Excited about closing on his new house, Furst Thyme Byer received emailed wire transfer instructions for his full $250,000 payment from his broker Chad at Chase N Rainbows Realtors. Complying with Chad’s instructions in the letter, Furst emailed Schneckner at Schneck’s Loans who wired the closing funds, as instructed, to what they both thought was In-O-Cent Title Company’s account. The next day, Ida at In-O-Cent Title called Furst looking for the money. Checking with Schneck’s Loans, Furst confirmed the funds were wired to the In-O-Cent Title account as directed. But In-O-Cent Title never received the money. The wiring instructions were bogus. They came from a similar email address, but it was not Chase N Rainbows’ – nor was it In-O-Cent Title’s bank account. Is anyone besides Furst responsible for the missing funds? If so, who? The title company? The mortgage broker? The real estate broker? Continue Reading Who Loses When Hacked Emails Send Wire Transfers to the Wrong Account?

Last month, Jim Duncey, the majority owner and face of Duncey’s Caps, Inc., was involved in a car accident and arrested for DWI.   Facing a PR crisis Duncey’s board of directors called an emergency meeting.  The board implemented its crisis plan, issued a statement condemning driving while intoxicated, suspended Duncey, ordered him to attend rehabilitation, and made a $100,000 donation to MADD. 

While the company survived the initial PR crisis, its bottom line did not.  Retail sales during the following quarter were down 20%.  One of the company’s major commercial customers also terminated its contract that produced $3 million in revenue annually.  To make matters worse, the board’s private investigator discovered that Duncey had previously been arrested for DWI three years earlier while on vacation in another state, but had managed to keep it quiet.  Does the company have any legal remedies against Duncey on top of terminating him?  Should the company seek those remedies? Continue Reading The Calm After the PR Storm: Recovering Damages from the Offender

Seeing the bottom line awash with red ink yet again, Susie Sears reluctantly decided to shut down her family-owned Widgets-R-Us.  Pressured by thinning margins, a weakening labor pool and increasing competition from foreign markets, Widgets-R-Us is leveraged to the hilt and profits are insufficient to pay even her secured debt. With no viable assets or business, there’s nothing to mortgage or to sell. How can Susie and her fellow company officers walk away without becoming personally liable?

Continue Reading Closing up Shop: Your Company and You

In the summer of 2016 Stormy Sultry aka Peggy Peterson and Dennis Duck aka David Dennison engaged in some alleged hanky-panky. Wanting to nip in the bud any later stories about what happened, Duck’s agent gets Sultry to sign a non-disclosure agreement (NDA) in exchange for which Duck happily pays Sultry $130,000 for her silence and her agreement that any dispute over the NDA could only be pursued in a private arbitration. Agreeing that damages for any breach are not readily determinable in dollars, the NDA has a liquidated damages provision that damages are $1 million per breach. Is the NDA enforceable? Continue Reading How to Avoid Trumping Non-Disclosure Agreements

Agreeing with Benjamin Franklin that there is nothing certain except death and taxes, Sketch Wood and his partner Minnie Brix, owners of Wood & Brix, and their 200 employees are certain that the new tax law will affect them, but they are a bit overwhelmed. Looking for an overview, Sketch asked his favorite non-tax lawyer to hit some of the high points of the first significant reform of the U.S. tax code since 1986. Continue Reading New Tax Law – Impacting Your Small Business and You

After not meeting his 2017 sales goals, Ollie B. Celling knows he might get fired from Duncey’s Caps, Inc. if he doesn’t get his numbers up in 2018.  Celling begins marketing Duncey’s through his personal Facebook, Instagram and Twitter accounts.  Soon he thinks he’s hit a home run: a customer from Japan wants to buy 5,000 ballcaps for whatever Major League Baseball team Yu Darvish signs with for the 2018 season.  There’s one catch – the customer wants to pay with a new cryptocurrency.  Duncey’s contracts require payment in U.S. dollars.  Celling goes to Jim Duncey, the owner of Duncey’s, and tells him that Duncey’s should change their contracts to start accepting cryptocurrency because “it’s the wave of the future.”  Should Duncey agree? Continue Reading Should You Accept Customer Payments in Bitcoin?

A number of years ago John Drane, owner of Drane Plumbing & Supply, executed a Power of Attorney (POA) naming his eldest daughter LaTrina Drane as his attorney in fact. John’s debilitating stroke last weekend risks placing him in rehabilitation for months. Determined to continue the family business that offers its customers “Let Us Drain Your Swamp,” LaTrina dusts off John’s POA. Will Latrina have any problems? Continue Reading Returning “Power” to the Power of Attorney

Crowdfunding money jar full of coinsSpurred by the frenzy of mid-century modern furniture of the 1950s and 1960s returning in popularity, a growing number of collectors are investing in and holding vintage furniture. Capitalizing on that craze, N. Stile Sune’s start-up Mothbalz Antiques cannot grow fast enough to meet demand. To buy more old warehouses and re-fit them into climate controlled spaces, N. Stile must raise over $2 million and is willing to give his investors an equity interest. Can N. Stile use crowdfunding or must he go the old fashioned route of a private placement memorandum (PPM)?

Due to Sune’s $2 million in capital needs (and more) crowdfunding is not a viable option.

Crowdfunding

The JOBS Act 2012 (Jumpstart Our Business Startups) was designed to encourage funding of U.S. small businesses and to ease various U.S. securities regulations affecting business investment. Enticingly entitled the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012,” Title III of the JOBS Act had visions of giving small individual investors access to early-stage investment and the enhanced ability to raise money beyond “friends and family,” through social media and from unknown investors like other sites such as Kickstarter.

When compared to other forms of private placements, crowdfunding is not a feasible option for our friend N. Stile Sune and Mothbalz Antiques. As explained in Forbes, here are ten reasons why:

  1. Issuers are capped to raising $1 million in any 12-month period.
  2. Shares issued are subject to a one-year restricted period.
  3. Crowdfunding is capped over a 12-month period at amounts depending upon net worth / income.
  4. Crowdfunding must be done through a registered broker-dealer or registered “funding portal.”
  5. The disclosure document (PPM) must be filed with the SEC prior to first sale and N. Stile Sune would have to file audited financial statements.
  6. Unlike JOBS Act changes affecting accredited investors, crowdfunding does not allow advertising except in narrow exceptions.
  7. Annual reports and possibly more frequent reports must be filed with the SEC.
  8. Legal prospectus liability applies to disclosures.
  9. Extensive due diligence is required, including background checks on management and large stockholders.
Tilting the Scales in Your Favor

Beware. Crowdfunding is far from a start-up fund raising panacea. You can still be sued for fraud for an actual or perceived misrepresentation or omission. One of the best ways to legally protect yourself and your business is also one of the most effective means for garnering serious investor interest.  Disclose as much information as possible about your business, ensuring that if things begin to fall apart and investors threaten to sue for securities fraud or other issues, you can use your disclosure as a powerful defense – through the traditional Private Placement Memorandum – or PPM for short.

For more information on private equity funding, check out our Gray Reed attorneys David Earhart and Mark Wigder.

Confidential folder isolated on a white backgroundGrowth in the DFW metroplex is booming, and the City of Flourish is one of the driving forces. Unfortunately, the City has had a difficult time keeping up its infrastructure with the growing population.  Recently the City selected a bid from Slab Mixer Co., a concrete pipe manufacturer, for culverts for a project widening some of the City’s streets.  After the City and Slab signed their contract, a group of Flourish citizens, concerned with how the City’s spending might affect their taxes, requested a copy of the contract under the Texas Public Information Act (TPIA).  When the City notified Slab of the request, Slab asserted that some of the terms in the contract needed to be redacted because they would give Slab’s competitors an advantage in future contracts.  Does Slab have the right to do that?

Background on the Texas Public Information Act

The Texas Public Information Act provides the public with the right to access information the government collects, subject to approximately 60 exceptions.  Tex. Gov’t Code §§ 552.221, 552.101-.154.  One exception is “information that, if released, would give advantage to a competitor or bidder.”  Id. at § 552.104(a).  Historically, the Texas Attorney General’s Office, which is charged with interpreting the Act and maintaining its uniformity, has taken the position that this exception only protects the governmental body, and not a private party.  In other words, the AG believed the Act only allowed a governmental body to protect information that would place it at a disadvantage with other governmental bodies inside and outside of the State of Texas.

Do Private Parties Have a Right to Protect Their Bid Information? 

Yes.  In 2015 the Texas Supreme Court in The Boeing Company et al. v. Paxton held that “a private party may assert the exception to protect its competitively sensitive information.”  The Court found that the plain language of the exception was not limited to a governmental body’s right to protect that information.  It also noted that the governmental body had the right to defer to the private party to assert its competitive interests were at stake and request that the competitively sensitive information be withheld.  Thus, Boeing had standing to assert the exception, but would have to show that the information requested, “if released, would give advantage to a competitor or bidder.”

What about Citizens’ Right to Know How Much Their Government is Spending? 

Some have claimed the Texas Supreme Court’s decision in Boeing has given governmental bodies a carte blanche loophole to avoid turning over any information about their contracts.  According to these critics, the Court’s decision allows the governmental bodies to assert that disclosing that information would give an advantage to the successful bidder’s competitors in the future.

While it’s a superficially appealing position from a taxpayer’s perspective, it ignores another argument that the governmental bodies assert to protect disclosure of this information.  As mentioned above, the governmental bodies have asserted the exception protects disclosure of sensitive information that the body believes will give other governmental bodies an advantage.

For example, the Boeing case points out that the Attorney General ruled the exception protected disclosure of information concerning the Texas Governor’s marketing meetings with businesses in other states because the State is competing with other states to recruit those businesses to relocate. The release of that information would give other states the advantage to approach those businesses with competing or better incentives.

Proposed Legislation

Companion bills (HB 792 and SB 407) have been filed in the Texas House and Senate to address the Texas Supreme Court’s decision in Boeing.  If enacted, the legislation would make clear that the exception only allows a governmental body to protect information that it believes would harm its competitive interests.  It would also apply an “exception to the exception” that would require governmental bodies to disclose that competitive information after the body awards the contract.  HB 792 was recently referred to committee. SB 407 was referred to committee, where it was discussed but not voted upon yet.

Tilting the Scales in Your Favor

That depends on how your business has been affected by the competitive bidding process.  If you have won bids in the past, and your proposals contain proprietary information that gives you a competitive advantage, you should ask the governmental body to redact that information if anyone requests it under the TPIA.  On the other hand, if your business has consistently lost out in the bidding process, you may want to press the Legislature to pass HB 792 and SB 407 this session so that you can see your competitor’s proposals and try to figure out how you can match, or beat, them in the future.