Maryland Business Law Blog

Crowdfunding for Startups: SEC Rules Hopefully Coming Soon

Posted by Edward Sharkey on Fri, 03/08/2013 - 05:00

When Congress legalized equity crowdfunding for startups and small businesses in the 2012 JOBS Act, it intended to give small businesses access to new investors and a viable substitute for debt financing. In addition to the excitement the law created in small businesses and startups, it sparked a lot of public commentary.

Until the SEC issues its rules, equity crowdfunding remains illegal under U.S. securities law, and access to investment capital remains cost-inefficient for many startups and small businesses. In the meantime, crowdfunding has been a hot topic for websites and publications geared toward the business and finance sectors. Investment companies, law firms, small business advocates, economists, and Congressmen are among those who have written. Although most business and finance experts have advocated a quick turnaround of the rules and cautioned the SEC against issuing rules that are too burdensome, many have not been as positive.

Earlier this week, Steven Rattner – a banker and investor who gained notoriety as President Obama’s “car czar” during the auto industry bailouts – published a critique of the crowdfunding provisions of the JOBS Act on the New York Times website. Rattner expressed reservations with allowing people to invest in “small start-ups with no track record,” even though the JOBS Act caps the amount that can be invested at a small fraction of one’s annual income.

Crowdfunding supporters argue that it is precisely this democratization of the capital market that will lead to investment in successful businesses: if the public wants to invest in a company, it likely indicates an affinity for its products or services as well.

The last time we wrote about this topic, the President had just nominated Mary Jo White as the next Chair of the SEC. Her Senate confirmation hearing is scheduled for next week, and she could take the position by mid-March. Some insiders speculate that her presence could lead the SEC to publish draft rules as early as April. A final version would come about three months later.

We will continue to monitor the state of the law regarding equity crowdfunding and will provide updates as the SEC nears completion of the rulemaking process.

Can I Make My Workers Independent Contractors?

Posted by Jeanine Gagliardi on Fri, 03/01/2013 - 05:00

The dream of having no employees can be enticing. No employment taxes. No retirement benefits. No unemployment insurance. And it seems so simple. Make all workers independent contractors. Why hasn't everyone thought of this? Well, they have. And a recent case from Kansas reminds us why everyone isn't doing it.

The Kansas case concerned a business that classified exotic dancers as independent contractors. The dispute began in 2005 when a dancer filed for unemployment benefits. The Kansas Department of Labor determined that the dancers were employees and ordered the business to make unemployment insurance contributions for them.

The business petitioned for judicial review of the Department of Labor’s decision. Eventually, the case made its way to the Kansas Supreme Court. The Court assessed the parties’ relationship under the law. In Kansas, like in Maryland and most states, the critical factor in determining whether a worker is an employee or an independent contractor is the employer’s right to control the worker and her work.

The Court held that the dancers were employees for whom the business was required to make unemployment insurance contributions. The following facts were enough evidence of control: (1) the business set rules for the dancers, including rules that regulated the dancers’ interactions with customers, and (2) rule violations were punishable by fines and termination.

While the Kansas case was limited to unemployment insurance benefits, erroneous classification of employees has consequences beyond that. Categorization of workers affects many other aspects of a business, including requirements for worker’s compensation insurance, retirement benefits, and health care.

While this case was decided in Kansas, it applied the same criteria that generally govern classification in every jurisdiction.

The takeaway: businesses do not have broad discretion to decide whether a worker is an employee or an independent contractor. Instead, a variety of state and federal laws and regulations establish tests for determining which workers are employees and which can be classified as independent contractors for particular purposes. And the penalty for getting it wrong can be expensive.

Is It Illegal to Use Unpaid Interns?

Posted by Jeanine Gagliardi on Tue, 02/19/2013 - 05:00

A recent agreement to settle a New York lawsuit reminds us of the care that businesses must take when using unpaid interns. In the case, a group of individuals that had served as unpaid interns for Charlie Rose’s talk show sued Charlie Rose. The interns claimed that state law required Rose to pay them for the work that they performed. Rather than try the case, Rose paid $250,000 to settle the matter.

Other similar lawsuits are still pending. For example, the "Black Swan" case we previously reported on is proceeding in court. In that case, two men who worked as unpaid interns on the set of "Black Swan," a Fox Searchlight Pictures (“Searchlight”) film, filed suit against Searchlight. The interns claimed that Searchlight violated federal and state labor laws by failing to pay them. The court recently permitted the "Black Swan" interns to expand the scope of their lawsuit.

Searchlight is one of several film and television units that make up Fox Entertainment Group, Inc. (“Group”). The "Black Swan" interns discovered that the policies and procedures that govern unpaid internships at Searchlight are applied to all of the Group’s interns. For this reason, the "Black Swan" interns sought leave to expand the scope of their complaint to add claims for unpaid interns who worked in any of the Group’s units. The court granted the "Black Swan" interns’ request, exposing the Group to additional liability.

Businesses that use or intend to use unpaid interns must comply with legal standards governing the practice. Guidelines issued by the federal government are available online. The standards are rigorous, and they preclude the use of interns under circumstances that many businesses believe (wrongly) are just fine. Among the guidelines are that the internship be for the benefit of the intern and that it be similar to training which would be given in an educational environment.

If you have questions concerning the application of these guidelines to your particular circumstance, please contact us.

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