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Many believe that crowdfunding will become the most popular financing strategy, instead of the traditional VC funding. A recent survey says no.

Much of the startup financing chatter over the last few months has revolved around the passage of the JOBS Act, and its impact on startup financing in the US. With the passage of the JOBS Act came crowdfunding, an innovative way to raise capital for businesses. Many believe that crowdfunding will become the most popular financing strategy—a movement away from the traditional venture capital firms. However, a recent survey may change this belief.

A recent update to a 2010 survey conducted by law firm Dorsey & Whitney polled more than 300 startup executives about how they plan to fund their business. Here are some of the reasons why startup CEOs may continue to seek traditional venture capital financing.

Survey Highlights

A Rise of…

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CROWDFUND Act

SEC Reiterates: Crowdfunding Not Legal Yet
The SEC issued an official comment emphasizing that crowdfunding is not yet legal. The JOBS Act has passed, and it makes crowdfunding legal, but not until the SEC issues a number of rules proscribed by the legislation. Congress wrote into the bill that the SEC had 270 days to promulgate these proscribed rules. The SEC’s statement reads:

“On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law. The Act requires the Commission to adopt rules to implement a new exemption that will allow crowdfunding. Until then, we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal…

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This entry in the Social Media Legal Issues series examines the nature of contracts and how to protect your business from rogue contracts made via social media.

Business owners and their employees often deal with contractual relationships in the course of running almost every type of business.

Though lawyers almost always advise against it, business people often form unwritten “handshake” deals with partners, suppliers, competitors, and customers. Many an unscrupulous business person has been “saved” by the fact that the deal to which he agreed was not in writing. Similarly, many managers have been “saved” by the fact that the oral promises their employees made were not easily enforceable.

The age of social media, for better or for worse, will make it more difficult for business owners who do not properly educate themselves and their employees regarding “contracts” to evade the consequences of thoughtless agreements. And thoughtless agreements will…

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This post continues our exploration of series LLCs by detailing the enterprise law and 'no boundaries' approach employed bankruptcy proceedings.

This post continues our exploration of series LLCs and their treatment in bankruptcy proceedings.

Option Three: Enterprise Law
In some situations, an LLC will appear to be separate in its operating agreement, but in reality function in a more integrated manner.  In these situations, a court would find the LLC is substantively consolidated and apply the doctrine of enterprise law.

Unlike entity law, enterprise law does not presume boundaries of liability. Instead, enterprise law looks at the situation as a whole and determines whether various firms are engaged in a joint enterprise. Our last post discussed four factors courts will use to determine the extent of separateness or consolidation of entities within a corporate group. To establish actual boundaries between each series, an…

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Today we’ll explore a second possible option for how bankruptcy court should treat series LLCs: entity law with (some) exceptions approach.

This post continues the discussion of series LLCs and bankruptcy. There are still unanswered questions in this area of law. Today we’ll explore a second possible option for how bankruptcy court should treat series LLCs: entity law with exceptions approach.

Option Two: Entity Law with Some Exceptions
Recall that to file for bankruptcy, a series must be a “person” under the Bankruptcy Code (the “Code”). Typically, LLCs are treated as a “person” by bankruptcy courts even though they aren’t mentioned in the definition in the Code. At this point, no court has determined a cell’s “personhood” for bankruptcy purposes.

Entity law is the general starting point for corporate groups in bankruptcy. Entity law is the body of law that creates formal legal boundaries…

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Securities Transactions & Corporate Governance

Google Stock Split Preserves Founder Control
Google’s stock split that was announced last Friday created a new class of non-voting stock. Google’s stock structure provides for 66% of the voting power to be concentrated in the hands of three individuals: the company’s two co-founders, Larry Page and Sergey Brin, and the Executive Chairman, Eric Schmidt. By creating the class of non-voting stock, and distributing this stock in the stock split, the controlling shareholders will avoid having their voting rights diluted. Other web companies such as Zynga, Facebook, and Groupon have implemented a similar stock structure, which allows for visionary company leaders to maintain company control. The drawback is that others, including investors and employees, have relatively fewer votes….

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The JOBS Act and crowdfunding: what the opponents and proponents are saying about the newly passed crowdfunding legislation.

With the recent discussion surrounding the JOBS Act and crowdfunding, we thought it was a good time to discuss some of the criticisms surrounding crowdfunding, as well as reasons why some of the criticism may be lacking legitimacy.

Loosening regulations opens the door to reckless investing and scam artists
Much of the criticism over the passing of the JOBS Act stems from the fear that loosening investment regulations is an invitation for get-rich-quick scam artists to take advantage of a larger pool of investors via the Internet. Economist Robert Reich argues that crowdfunding is just a means by which people whose net worth is less than $100,000 can “gamble away” up to 5 percent of their annual incomes. Another critic, Jack Hernstein,…

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This is the final installment in our key term sheet provisions series. This post reviews rights of first refusal, restrictions on sales, voting rights, proprietary information and inventions agreements, co-sale agreements, founders activities, no shop agreements, and indemnification provisions.

Right of First Refusal
The right of first refusal provision grants investors a right to participate in subsequent stock offerings. This right is sometimes called a pro rata right, because it enables investors to participate pro-rata. Pro rata means proportional, and in this context means that an investor can purchase an amount of new stock proportionate to their holdings in the company immediately prior to the issuance of the new offering. In more simple terms, it means that if an investor has 5%…

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Today's post explores one approach bankruptcy courts may take when dealing with series limited liability in a series LLC: impenetrable boundaries.

To follow up last week’s post that detailed the background of series LLCs, I wanted to bring to light one of the major risks related to starting a series LLC. Today’s post takes a look at the issues presented by unanswered questions pertaining to treatment of series LLCs and bankruptcy. Over the course of the next few weeks, we’ll discuss four possible options for how bankruptcy could (and perhaps, should) handle series liability during bankruptcy proceedings. Today’s post explores option one: impenetrable boundaries between series.

Are individual series able to file for Bankruptcy?
If an insolvent series (or cell) is to protect the other cells from its liabilities, it would make sense that the individual cell could file for bankruptcy. Right? Unfortunately,…

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CROWDFUND Act & Securities Law

SEC Seeks Feedback On JOBS Act
The SEC announced on Wednesday that it is seeking feedback on the changes that will be forthcoming under the JOBS Act.  The JOBS Act makes it easier for companies, smaller companies in particular, to raise money through the sale of equity. In the JOBS Act, Congress left much of the heavy lifting to the SEC. For example, the portion of the bill that requires crowd funding websites to protect consumers states “intermediareies shall take such measures to reduce the risk of fraud with respect to such transactions, as established by the Commission (the SEC), by Rule.” Because important aspects of this bill have been left to the SEC, it will be…

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