasonably foreseeable that they will trade on that information, before it is made available to the general public. Here, the SEC decided not to initiate an enforcement action against Netflix or Hastings. However, the report also offers guidance to public companies on the application of Regulation FD to disclosures made through social media.

The report explains that, under certain circumstances, public companies may disseminate material, nonpublic information through social media without violating Regulation FD if investors previously have been notified that specific social media will be used to spread such information. The report states that the framework set forth in the SEC’s August 2008 Guidance on the Use of Company Websites should be used when analyzing communications made through social media. Specifically, “the central focus of this inquiry is whether the company has made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company or what they need to do to be in a position to receive this information.”

The report also explained that without prior notice to investors, it is unlikely that a corporate officer’s personal social media site used to disseminate corporate information would qualify as a method “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” as required under Regulation FD. In the Netflix inquiry, Hastings’ Facebook page had never been previously used to announce company metrics, yet the SEC still chose not to initiate an enforcement action against Netflix or Hastings.

Bottom Line: Public companies should have social media policies in place for their directors and executive officers to educate them about Regulation FD. Before a representative of the company posts any material and nonpublic information on a social media platform, the company should take steps to ensure that investors, the market, and the media are aware of this channel of distribution.

Business Law Section Activities
Financial Institutions Subsection

UCC Article 9: The New Amendments—Wednesday, May 15

Learn about the new amendments to UCC Article 9 concerning security interests. Get up-to-speed on HB12-1262, by which the Colorado Legislature adopted substantially all of the 2010 amendments recommended by the National Conference of Commissioners on Uniform State Laws. Be ready for these changes, which begin July 1. Presented by Chuck Calvin of Faegre Baker Daniels.

The live program is in the CBA-CLE Large Classroom, 1900 Grant Street, Suite 300, Denver, CO, and also available via webcast. Same-day registration will begin at 11:30, followed by the program from noon to 1 p.m. One general CLE credit is available.

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

M&A Subsection

So You Sold to a Private Equity Group – Will Life Ever Be the Same?—Tuesday, May 7

In 2011, Vector Capitol bought out Sentinel Technologies, a Dallas-based manufacturer of cash management solutions. Jeff Galgano, Sentinel CFO and member of the buyout management team, will present on the major transaction and life after the deal. Galgano’s previous experience as an investment banker, CFO, and member of the management team that bought out Sentinal from a public company in 2006, allows him various perspectives of the transaction. Attend this program to learn Galgano’s unique insights of the 2011 buyout.

The live program will be at the CBA-CLE Classroom, 1900 Grant Street, Suite 300, Denver, or via webcast from 8 to 9 a.m. One general CLE credit is available.

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

CBA-CLE Information

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

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 Publications

American Bar Association Business Law Books

CBA-CLE carries a complete list of ABA books focused on business law. Titles include:

  • Advising the Small Business: Forms and Advice for the Legal Practitioner
  • Corporate Director’s Guidebook
  • Directors and Officers Liability Insurance Deskbook
  • Financial Statement Analysis and Business Valuation for the Practical Lawyer
  • Fundamentals of Corporate Governance—A Guide for Directors and Corporate Counsel
  • Intellectual Property Deskbook for the Business Lawyer—A Transactions-based Guide to Intellectual Property
  • The Guide to Business Divorce
  • The Keys to Banking Law—A Handbook for Lawyers
  • The Role of Independent Directors in Corporate Governance

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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