I have found that many people are still unaware that the SEC has ammended the definition of "accredited investor."
Please note that the value of a primary residence now must be excluded when determining the net worth of an individual. Previously, the value of the primary residence could be included in this calculation. This will have the effect of reducing the number of persons meeting this definition.
See the definition here.
Thursday, December 29, 2011
A Loan May be a Whole Lot Easier!
Several posts ago, I described the difference between an investor/investment and a lender/loan. In various other posts and in my book Mastering Inventions & Patents; Markets & Money, I have pointed out the significant burden of regulations surrounding solicitation of investments. These burdens apply whether you are accepting money from a complete stranger or from a family member. If the investor is not accredited, then the legal costs of preparing the proper documentation that you are required to give the investor can be very substantial, easily $10,000 or more.
Therefore, if you seek relatively small amounts of capital, especially less than $50,000, it may not make sense to spend the money required to get set up to take investments. Instead it may be much wiser to take a loan. Loans are not subject to any of the regulatory burdens and are far simpler to set up. I do recommend that you have an attorney review any loan documents that you prepare, but the cost will be far less that the cost to prepare investment documentation.
Therefore, if you seek relatively small amounts of capital, especially less than $50,000, it may not make sense to spend the money required to get set up to take investments. Instead it may be much wiser to take a loan. Loans are not subject to any of the regulatory burdens and are far simpler to set up. I do recommend that you have an attorney review any loan documents that you prepare, but the cost will be far less that the cost to prepare investment documentation.
Tuesday, December 13, 2011
Access to Capital Bill Passes US House
The US House has passed HR 2940, the “Access to Capital for Job Creators Act.” It now awaits action in the Senate. As I mentioned in a previous post, this bill would eliminate the prohibition on general advertisement (solicitation) of securities offered under Rule 506 of Regulation D, which is an exemption commonly used by entrepreneurs raising small amounts of capital.
This bill and the crowdfunding bill had broad support in the House, and the Obama administration has voiced its support of the crowdfunding bill, so prospects for final passage may be good.
My opinion is that the "Access to Capital" bill is very positive for entrepreneurs, but the entire crowdfunding concept is fraught with landmines for entrepreneurs. If you do choose this method, be sure you know the potential negative consequences and how to manage them or you may have a lot of very bad days!
This bill and the crowdfunding bill had broad support in the House, and the Obama administration has voiced its support of the crowdfunding bill, so prospects for final passage may be good.
My opinion is that the "Access to Capital" bill is very positive for entrepreneurs, but the entire crowdfunding concept is fraught with landmines for entrepreneurs. If you do choose this method, be sure you know the potential negative consequences and how to manage them or you may have a lot of very bad days!
Crowdfunding Bill Advances
The US House of Representatives has passed H.R. 2930, the Entrepreneur Access to Capital Act, which I mentioned in my previous post. The bill is now awaiting action in the Senate. It allows entrepreneurs to raise up to $2 million online if they provide potential investors with audited financial statements; $1 million if not.
Wednesday, November 02, 2011
General Solicitation Ban to be Banned?
Earlier today I mentioned to you a House bill up for consideration that would make it easier for companies to raise money through "crowdfunding" sites. I also learned today that the House is voting this week on a bill that would remove the ban on public, (i.e "general") solicitation for private offerings of securities to wealthy investors.
Whereas the bill contemplating the crowdfunding changes may not end up to be very advantageous for entrepreneurs, this one should be very nice in that regard.
Whereas the bill contemplating the crowdfunding changes may not end up to be very advantageous for entrepreneurs, this one should be very nice in that regard.
Funds@Facebook.com?
Many of you may have heard of "crowdfunding," in which an entrepreneur may raise funds in small amounts through one of several Internet-based services.
There are a number of problems with this approach- one of which would be that any such solicitation would violate SEC rules regarding private placement of unregistered equitites.
Legislation currently before Congress would address this issue by allowing companies to accept from an investor up to $10,000 or 10% of the investor's income in return for equity stakes in companies. The House Financial Services committee has recently backed the proposal.
While this may initially sound like a good idea, there are very many ways for this to go wrong for the entrepreneur and the investor in the long run; far too many to address here. The biggest one for the entrepreneur, however, is that you will likely end up with dozens, hundreds, or even more investors, each of whom would then have a legal right to sue you and mess with your life! That would not be a good trade-off in my view.
If legislation ever passes making this legal, be sure to look before you leap.
There are a number of problems with this approach- one of which would be that any such solicitation would violate SEC rules regarding private placement of unregistered equitites.
Legislation currently before Congress would address this issue by allowing companies to accept from an investor up to $10,000 or 10% of the investor's income in return for equity stakes in companies. The House Financial Services committee has recently backed the proposal.
While this may initially sound like a good idea, there are very many ways for this to go wrong for the entrepreneur and the investor in the long run; far too many to address here. The biggest one for the entrepreneur, however, is that you will likely end up with dozens, hundreds, or even more investors, each of whom would then have a legal right to sue you and mess with your life! That would not be a good trade-off in my view.
If legislation ever passes making this legal, be sure to look before you leap.
Friday, October 21, 2011
Do You Really Mean "Investor?"
Entrepreneurs often tell me they want to "get investors" for their business. However, in questioning them I find out that they often do not understand the definition of the term "investor." Below are some key points to help you understand the term in case you are unsure of the meaning as well.
-Someone who loans money to you or your company is not an investor; they are a lender.
-An investor will receive an ownership stake in your company in return for the investment, whereas a lender will not (unless there is a separate agreement to this effect).
-An investment does not have to be paid back, whereas a loan does have to be paid back.
-The sale of an investment may be considered to be a sale of a security and thus regulated by the Securities Exchange Commission and state regulators, whereas a loan is not considered a security.
-The sale of an investment will be considered to be the sale of a security if the investor does not have management control in the company.
I hope this helps!
-Someone who loans money to you or your company is not an investor; they are a lender.
-An investor will receive an ownership stake in your company in return for the investment, whereas a lender will not (unless there is a separate agreement to this effect).
-An investment does not have to be paid back, whereas a loan does have to be paid back.
-The sale of an investment may be considered to be a sale of a security and thus regulated by the Securities Exchange Commission and state regulators, whereas a loan is not considered a security.
-The sale of an investment will be considered to be the sale of a security if the investor does not have management control in the company.
I hope this helps!
Friday, September 30, 2011
Patent Bill Update
Well, the patent reform bill is now law, but the provisions do not take effect until 2013. The bill provides broad outlines for the new provisions, but the USPTO will have to issue new rules based on the statute. The federal courts will inevitably end up having to interpret these new rules, so it will be quite some time (e.g., years) before all of the implications of the law become clear. Stay tuned...
Monday, September 12, 2011
Patent Bill Sent to Obama
Well, the senate passed the patent reform act and sent it to Obama for signature. Obama has previously stated that he will sign the bill, so I guess it's a done deal.
This is clearly set up to benefit large corporations. Large corporations clearly have not been the drivers of the U.S.'s world leadership in innovation. R.I.P innovation leadership. We will be inevitably dragged down to the standards of the rest of the world.
This is clearly set up to benefit large corporations. Large corporations clearly have not been the drivers of the U.S.'s world leadership in innovation. R.I.P innovation leadership. We will be inevitably dragged down to the standards of the rest of the world.
Friday, September 09, 2011
Patent Changes Update
Well, it looks like the patent law overhaul that I mentioned in my previous post is closer to reality and almost assured of being signed into law.
While some of the provisions seems reasonable, the "biggie," which is the change to a first-to-file system from a first-to-invent system, will be extremely destructive to innovation, especially among independent inventors. This provision clearly and overwhelmingly favors the huge corporations that forced this legislation on us.
The Wall Street Journal recently reported on a study by researchers at the University of Pennsylvania that showed that when Canada changed its patent system in a simlar manner in 1989, filings by independent inventors dropped and did not recover.
Think about it... the rest of the world uses the first-to-file system, but virtually all of the significant technology development in the world occurs in the U.S., with its first-to-invent system. Has anyone in Washington ever heard of the sage advice: "If it ain't broke, don't fix it?" (Of course not; silly me!)
Unfortunately, it looks like this is a done deal, according to what I have read.
While some of the provisions seems reasonable, the "biggie," which is the change to a first-to-file system from a first-to-invent system, will be extremely destructive to innovation, especially among independent inventors. This provision clearly and overwhelmingly favors the huge corporations that forced this legislation on us.
The Wall Street Journal recently reported on a study by researchers at the University of Pennsylvania that showed that when Canada changed its patent system in a simlar manner in 1989, filings by independent inventors dropped and did not recover.
Think about it... the rest of the world uses the first-to-file system, but virtually all of the significant technology development in the world occurs in the U.S., with its first-to-invent system. Has anyone in Washington ever heard of the sage advice: "If it ain't broke, don't fix it?" (Of course not; silly me!)
Unfortunately, it looks like this is a done deal, according to what I have read.
Thursday, August 25, 2011
Royalties on Products of Government-sponsored Research?
I may be a little behind the times, but I just became aware of a House bill that proposes to establish a commission to study the imposition of royalties upon products that commercialize federally funded research. The funds would ostensibly be used to promote research and/or STEM education.
However, we know that this is really a transfer of funds from private-sector innovators that are successfully commercializing new products to the Federal Government which has not exactly been the best money manager we've ever seen.
I have excerpted, for your reading pleasure, a few pertinent portions of the bill. You can read the entire thing at govtrack.us.
SEC. 2. ESTABLISHMENT.
There is established a commission to be known as the ‘Commission on American Discoveries and American Jobs’ (in this Act referred to as the ‘Commission’).
SEC. 3. FINDINGS.
Congress finds the following:
(1) The Federal Government is estimated to have spent $147,400,000,000 in fiscal year 2010 on research and development (not including funds allocated under the American Recovery and Reinvestment Act (Public Law 111-5)) to meet the mission requirements of the Federal departments and agencies.
(2) Federal Government research and development has led to new products and processes for the commercial marketplace, including antibiotics, plastics, airplanes, computers, microwaves, and bioengineered drugs.
(3) There are many other technologies and techniques generated in the Federal laboratory system that could have market value if further developed by the industrial community, and the knowledge base created by the research and development activities of such system can serve as a foundation for additional commercially relevant efforts in the private sector.
(4) Technological progress is responsible for up to half the growth of the United States economy and is the principal driving force behind long-term economic growth and increases in our standard of living.
(5) It is only through commercialization, a function of the business sector, that a significant stimulus to economic growth occurs. Thus, there is congressional interest in accelerating development and commercialization activities in the private sector through legislation.
(6) Royalties derived from intellectual property rights provide the academic community a way to support further research and the business sector a means to obtain a return on their financial contributions to such research.
SEC. 4. DUTIES OF COMMISSION.
(a) Study- The Commission shall conduct a study to examine--
(1) the state of technology transfer from federally funded research to the private sector;
(2) the possibilities for the Federal Government to collect royalties from early research that leads to the commercialization of a profitable product or technology;
(3) the potential adverse consequences of such royalties on technology transfer, commercialization, and economic growth; and
(4) the potential benefits of reinvesting revenues from Federal royalties into science, technology, engineering, and math education, and seeding future federally funded research;
(b) Report- Not later than one year after the first meeting of the Commission, the Commission shall submit to Congress a written report of the results of the study conducted under subsection (a) and recommendations of regulatory and statutory changes that would enable the Federal Government to--
(1) claim royalties from the investment of the Federal Government in early research;
(2) reinvest such royalties in science, technology, engineering, and math education and future Federal research;
(3) ensure products resulting from Federal research are manufactured in the United States; and
(4) affix a symbol, marker, or insignia on commercialized products to show that they had originated from federally supported research.
However, we know that this is really a transfer of funds from private-sector innovators that are successfully commercializing new products to the Federal Government which has not exactly been the best money manager we've ever seen.
I have excerpted, for your reading pleasure, a few pertinent portions of the bill. You can read the entire thing at govtrack.us.
SEC. 2. ESTABLISHMENT.
There is established a commission to be known as the ‘Commission on American Discoveries and American Jobs’ (in this Act referred to as the ‘Commission’).
SEC. 3. FINDINGS.
Congress finds the following:
(1) The Federal Government is estimated to have spent $147,400,000,000 in fiscal year 2010 on research and development (not including funds allocated under the American Recovery and Reinvestment Act (Public Law 111-5)) to meet the mission requirements of the Federal departments and agencies.
(2) Federal Government research and development has led to new products and processes for the commercial marketplace, including antibiotics, plastics, airplanes, computers, microwaves, and bioengineered drugs.
(3) There are many other technologies and techniques generated in the Federal laboratory system that could have market value if further developed by the industrial community, and the knowledge base created by the research and development activities of such system can serve as a foundation for additional commercially relevant efforts in the private sector.
(4) Technological progress is responsible for up to half the growth of the United States economy and is the principal driving force behind long-term economic growth and increases in our standard of living.
(5) It is only through commercialization, a function of the business sector, that a significant stimulus to economic growth occurs. Thus, there is congressional interest in accelerating development and commercialization activities in the private sector through legislation.
(6) Royalties derived from intellectual property rights provide the academic community a way to support further research and the business sector a means to obtain a return on their financial contributions to such research.
SEC. 4. DUTIES OF COMMISSION.
(a) Study- The Commission shall conduct a study to examine--
(1) the state of technology transfer from federally funded research to the private sector;
(2) the possibilities for the Federal Government to collect royalties from early research that leads to the commercialization of a profitable product or technology;
(3) the potential adverse consequences of such royalties on technology transfer, commercialization, and economic growth; and
(4) the potential benefits of reinvesting revenues from Federal royalties into science, technology, engineering, and math education, and seeding future federally funded research;
(b) Report- Not later than one year after the first meeting of the Commission, the Commission shall submit to Congress a written report of the results of the study conducted under subsection (a) and recommendations of regulatory and statutory changes that would enable the Federal Government to--
(1) claim royalties from the investment of the Federal Government in early research;
(2) reinvest such royalties in science, technology, engineering, and math education and future Federal research;
(3) ensure products resulting from Federal research are manufactured in the United States; and
(4) affix a symbol, marker, or insignia on commercialized products to show that they had originated from federally supported research.
Wednesday, August 10, 2011
America Invents Act
I hope that you have already heard about the America Invents Act, but if not, you should get yourself up to speed on this potential radical change to US Patent law. The House and Senate have both passed substantially similar legislation and if the bills are reconciled, the President has indicated that he would sign the resulting legislation.
The most radical change is the move from a first-to-invent system to a first-to-file system such as is found in other countries. A great summary of the legislation and a discussion of potential effects is found in this Wikipedia article.
One interesting excerpt is the following: "The patent reform bill of 2007, which the current bill closely resembles, was analyzed by the Deputy Director of IP division of Beijing High People's Court, Senior Judge, and he found that that the bill "... is friendlier to the infringers than to the patentees in general as it will make the patent less reliable, easier to be challenged and cheaper to be infringed. It is not bad news for developing countries which have fewer patents. Many of the Chinese companies are not patent owners in the U.S. market and their products are often excluded from the market because of patent infringement accusations. This bill will give the companies from developing countries more freedom and flexibility to challenge the relative US patent for doing business in US and make it less costly to infringe."
Sound scary to you? Please read up and comment with your thoughts on this change to the patent law.
The most radical change is the move from a first-to-invent system to a first-to-file system such as is found in other countries. A great summary of the legislation and a discussion of potential effects is found in this Wikipedia article.
One interesting excerpt is the following: "The patent reform bill of 2007, which the current bill closely resembles, was analyzed by the Deputy Director of IP division of Beijing High People's Court, Senior Judge, and he found that that the bill "... is friendlier to the infringers than to the patentees in general as it will make the patent less reliable, easier to be challenged and cheaper to be infringed. It is not bad news for developing countries which have fewer patents. Many of the Chinese companies are not patent owners in the U.S. market and their products are often excluded from the market because of patent infringement accusations. This bill will give the companies from developing countries more freedom and flexibility to challenge the relative US patent for doing business in US and make it less costly to infringe."
Sound scary to you? Please read up and comment with your thoughts on this change to the patent law.
Monday, August 01, 2011
How to Predict the Future
Who wouldn't like to be able to predict the future? Well, I can't give you an absolutely foolproof way to predict your future, but I can pass along some wisdom I heard long ago from a source I no longer recall. And that is this: "The best way to predict the future is to create it."
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