After a little political battle earlier in the month, the House of Representatives has now passed HR 37, which includes a voluntary exemption for “emerging growth companies” (mostly under $1 billion in revenues) to choose not to utilize Extensible Business Reporting Language (XBRL) for financial statement reporting with the SEC. The vote, on January 14, was 271-154, including 29 Democrats voting for it. The bill has now gone to the Senate Banking Committee. This will be a nice help for smaller companies to reduce their SEC compliance costs for something that really is not that helpful in most cases.
The bill is actually a combination of 11 different bills, and has other provisions relating to the Dodd-Frank Act including delaying the so-called “Volcker rule.” Of more interest to my blogees are an exemption for so-called merger & acquisition brokers from SEC broker-dealer registration, and a requirement for the SEC to look at ways to simplify their disclosure rules under Regulation S-K. Hopefully the Senate will pass it and the President will see this as a needed shot in the arm for small business, and not the “bank deregulation” bill that some Democratic leaders are painting it as.
Next we hope the Congress will take another look at the bills passed by the House Financial Services Committee last May to reduce the Rule 144 holding period, expand the availability of short form registration on S-3, and provide a sunset of two years for the reverse merger rule under 144 requiring a company to be current in their SEC filings before a sale under that rule can take place post-reverse merger. These also, one would hope, could find ways to bi-partisan and Presidential support. We shall see!
I actually started working on this back on Father’s Day but looking over old drafts pulled it out! Never too late to talk about the incredible adventure that is dadhood. The dice do roll for every set of parents choosing to have a child, adopt a child, take in a foster child, or even decide to go childless. Sometimes having a child or even adopting can be difficult. Desperate parents-to-be try everything in the book, many successful and some not. Then when you are lucky enough to have or adopt that child, so many kids do indeed turn out awesome and create incredible pride and feelings of love you never thought possible. But many parents face issues with children who are mentally or physically ill, or choose to estrange themselves as adults, or simply create incredible difficulty for their family and parents. Sometimes children are affected by parents with mental or physical challenges or addictions. Those parents face extra burdens to deal with their own issues while being there for their kids as well.
Parenting is hard and also awesome. And being a dad, well it’s a unique experience for sure. Since most dads work, and statistics say 50% are divorced, the term “quality time” takes on special meaning. A wise man of my parents’ generation said something simple: you have to give your kids time. This gentleman in particular practiced what he preached. He worked with one of his grown children and spent literally every day with them and their kids, never making his own plans until he knew they didn’t need him. Is this harder when you or your child are dealing with challenges on their own or in their relationship with you? Of course. That’s when you just can’t give up.
Giving your kids time is as much about quality as quantity. When you are home all weekend with them but spend most of your time watching TV or on the computer, that is not spending time with your kids. Make that extra effort. Do something with them. It can be a meal, a board game, a movie or funny video, a bike ride, even just a chat about school or music or whatever. Throw a ball around. Talk to them. Listen to them. As the dad of one grown and one not quite grown child, I can only say, the time zooms by. They will be adults before you know it. Make those memories and make them count. OK back to entrepreneurship and all that!
Let’s give one to the states. Often in their attempt to regulate securities offerings we find states a source of delay and frustration. However, given the snail’s pace at which the SEC is implementing crowdfunding rules mandated by the Jumpstart our Business Startups (JOBS) Act of 2012, many states are jumping ahead and passing their own crowdfunding laws.
Congress and the SEC have recognized that offerings taking place wholly within a state by a company located there can be done under state regulation, exempt from all federal oversight. This “intrastate exemption” has been used as a basis for these new local crowdfunding rules.
So now 13 states have passed laws and another 14 are in the process of doing so. Some allow you to raise up to $1 million, others up to $2 million. Some don’t require audited financial information for smaller offerings, some do. There do not seem to be requirements of a “portal” or broker-dealer to be involved as mandated by the JOBS Act at the federal level. It’s all turning into an interesting experiment as to what will and won’t work.
Let’s keep an eye on this!!
When starting a business, one key threshold question is whether you want to go solo or start with partners. Assessing your own personality and strengths helps you determine the best route. Many go forward with founding partners, others add partners who contribute important services and then of course investors can become your partners. Sometimes too late a founder realizes he has connected with the wrong people to really build a success and enjoy the ride as well. I believe one of the top 3 reasons businesses fail is making bad partner choices. Here are five signs you have probably not chosen the right people with whom to share entrepreneurship:
1. But I thought that… If you didn’t have a clear written understanding of who is responsible for what and whose strengths will be utilized in which ways, misunderstandings often develop down the road. So often in a breakup one partner says he or she thought the arrangement was going to be much different than it actually materialized. Be up front in the up front, and warning: if there are more than minor difficulties coming to an agreement going in, it is probably a sign of trouble ahead.
2. Hiring could have done the job… Often equity is handed to individuals providing services to a company when cash simply is not available. Suddenly a founder finds herself with a 10% owner who helped build a website or set up online payments when most businesses would have simply paid for the service in cash. That partner now has rights and significant potential upside (like the Facebook office muralist who had $200 million in company stock when it went public). If you do grant equity in these situations, ideally try to have the ability to buy out the service provider down the road.
3. Rainmaker with their own agenda… It is common to offer equity as an incentive to someone who is bringing revenue into the business as a salesperson or business development executive. Sometimes that new partner decides to move on to another company, taking their “incentive” with them. They may even take business out your door. Again, make sure there is a buyout arrangement, and if possible a non-compete restricting their ability to work across the street for some period of time if permitted in your state.
4. I don’t care if I will get the same benefit… Life circumstances often intervene whether health-related, personal issues, child-rearing and the like. This can lead one partner to desire a reduced or adjusted schedule or commitment for some period. A partner that will not accept this flexibility and attempts to require you to give 100% of yourself 100% of the time may not be ideal. If you are seeking the adjustment, remind them that you will do the same for them if life issues affect them in the future. If you are aware of these potential circumstances when you start the business, try to provide for it in your initial agreement.
5. I have to let you go… When one partner (often an investor) has the right to force a founder to leave the company, be careful. Often these are incorporated in “termination for cause” provisions in employment agreements which normally seem innocuous and require criminal activity or the like. But sometimes the list of “cause” includes broader provisions such as “actions materially deleterious to the company” or other items which could inadvertently incorporate things like a DUI. These “for cause” terminations, unfortunately, often result in nasty corporate divorce lawsuits.
Know both your partner and your deal before you begin to significantly increase the chance that you will have a successful partnership.
In a celebratory moment for financial printing companies, the House of Representatives this week failed to re-pass a comprehensive business package that included an exemption from XBRL financial reporting for smaller companies. The House had overwhelmingly passed the same bill in November before the new Congress settled in. Since the bill never passed the Senate, the new House has to pass it again, but failed.
It is not clear what politics are at work given that there was pretty wide bi-partisan support for the bill last fall, but some say the Republican effort to push the bill through without debate or committee consideration was simply unacceptable for the Democrats (led by Nancy Pelosi, Maxine Waters and Elizabeth Warren) and Republicans couldn’t get a two-thirds vote done to suspend rules and have a vote on the bill.
As we know, the SEC has been requiring “apples to apples” financial reporting of key line items for a number of years. Smaller companies have complained that the cost of compliance is significant compared to the limited benefit. Larger companies are followed by analysts who appreciate the ability to more easily compare competitors in the same space, but most smaller companies do not have analyst coverage. Unfortunately this was wrapped up in a larger package that the Democrats fought down. Maybe the XBRL exemption will have another day.
Want to bring a case but can’t afford the lawyers? No problem. Chicago lawyer Michael Helfand has set up a crowdfunding site to help you raise money. You can find it at https://www.fundedjustice.com/en. It can be especially true for smaller cases, like workers compensation claims, where just a few thousand might be needed to bring a case. The site is still pretty new and small, but Helfand hopes, according to the ABA Journal, to help folks seeking social justice and the like. Gelfand has already been running a successful legal referral service.
As we know, in Europe the “loser pays” system requires the unsuccessful party in a lawsuit to pay the legal fees of the winner in most cases. We don’t have that here, of course, and when you bring a case you are out your legal fees unless you have an agreement to the contrary or there’s a law that provides it (such as when you are defending a registered trademark). This means that sometimes cases just can’t be brought because of lack of funds. Some cases are based on a contingency where fees are only paid upon success, but that is generally limited to personal injury cases and some class actions.
So Helfand’s solution could be a help to those who want to bring meritorious cases but don’t have the means. But the key, as the article indicated, is to have a good story and good social network connections. So maybe you can raise crowdfunding money for the legal fees to pay lawyers to handle your crowdfunding raise for your company?