Maryland Business Law Blog

Crowdfunding for Small Businesses and Startups

Posted by Edward Sharkey on Fri, 07/13/2012 - 21:38

Small businesses and startups are excited about a key provision of the new JOBS bill. For the first time, businesses can raise up to $1 million (each year) through public "crowdfunding", without having to register a public offering.

This is a tremendous simplification of the process.

Previously, to sell stock of any kind, a business had to register the offer with the SEC, or get an exemption under fairly strict limitations on who could invest and how the issue could be promoted. Both paths were costly and cumbersome. Now, businesses will be able to raise up to $1 million through public offerings to non-accredited investors. The expectation is that this will be accomplished through existing broker-dealers or approved “funding portals” that will register with the SEC. Already, crowdfunding sites are positioning themselves online.

Disclosures will still be needed. A company that wants to raise less than $100,000 will need to provide tax returns and financial statements certified by the CEO. For $100,000 to $499,000, the company’s financial statements will need to be reviewed by a public accountant. For $500,000 to $1 million, a company will need to provide audited financials.

Investors with incomes of less than $100,000 will be limited to investing 5% of income or a $2,000. Those who make more than $100,000 will be limited to 10% of income or $10,000. The bill also raises the cap on the number of shareholders a business may have before being required to register with the SEC from 500 to 1,000. Businesses also are allowed to raise up to $50 million before starting the process of going public.

The SEC is working on regulations to implement the law, which should be ready in early 2013. All of this is going to help reduce the cost and friction of bringing capital to small businesses and startups. It will not eliminate all of the costs. Issuers will still need to prepare and file disclosure statements, including a description of the business and a business plan. In addition, issuers raising $100,000 or more will need a public accountant. But it is a giant step toward liberalizing the capital markets at a time when it is tough for small businesses to find funding.

What to do Upon Receiving a "No Match" Letter from Social Security

Posted by Edward Sharkey on Thu, 07/05/2012 - 16:47

When businesses hire a new employee, the government gets notice of his name and social security number. If they do not match the government's data, the Social Security Administration sends the employer a "no match" letter. This can be the result of government error. It can also mean the employee is using a false social security number.

The government has not given businesses guidance on what to do about it. The Department of Labor merely suggests that businesses give the employee time to resolve the issue with the government. It has not said what to do if that does not work.

This leaves businesses faced with two options. Retain the worker at the risk of liability for employing an unauthorized worker. Or terminate the worker at the risk of a discrimination claim if he is in a protected class (such as being a foreign national).

A recent opinion, from a federal appeals court has provided a little clarity. It suggests that an employer who terminates a worker due to immigration status will not be violating federal anti-discrimination law.

In the case, a bank employee helped her husband, an alien in the U.S. illegally, to open banking accounts. When the bank discovered it, it became concerned about fraud. It eventually fired the employee. She sued, claiming she was terminated because she was married to a foreign national.

The court dismissed the lawsuit. The court of appeals explained that “national origin,” which can be the basis for a discrimination claim, is defined as “the country from which you or your forbearers came.” This is different from "alienage" or a person's immigration status. Alienage is not a protected class. If a business fires a worker because it believes he is an illegal alien, the employee has no claim for discrimination.

The takeaway: while the distinction between national origin and alienage is narrow, a business that gives an employee leeway to address a "no-match" issue could reasonably consider termination if it is not resolved and the business is concerned about keeping an illegal worker. The decision in each case should be made on the basis of the specific facts.

The ADA Does Not Protect Medical Marijuana Use

Posted by Jeanine Gagliardi on Thu, 06/07/2012 - 22:25

In addition to protecting individuals with disabilities from discrimination in employment, the ADA prohibits entities from discriminating against individuals with disabilities in the provision of public services. There are, however, limits. In a recent California case concerning public services, a U.S. Court of Appeals held that medical marijuana use is not protected by the ADA. Although the case arose outside of the employment context, the holding is instructive for employers.

California law permits residents to use marijuana for medical purposes. Two California cities in which facilities distribute medical marijuana have acted to close the facilities. Three “severely disabled” Californians who use the facilities to obtain medical marijuana sued the cities, claiming that the efforts to close the facilities violate the ADA’s preclusion of public services discrimination.

The trial court rejected the patients’ claim, and the appellate court agreed. The ADA expressly states that an individual engaged in the illegal use of drugs is not an individual with a disability under the Act. Although medical marijuana use is permitted by California state law, it remains illegal under federal law. For this reason, the ADA does not protect against discrimination on the basis of medical marijuana use. In the employment context, the court’s holding means that firing an employee because of marijuana use, regardless of any given reason, does not violate the ADA.

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