Broker-Dealers Offered Opportunity to Provide Comments to FINRA Rules for Capital Formation

The Financial Industry Regulatory Authority, known as FINRA, is undergoing a review of internal operations and programs as part of a review process dubbed FINRA 360. FINRA, as an independent self-regulatory organization with the overall goal of protecting investors and creating efficiency in the markets, governs many in the financial services industry in conjunction with the securities and exchange commission. FINRA has been issuing notices and seeking comments from those in the industry, as part of FINRA 360, with the goal of identifying opportunities to further the FINRA mission.

Recently, FINRA started the review process for rules that pertain to broker-dealers and their involvement with the capital formation process, and has issued corresponding notices. One of the recent notices from FINRA includes regulatory notice 17-14, seeking comments regarding broker-dealers when involved with unregistered securities and operating funding portals. The broad spectrum of rules that fall within the purview of notice 17-14 include funding portals, crowdfunding, capital acquisition brokers, unlisted real estate investment trusts, and other administrative and operational rules for raising capital.

For those wishing to submit comments on the rules, FINRA has set a deadline of May 30, 2017. For more information, FINRA notice 17-14 can be found at the following link: http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-14.pdf

© 2017 Vandenack Weaver LLC
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New Corporate Compliance Guidance Issued by the Department of Justice

Earlier this year, under the direction of the new Attorney General, the United States Department of Justice (“DOJ”) issued new guidance for corporate compliance programs. This guidance applies when the DOJ is investigating a business and determining how to prosecute a business for federal crimes, such as certain types of fraud. The DOJ notes that the recently issued “Evaluation of Corporate Compliance Programs” updates the prior guidance and does not replace or substantially alter the investigation process.

Currently, federal prosecution of a business will follow the United States Attorney Manual, which provides factors for determining whether to charge a business, negotiate a plea, or come to some agreement. When making these determinations, the government will, among other items, evaluate the compliance program instituted by the business entity. The new guidance specifically pertains to the business compliance program pertaining to fraud prevention. The new fraud compliance guidance lists 11 topics to be evaluated by the DOJ, including Analysis and Remediation of Underlying Misconduct, Risk Assessment, Senior and Middle Management, and other topic areas.

The new guidance provides granularity and clarity regarding the DOJ evaluation of corporate compliance programs, when facing corporate criminal investigations. Although designed for corporate criminal investigations, this should guide companies implementing a compliance program, especially those in highly regulated industries, such as healthcare, pharmaceuticals, and securities. The updated factors issued by the DOJ can be found at the following link: https://www.justice.gov/criminal-fraud/page/file/937501/download

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SEC Updates Rules for Capital Raises Through Regulation D

Over the past couple of years, the Securities and Exchange Commission (“SEC”) has evolved how companies can raise capital, while simultaneously maintaining adequate protection for investors. For example, starting in May of 2016, companies were provided the option of raising capital through the newly created Regulation Crowdfunding, but the SEC was not finished modernizing the laws for exempt securities issuance. On October 26, 2016, the SEC finalized rules amending Regulation D, which contains exemptions from securities registration.

 

Many non-public companies, at all stages, rely on Regulation D for capital raises. Depending upon the unique circumstances of the company, the company may have utilized registration exemptions under rule 504, 505, or 506 of Regulation D. However, exemption under rule 505 became disfavored compared to rule 504 and 506 because of the additional, and oftentimes onerous, regulatory requirements. Recognizing this trend, the SEC finalized rules that increased the amount a company can raise under rule 504 to $5,000,000 dollars, up from $1,000,000, in a 12-month period. This means that the same amount of capital can be raised under rule 504 as was possible under rule 505, allowing the SEC to repeal rule 505.

 

For most companies relying on Regulation D to raise capital, the factors used before the rule change will likely continue to be the predominate factors when determining whether to use rule 504, often referred to as the “seed capital” exemption, or rule 506 exemption. For example, an entrepreneur in the first few years of business that requires additional capital to get a product, currently in research and development, to the market, will likely look to rule 504, which limits the total money raised, but is more navigable for new companies. Moving forward, as the SEC undergoes a change of leadership, starting when SEC Chairwoman Mary Jo White steps down in early 2017, these rules may continue to evolve and any company looking to utilize a Regulation D exemption should consult with legal counsel. For more information on the current changes under SEC Regulation D, please visit the following SEC website: https://www.sec.gov/news/pressrelease/2016-226.html

© 2016 Vandenack Weaver LLC
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IRS Implements New Safeguards for Income Verification Express Service

The Internal Revenue Service (“IRS”) is implementing new requirements for taxpayers who use the Income Verification Express Service (“IVES”), a service companies use when signing off on the incomes of loan applicants. The new safeguards are part of a larger effort to protect taxpayers and fortify authentication standards.

The new requirements were sent to IVES participants shortly after the IRS announced the initiative. Among others, the requirements involve collecting data to verify participant clients and the individuals that clients authorize to submit and receive IRS transcripts on the clients’ behalf. The IRS will not deliver borrower income transcripts unless IVES participants certify their compliance with the new requirements. Additional safeguards include requiring individuals to have strong passwords and unique login credentials.

The new protections reflect initiatives being taken elsewhere in the tax system. Recently, the IRS shut down the electronic filing (“e-file”) PIN tool, a tool to assist with electronic tax filing, after criminals attacked the system and stole PIN numbers. The IRS is taking these steps in an attempt to protect taxpayer information and combat potential fraud.

The new requirements are in effect as of July 1, 2016.

© 2016 Vandenack Williams LLC
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Can Franchise Agreements Be Terminated or Not Renewed?

A Business FAQ with Mark A. Williams.

The simple answer is yes, franchise agreements can be terminated and that is pretty scary for somebody that owns a franchise business. The more complicated answer is that you have to look at your franchise agreement. Usually there are provisions in there that cover the renewal of the franchise and what happens if it is terminated.

There is also state and federal law that apply to franchises. In some states, the franchisor might not just be able to terminate your franchise even if the franchise agreement says they can.

Yes, franchise agreements can be terminated, they can be not renewed, but in almost every circumstance, whether it is by your franchise agreement or whether it is by law, you have some rights to renew and you need to make sure you pay attention to those rights when you get into a franchise relationship.

© 2014 Parsonage Vandenack Williams LLC

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What Rights Do Minority Shareholders Have?

A Business FAQ with Mark A. Williams.

Minority shareholders have the same rights that every shareholder has. Generally, that means they have the right to access books and records of the company, financial information, and they have the right to attend shareholders meetings and they have the right to vote on things. When you are a minority shareholder, the majority shareholders and the officers and directors of the company might actually owe you more fiduciary duties than they would owe to other shareholders. There are some legal protections if you are the small guy to make sure that that majority shareholder can’t do too much for their own personal benefit to your detriment.

© 2014 Parsonage Vandenack Williams LLC

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What Law Governs Contracts With Foreign Entities?

A Business FAQ with Mark A. Williams.

The law that governs every contract is usually the law that the contract says. In  most agreements, there will be a provision in it that says if we get into a dispute, here is the law that is going to apply. If the contract does not say that, then there is a little bit of a problem. Every state has some laws and there are federal treaties with other countries, and those laws and treaties are supposed to work out whether it is the law of your state or whether it is the law of the foreign jurisdiction that is going to apply.

The important thing to think about is if you are going to do business with a company in another country, you really need to  make sure that in your contract, you specify what law is going to apply and what jurisdiction lawsuits are going to happen in so that if there is a dispute, you know how it can get resolved.

© 2014 Parsonage Vandenack Williams LLC

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