Myer Law Blog

There is no legal requirement to issue stock certificates in most jurisdictions.   Many corporations still issue them, but that is out of habit and custom.  When is the last time you bought shares in a public company and asked your broker for a stock certificate?  The answer is probably never, and that is because public companies in the US long ago deposited all their stock certificates with a predecessor of the Depositary Trust & Clearing Corporation in New York.   As a result, transfers of stock in public companies are handled as book entries.

Even this system is out dated.  Most jurisdictions permit stock to be issued without ever creating a certificate. In Washington State, RCW 23B.06.260 permits the board of directors to approve issuing shares without certificates. In that case, each shareholder is instead sent a record containing the information that would otherwise be on the certificate.

I often advise clients to set up stock registers in spreadsheets that contain all the information required by RCW 23B.06.250.  Each spreadsheet has a header with a date, the corporation’s name and the class of stock covered. The footer consists of a stock legend that states that the shares are not registered and therefore may not be transferred by law except pursuant to an exemption and that the shares are also subject to additional transfer restrictions and other rights and obligations under a shareholders’ agreement.  In the case of preferred stock, the legend also contains a reference to the articles of designation that define the rights, preferences and limitations of the series.

Each entry or spread sheet row in the stock register lists the date of issuance, to whom the shares were issued, and the number of shares so issued.

Each time the spread sheet is updated, the original is signed by two authorized officers of the corporation and then scanned and saved as a PDF file that can be emailed to each shareholder.  Once emailed, the statutory requirement of sending a record has been satisfied.  Furthermore, the corporation is well on its way to complying with RCW 23B.07.200, which requires that “after fixing a record date for a meeting, a corporation shall prepare an alphabetical list of the names of all its shareholders on the record date who are entitled to notice of a shareholders’ meeting. The list must be arranged by voting group, and within each voting group by class or series of shares, and show the address of and number of shares held by each shareholder.”

Of course a corporation can still use old fashioned stock certificates.  But certificates are expensive to produce, often contain errors, get damaged or misplaced and are difficult to collect when the corporation recapitalizes or is merged into another entity.   As far as I am concerned, let’s end this practice and stop using stock certificates.

I invite your comments to this blog post and look forward to posting another missive in the near future.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington.   This posting does not constitute legal advice.

One of the most hotly debated topics in the start-up community is whether the founders of a new business should incorporate in Delaware or locally.  For entrepreneurs located in the Puget Sound Region that would, of course, be right here in Washington State.  I used the term “incorporate”, because angel investors are generally not interested in pass-through entities for tax purposes.  Choice of entity, another hotly debated issue, is a topic for another day.

The arguments for incorporating in Delaware revolve around the advantages of the depth and predictability of Delaware corporate law and the fact that investors expect to get those advantages.  In my experience, the substantive legal advantages are both narrow and esoteric and often don’t apply to start-up corporations.  Public companies and their executives have good reason to choose Delaware corporate law, but few of these reasons apply to angel investors. Rather, the discussion with angels tends to focus on valuation, with the investors saying “if you had only incorporated in Delaware, we might be able to justify the pre-money valuation on your term sheet.”

While this argument may score negotiating points, it is a straw man that lacks any real substance.  In an effort to refute the argument or, perhaps, out of concern that a mistake has in fact been made, the founders turn to their attorney for a response.

First, let’s look at the situation practically.  Angels tend to invest locally so that they can meet with the founders of the start-up face to face. Therefore, choosing Delaware law will not help a Puget Sound start-up attract investors from other communities. Yes, many lawyers are familiar with Delaware law besides their local law, but an East Coast or even a Bay Area based angel isn’t usually interested in investing in a Seattle start-up.

Second, assuming that your founder’s agreement, the shareholders’ agreement and the investor subscription agreements require disputes to be heard in Seattle, do you really want to be using another state’s law in a Washington court or a Washington arbitration proceeding?  Washington lawyers and arbitrators are most comfortable and familiar with applying Washington law. The choice of Washington law will be both cost-effective and predictable.  Even worse, if dispute resolution is not restricted to Washington, do you want to be flying to Delaware and hiring Delaware counsel to defend against a lawsuit brought by one of your investors in the Delaware Court of Chancery?

One argument I have heard mentioned is that by incorporating in Delaware or Nevada you can avoid Washington’s Business and Occupation Tax.  The reality is that if you do business in Washington, you will owe B&O Tax.  That has nothing to do with where you incorporate.  Sure, if you incorporate in Delaware, it will take the Washington Department of Revenue a while to catch up with you, but the moment you pay salaries in the Puget Sound Area, DOR has all the nexus it needs to establish taxing authority.

To summarize: (1) the reasons for incorporating in Delaware don’t apply to most start-ups, (2) you can’t escape Washington’s B&O Tax by incorporating in another jurisdiction, (3) the investors who might not want you to incorporate in Washington won’t invest in your company in the first place, and (4) legal risks and costs are much easier to control if you incorporate at home.

I invite your comments to this blog post and look forward to posting another missive in the near future.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington.   This posting does not constitute legal advice.

It has been nigh impossible to find out just what was in the amendments that the Senate passed last week.  Recall that the original bill included provisions that would have (1) subjected Rule 506 private placements to state regulation and (2) more than doubled the thresholds to qualify accredited investors.  However, today the Wall Street Journal reported in an opinion piece that these two provisions were removed from the bill by the amendments that were passed, but that none of us have been able to get to read.  While it is never clear in the legislative process when a threat has truly been averted, I would like to thank all my readers who called or wrote their elected representatives to speak up for start-up companies and their angel investors.  In an earlier piece, I had asked you to start howling with rage.  I think you can stop that now.  It may well be time to start celebrating!

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington.   This posting does not constitute legal advice.

I don’t write about technology, but every rule has exceptions.  If you haven’t looked at Google Voice (“GV”) yet, check it out and sign up for a number or perhaps you can arrange to have a friend send you an invitation to a free account.

GV gives you a local phone number that you give out to your friends and clients.  On the GV website, you enter in your work, home and mobile numbers and tell GV which of these and when you want your GV calls forwarded.  Then you stop giving out your other phone numbers and everyone just needs to know one number to reach you anywhere and anytime.

GV also has a voicemail feature that transcribes your messages and emails or texts them to you.  There are numerous other features that might interest you, but other phone systems have these too.

What makes GV so interesting is that you are not charged for calls or SMS messages within the US.  Overseas calls are inexpensive (Europe is currently 3 cents a minute) and if you call an overseas mobile phone the current charge is 19 cents a minute.

The way GV works is that when you place a call, GV calls you and then connects you to the number that you called.  That means that you don’t need the phone features of your telephone because you don’t dial the call.

My contacts are on my lap top in MS Outlook and I have a docking station at home and at the office.  (When my computer is not connected to the Internet, my contacts are available on my iPhone, so don’t worry about my not being able to call you.)   I use Go Contact Sync for free to make sure that my MS Outlook contacts are always synched with my GV contacts.  I keep Google Chrome open on my computer (GV runs best on Google’s browser — go figure) and with two clicks I can place a call to any of my contacts (or I can type in a number if someone is not yet listed as a contact.)

After I click on the number I want to call, GV calls the phone I have set it to (office, home or mobile) and after I pick up, GV connects me to the party with whom I wish to speak.  It’s that easy and at no cost to me whatsoever.

Now about that office phone.  My landlord provides a high speed internet hook up in my office.  I plugged a router into the ethernet outlet so that I can get two IP addresses, one for my computer and one to which I have plugged in a VOIP adapter.  I am using a Linksys PAP2-NA which costs around $45.  I have a normal desk phone plugged into the adapter.  To activate my VOIP phone, I signed up for free with Sipgate.  They gave me a phone number that I set up to connect to the IP address of the VOIP adapter and then typed the Sipgate phone number into GV as my office line.  I can’t dial a call from my office line since I don’t have a telephone provider, but then I don’t need to because GV calls my office line when I place a call.

I invite your comments to this blog post and look forward to posting another missive in the near future.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington.   This posting does not constitute legal advice.

Here is a link to a letter the Securities Committee of the WSBA sent to Senator Dodd as well as other legislators voicing the Committee’s dismay over proposed Section 926:

Letter to Sen. Dodd from the WSBA in opposition to Section 926 of the “Restoring American Financial Stability Act of 2010”

One aspect of the bill that has not been widely discussed (and is not the subject of the WSBA’s letter) concerns a  problem with the definition of accredited investor in Rule 501.  The thresholds for net worth ($1 million) and annual income ($200,000 for singles or $300,000 for couples) were set in 1982 when the CPI stood at around 96.5.  Section 412 of the bill instructs the SEC to adjust these thresholds for inflation.  In February 2010, the CPI was 216.741.  That means that if the bill is enacted into law, to be accredited an investor would now be required to have  a net worth of around $2.25 million or annual income (if married) of approximately $675,000.  This would, of course, drastically reduce the size of the pool of investors that start-ups could access for “traditional” (accredited investor only) Rule 506 private placements.

I wonder if Section 926 (requiring SEC or state regulatory review) is a decoy and the real goal is to enact Section 412 and adjust thresholds for 28 years of inflation.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington.   This posting does not constitute legal advice.

Senator Dodd’s 1328 page bill (Restoring American Financial Stability Act of 2010) contains a provision under Section 926 entitled Authority of State Regulators over Regulation D Offerings that would take away the ability of Start-up companies to raise funds without review by the SEC or state securities regulators.

Currently, companies and private funds that want to raise money may do so from accredited investors (people with a net worth of $ 1 million or more) without prior review of the offering by any federal or state regulator if the issuer complies with Regulation D’s Rule 506.  That Rule forbids advertising and public solicitation, but otherwise does not prescribe the form of offering documents or the content of disclosure.  Within 15 days of the first closing, the issuer is required to file a Form D with the SEC and with the securities regulators of the states in which the investors reside.

Rule 506 does not stand in isolation. Other federal and state laws require that a person who sells securities disclose all material facts that impinge on the value of that security. State securities regulators possess numerous civil and criminal remedies to prevent or punish fraud. Injured investors can sue for rescission or damages, statutory interest (at 8% in Washington State) and recovery of attorneys’ fees.

Yet to police potential fraud even earlier in the process, Senator Dodd’ bill proposes to let the SEC decide by rule-making which offerings it would like to review.  Those deals that the SEC does not review would be subject to review by state regulators. (This is a gross over-simplification of what the bill actually says, but it will suffice for today.)

The point is that to try to catch a handful of bad guys (who presumably won’t even file Form Ds if this bill becomes law), all the honest companies out there who want to conduct private placements will need to incur significantly greater costs to comply with securities laws.

The timing of this “reform” effort is unbelievable.  The world economy is just beginning to climb out of a massive recession and bank credit has virtually dried up.  Small and start-up businesses are unable to obtain loans of any kind other than from the Small Business Administration.  Now the one source of funding that has functioned reasonably smoothly in these troubled times, the angel market, is in danger of being tied up in red tape.

We need to let our federal and state governments know that this bill is a disaster. It is time to start howling with rage.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington.   This posting does not constitute legal advice.

What you do with legal documents between my review and signing matters.  Think of the law as a system of rules and legal documents as switches that turn these rules on or off as needed.   If the default setting works for you, then the legal document may be silent on an issue because we don’t need to change that switch setting.

Imagine, for example, that you are setting up a limited liability company with two other people (or “members” in the parlance of LLCs).  At signing, one of these people, Joe Smith, asks to sign the operating agreement (let’s call it the “OA”) as “Joe Smith, LLC, by Joe Smith, its member.” You figure this is a small change and you can simply mark-up the documents and sign.

Bad idea, I’m afraid.  The OA has transfer restrictions that will work fine for most members.  But if one of the members is itself a legal entity, then it is likely that the transfer restrictions won’t work as drafted.  Instead, the operating agreement of Joe Smith, LLC can transfer control from Joe to another person, blowing right by the OA’s transfer restrictions.

By the way, it’s not a big deal to fix the problem.  It’s just that you need me to be in the loop to spot the issue and address it so that you don’t have an unpleasant and costly surprise some time down the line.

I invite your comments to this blog post and look forward to posting another missive in the near future.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington.   This posting does not constitute legal advice.

My philosophy is to provide cost effective legal services by maintaining a lean overhead structure and transparency in billing.  As a client, you want to know up front what you and I will be working on and how much it will cost to complete the project.  Only then can you assess whether the services you are buying will add value to your business.

What does this mean in practice?  On many projects, clients can help by providing information in as close to final form as the contract or offering document requires.  I will need to review your input and make sure that it is seamlessly integrated into the legal document we are drafting, but your involvement, properly structured, can save time and money.

The same is true in reviewing documents that others have drafted.  As the attorney, I need a thorough overview of the transaction so that I can spot issues, but I don’t need to reinvent the wheel.  If a document is in good shape when I review it, then my time on the deal can be minimized.

I invite your comments to this blog post and look forward to posting another missive in the near future.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington.   This posting does not constitute legal advice.

Today,  I am launching my new firm and with it a website that you can navigate using the links on this page.  My office will remain the same — on the 8^th Floor of 1525 Fourth Avenue  — but instead of being of counsel at AXIOS Law, I will be a tenant.

AXIOS Law will continue to practice intellectual property and technology law, where Adam Philipp, Thomas Loop, Dylan Adams and Chad Kirby offer exceptional value for top quality performance.

At Myer Law, I will continue to provide corporate and securities legal services, with a focus on four practices areas: drafting and negotiating business contracts, forming start-up companies, advising on private equity placements and forming hedge funds.

I look forward to hearing from clients, attorneys, readers and friends now or in the future.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.