FROM START-UP TO PUBLIC COMPANYTHE USA EXPERIENCE 13 OCTOBER 2015 Michael A. Refolo, Esq.
WHAT ARE YOU SELLING? § Products/Goods § Services § Both 2
WHEN DO ENTREPRENEURS NEED PROTECTION FROM LIABILITY? § What are the risks in running your business? § How could you get sued? § Should you form an entity that protects you from these risks? 3
WHAT HAPPENS IF YOU ARE SUED AND YOU HAVE NO PROTECTION FROM LIABILITY? § Basic common law protections • Homestead Act • Bankruptcy laws § Other protections? • Insurance ($ for premiums) § What if owners are not protected? • Garnishment – wages and bank accounts 4
• Judgments § Foreclose on real estate § Lien on personal property and bank accounts 5
HOW DO YOU GET PROTECTION? § Form a business entity 6
WHAT TYPE OF BUSINESS ENTITY GIVES YOU PROTECTION FROM LIABILITY IN THEUSA? § No protection: • Sole proprietorship § On your own • General partnership § Share in profits and losses and liability joint/several § Some protection: • Limited liability partnership • Limited partnership 7
§ Strongest protection! • Corporation (Inc. or Corp. or Ltd. ) • Limited Liability Company (LLC) 8
HOW CAN OWNERS BE LIABLE EVEN IF YOU FORM A CORPORATION OR LLC? § “Pierce the Corporate Veil” § Commingle business funds with personal funds 9
HOW CAN OWNERS OR OFFICERS/DIRECTORS BE LIABLE TO EACH OTHER? § Breach a “fiduciary duty” • Duty of Care § Act with reasonable Business Judgment § Duty of Loyalty • No Self-Dealing • Act in Good Faith • Corporate Opportunity § Partners have “heightened” duties to each other 10
WHAT ARE OTHER CONSIDERATIONS IN FORMING AN ENTITY? § Income Taxes on Profits • Double Tax on profits and distributions/dividends § C Corporations • Single Tax on Owners § S Corporations § LLCs § Partners • Fees (annual filing fees) 11
HOW DO YOU CREATE THESE BUSINESSES IN THE U. S. ? § Sole Proprietorship • DBA filing (“doing business as”) • Local permits § Partnership • Partnership agreement § Limited Partnership • Filing with Secretary of State • Limited partnership agreement 12
§ Limited Liability Partnership • Filing with SOS • One page certificate • Professional liability insurance § Corporation • Articles/Bylaws/Board of Directors/Officers 13
§ S Corporation • Corporation process plus IRS (tax filing) • Tax filing if requirements are met § § Stockholders are individuals U. S. Citizens/Green Card Limited number of Shareholders – 100 One class of stock (common stock) only 14
§ Limited Liability Company • File certificate • Operating Agreement 15
WHAT STATE SHOULD YOU FORM THE ENTITY IN? § State of residence or business location § Delaware 16
HOW DO YOU PROTECT YOUR GOODWILL? § Non-Disclosure Agreement or Confidentiality Agreements § Noncompetition agreements with employees § Non-Solicitation agreements with employees § Domain Name Registration 17
HOW DO YOU PROTECT YOURINTELLECTUAL PROPERTY? § § Trademark Patent Copyright Assignments by employees and contractors 18
HOW DOES A BUSINESS GET START-UP FUNDING? § Personal funds § Traditional bank financing – collateral/guaranty • Mortgage – real estate • UCC on personal property • Personal guaranties 19
HOW DOES A BUSINESS RAISE CAPITAL? § Seek investors to buy an interest 20
WHAT TYPES OF INVESTMENTS DO INVESTORS SEEK? § Corporation Stock • Common Stock § Voting § Pro rata ownership • Preferred stock – what are the preferences? § Liquidation Rights § Interest/Dividends § Put rights 21
§ LLC Units or “membership interest” § Convertible note • Interest rate? • Maturity date to pay off the note • Convertible into common stock at Investor’s option 22
§ Options/warrants • Fair market value “strike price” • Vesting • Maturity or Termination Date 23
WHO CAN BE YOUR INVESTORS (EARLY STAGES)? § Friends and family, angel groups (“Angel Round”) § Crowdfunding websites/accredited investor database § Hedge funds § Venture capital firms 24
HOW DO YOU RAISE FUNDS (LATE STAGES)? § IPO – need funds underwritten • SEC registration • Road show § Secondary Offerings 25
HOW DO SECURITIES LAWS REGULATE CAPITAL RAISES? § Federal Law • Offer and sale of a security must be § Exempt or § “registered” § Federal exemptions – private placement • Regulation D – limited advertising/soliciting • Accredited investors 26
§ Register? • • Must file for registration “Form S-1” and “Prospectus” Triggers ongoing reporting Annual Report (10 -K) § Quarterly Reports (10 -Q) § Current Reports (8 -K) 27
§ State “blue sky” laws • Often preempted by Federal Law • May have separate registration or exemptions 28
HOW DO YOU GO PUBLIC WITHOUT AN IPO? § Got too big – USD $10 million assets plus 2000 shareholders § Voluntarily filed to be public – File Form 10 Registration § Reverse merger § Direct Public Offering (no underwriter) 29
WHAT ARE THE REQUIREMENTS OF A PUBLIC COMPANY? § § § Ongoing reporting SEC reports Audited financials Legal costs Shareholder information Restrictions on insiders • Insider trading • Short swing liablity • Reporting by officers/directors/5% shareholders/10% shareholders 30
HOW DOES A PUBLIC COMPANY GET LISTED ON AN EXCHANGE? § DTC/Cede & Co. § Exchanges – NASDAQ and NYSE and OTC • Initial listing requirements/fees • Ongoing listing requirements 31
AS AN ENTREPRENEUR OR INVESTOR, WHAT IS YOUR EXIT STRATEGY? § IPO and get cash out the value? § Sell all your stock? § Sell your company? Merger/acquisition? 32
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