Month: September 2015

Virginia’s New Crowdfunding Law

Authored by attorney Jay Rixey

A new Virginia code amendment, effective as of July 1, 2015, makes it easier for small Virginia companies to raise capital by allowing companies to raise up to $2 million through crowdfunding.

The amendment, codified at Virginia Code §13.1-514(21), creates an exemption from the more detailed securities, broker-dealer, and agent registration requirements of the Virginia Securities Act for any security issued by a Virginia entity, as long as the following requirements are met:

  1. The offering is conducted in accordance with the federal exemption for intrastate offerings in § 3(a)(11) of the Securities Act of 1933 and the SEC Rule 147;
  2. The offer and sale are made only to Virginia residents;
  3. The aggregate price of the securities offered does not exceed $2 million;
  4. The maximum amount invested by a purchaser who is not an accredited investor is $10,000;
  5. Compensation is not paid to employees, agents or other persons for the solicitation or based on the sale of the securities unless they are registered as a broker-dealer or agent;
  6. Neither the issuer nor any other related person is subject to disqualification; and
  7. The security is sold in compliance with the conditions established by the Virginia State Corporation Commission.

To view the Virginia State Corporation Commission regulations, please visit http://law.lis.virginia.gov/admincode/title21/agency5/chapter40/section190/.

The Virginia State Corporation Commission is required to report to the House and Senate on July 1 of each year on the implementation of this new crowdfunding exemption, including (i) updates on federal action; (ii) the number of filings in the Commonwealth made pursuant to this crowdfunding exemption; (iii) the mean, media, and total values related to money raised under offerings made pursuant to this crowdfunding exemption, and (iv) recommendations for revisions.

The state code amendments were effective as of July 1, 2015, and the Virginia State Corporation Commission regulations were effective as of July 31, 2015.

The provisions of this crowdfunding exemption are set to expire on July 1, 2020.

For additional information, please contact us.

An Ounce Of Prevention…

Authored by Geoffrey Hemphill

Too many times in my practice, clients have come to me in the midst of a tumultuous intracompany squabble. Owners who once thought they were going to start the next Microsoft or Apple are now at each other’s throats, lobbing all sorts of accusations and wrestling for control of the company. Sadly, the owners are often members of the same family.

In “You’ve Got Mail” Tom Hanks told Meg Ryan that business isn’t personal, it’s war. His Godfather references notwithstanding, if he’s right, it might benefit all business owners to employ good military tactics when entering the fray. Any commander worth his rank will establish strict protocols not only for formation and operation, but he or she will also formulate a clear and effective exit strategy to get out of a situation unscathed when the bullets start to fly. Invariably, my worst business breakups occur when the owners failed to implement or even consider an effective exit strategy.

In Ott v. Monroe, 282 Va. 403 (2011), the Virginia Supreme Court addressed a case involving a dispute in a family run business. The facts are as follows:

  • Dewey and his wife, Lou Ann formed a Virginia limited liability company called L & J Holdings, LLC (the “Company”).
  • The Company had an operating agreement, which provided:
  • Dewey (80%) and Lou Ann (20%) were the sole members of the company
  • The operating agreement named Lou Ann the managing member
  • Dewey died and left his entire estate to his daughter, Janet.
  • Janet called a meeting of the members of the company for the purpose of removing Lou Ann as managing member
  • Lou Ann responded that Janet only inherited Dewey’s right to share in profits and losses and that she did not have the power to remove Lou Ann as the managing member.  The dispute made its way into the courts.
  • The operating agreement stated “Any member…may transfer all or any portion of the member’s interest at any time to…other members [or] the spouse, children or other descendants of any member.”

The Virginia Supreme Court held in favor of Lou Ann. Even though she only owned 20% of the membership interest, the transfer of the 80% interest from Dewey to Janet by will did not give Janet any interest other than a profits interest. Thus, Janet had no authority to remove Lou Ann as managing member of the company.

Virginia Code §13.1-1039 provides that an assignment does not entitle the assignee to participate in the management and affairs of the limited liability company or to become or exercise any rights of a member. Such an assignment entitles the assignee to receive, to the extent assigned, only a share of profits and losses and distributions to which the assignor would be entitled. That section can be overwritten by language in an operating agreement.

Virginia Code §13.1-1040(A) provides the method by which an assignee of a profits interest may become a full member. Unless otherwise provided in an operating agreement, an assignee must obtain the consent of the majority of the other members to become a full member. Janet certainly was not going to get Lou Ann’s consent, so she relied upon the operating agreement.

The court ruled that the language in the operating agreement, which allowed a member to transfer his or her interest to children, lacked the specific language that would constitute an exception to the statute.

Thus, while the parties tried to implement an exit strategy, they did so poorly. The bullets started flying and the operating agreement provided no cover. If Dewey wanted to ensure that his daughter would get his full membership interest, and thus the ability to remove Lou Ann as managing member, he needed to include a more specific provision in the operating agreement. Such a provision would state that Dewey’s assignee would become a full member, with all rights of ownership as a member under the Virginia Code and cite the relevant sections. This assumes that all the members signed the operating agreement, thus consenting to such a provision.

The moral of the story is, even if times are good and the owners still think that they will be neighbors of Bill Gates or Mark Zuckerberg in the near future, they should review their operating agreement to make sure their exit strategy will legally bring about the desired result. A member needs to know that without careful planning, his or her successor may only inherit a profits interest, without the power to manage the company, regardless of how great the percentage ownership is. Let me guess, Lu Ann and Janet are not Facebook friends.

Department of Labor and Industry Misclassifications Policy

Authored by summer clerk Thomas O’Dea

The Virginia Department of Labor and Industry recently issued a new policy making construction employers responsible for providing proof of its’ subcontractors’ contractor licenses upon request. Under this policy, all workers on a job site will be characterized as either employees or independent contractors. If they are subcontractors, the contractor must be able to furnish proof of their licensure. Virginia Occupational Safety and Health Compliance (VOSH) inspectors will be enforcing this new policy during periodic workplace inspections. Noncompliance with this classification matrix can result in an array of punishments from several agencies.

First, if the inspector finds that the employer has misclassified employees, he can issue a citation, which can result in fines against the employer of up to $7,000.00 per misclassified worker. Failing to remedy the violation can result in an additional $7000.00 fine per violation, per day.

Second, the inspector can refer both the employer and the workers to the Department of Professional and Occupational Regulation (DPOR). DPOR can assess an unlicensed subcontractor a $500.00 fine for each day that he worked on the job site as well as charge him with a Class 1 Misdemeanor which can carry a penalty of up to 12-months in jail and an additional $2,500.00 fine. A construction employer who fails to remedy the license violations may be subject to license revocation.

Finally, a noncompliant employer can be referred to the Virginia Employment Commission (VEC) and/or the Virginia Workers’ Compensation Commission (VWCC) for audits of its employment practices. Negative findings can be punished as criminal offenses and are classified as Class 1 Misdemeanors carrying the same penalty described above.

As an example of this enforcement structure, an employer who has three misclassified workers on a job site may initially face $21,000.00 in fines from VOSH and audits by the VEC and VWCC, which could result in an additional $15,000.00 in fines and up to 6 years in jail. The workers may face up to $3000.00 in fines and up to 12-months in jail for each day they worked on the job site without a license.

In essence, all workers must be employees or subcontractors. If they are subcontractors, they need to have contractor licenses. If the employer fails to provide proof of such licensure to a VOSH inspector, there can be significant consequences from VOSH, DPOR, VEC, and/or VWCC.

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