New York & New Jersey Business Lawyer Blog

Tax Credits [CC BY 2.0 (], via FlickrPrivate equity, the process by which companies can raise funding from investors, comes with numerous rules and regulations enforced by the Securities and Exchange Commission (SEC). One of the most important rules that small businesses must understand is Regulation D, or “Reg D,” 17 C.F.R. § 230.500 et seq., which sets forth the procedures for offering securities for sale without going through the full process of registering with the SEC under the Securities Act of 1933, 15 U.S.C. § 77a et seq. Reg D prohibits advertising any sale of securities to the general public, and it states that a business may only issue securities to “accredited investors.” In August 2015, the SEC approved a venture capital firm’s plan to use an online platform to match investors with businesses, finding that it does not conflict with Reg D’s ban on public advertising. This could be good news for other businesses hoping to leverage the internet and social media to raise private equity funds.

Under Reg D, securities may only be issued to “accredited investors,” defined to include banks, nonprofit business trusts, directors, or officers of the issuing company, and individuals with a net worth of more than $1 million or annual income in excess of $200,000. 17 C.F.R. § 230.501(a). With some exceptions, an issuer under Reg D cannot advertise the sale of securities or solicit purchasers from the general public. 17 C.F.R. § 230.502(c). Issuers must file Form D with the SEC to indicate compliance with Reg D.

Rule 506 of Reg D, codified at 17 C.F.R. § 230.506, establishes procedures for communicating with potential investors. Most Reg D offerings follow Rule 506(b), which provides that issuers can approach potential investors if they have a pre-existing relationship, but they cannot advertise or solicit investors from the general public. Offerings under Rule 506(b) may also include up to 35 non-accredited, sophisticated investors who are “capable of evaluating the merits and risks of the prospective investment.” Id. at § 230.506(b)(2)(ii).

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geralt [Public domain, CC0 1.0 (], via PixabayCybersecurity is a critically important part of nearly every business operating today. Data breaches that compromise customers’ personal information, such as names, addresses, and credit card numbers, can result in huge losses due to identity theft and other types of fraud. If the Federal Trade Commission (FTC) concludes that a business failed to take adequate measures to protect its data, it can bring an enforcement action for “unfair or deceptive acts or practices in or affecting commerce” under Section 5 of the FTC Act, 15 U.S.C. § 45. The Third Circuit Court of Appeals recently ruled in the FTC’s favor in a case involving the theft of more than 619,000 customers’ credit card information by hackers. FTC v. Wyndham Worldwide Corp., No. 14-3514, slip op. (3rd Cir., Aug. 24, 2015). The court did not rule on the merits of the FTC’s claim. It merely found that the FTC has authority to pursue the claim under Section 5.

According to the court’s ruling, the FTC began enforcing Section 5 “against companies with allegedly deficient cybersecurity that failed to protect consumer data against hackers” in 2005. Id. at 6. The defendant, which manages hotels directly and franchises its brand to independent hotels, experienced three cybersecurity breaches in 2008 and 2009. The theft of customer financial data resulted in fraudulent credit card charges exceeding $10.6 million. The defendant uses a “property management system” to process customer information, including names, addresses, and credit card information. Id. at 7. It requires franchisees to use the same system, configured to certain specifications.

The FTC’s lawsuit alleged numerous deficiencies in the defendant’s cybersecurity measures, including inadequate supervision of franchisees’ use of the property management system; use of “easily guessed passwords [by franchisees] to access the property management systems,” id. at 8; lack of firewalls and other common cybersecurity tools; failure to restrict access to its network by third-party vendors; the ability of franchisees to connect their networks to its central network without security; and failure to monitor its networks for intrusions, even after the first and second breaches. These acts and omissions, the FTC claimed, constituted “unfair” practices under the FTC Act. 15 U.S.C. § 45(a)(1).

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By Ken Lund [CC BY-SA 2.0 (], via Wikimedia CommonsManaging employment-related matters can be one of the trickiest, most difficult aspects of owning and running a business. A vast array of laws at the local, state, and federal levels affect the employer-employee relationship, including wages, hours of work, workplace safety, family and medical leave, non-discrimination, and reasonable accommodations for certain needs and conditions. While the vast majority of employment statutes and regulations have the best of intentions, maintaining full compliance with all applicable laws can be difficult for businesses with entire staffs devoted to the task. Small businesses may inadvertently run afoul of an employment law and face substantial penalties as a result. Recent news from the U.S. Department of Labor (DOL) illustrates the magnitude of the issue for New Jersey businesses. The DOL is holding more than $7 million collected from New Jersey employers in wage and hour claims, which remains unclaimed by employees.

The DOL’s Wage and Hour Division (WHD) enforces certain provisions of the federal Fair Labor Standards Act (FLSA), 29 U.S.C. § 201 et seq., the statute that sets the nationwide minimum wage. Since 2010, the federal minimum wage has been $7.25 per hour. 29 U.S.C. § 206(a)(1)(C). The FLSA also establishes overtime pay of time-and-a-half for employees working over 40 hours in a week, with some exceptions. 29 U.S.C. § 207(a). The WHD can take legal action against employers for alleged violations of FLSA wage and hour provisions. The DOL maintains a website entitled “Workers Owed Wages,” or “WOW,” where people may search to see if their employer is listed, and then if they are included in any recovery of back wages.

New Jersey’s equivalent statute is the New Jersey Wage and Hour Law, N.J. Rev. Stat. § 34:11-56a et seq. It has similar provisions for overtime but sets a higher statewide minimum wage. As of January 1, 2015, New Jersey’s minimum wage is $8.38 per hour. N.J.A.C. § 12:56-3.1(a). The New Jersey Department of Labor and Workforce Development enforces state wage and hour laws.

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By Kevin Hutchinson (Flickr) [CC BY 2.0 (], via Wikimedia CommonsRaising capital is a critical step in the early stages of starting a business, but federal and state laws set several important limits on this process. Ownership in a business, when given in exchange for a monetary contribution, is generally considered a “security” for the purpose of federal financial law. Federal law requires companies that are offering stock for sale to the public to register the offer with the Securities and Exchange Commission (SEC). An exception to this rule, known as “Regulation D” or “Reg D,” allows companies to offer stock to certain investors without the lengthy and expensive SEC registration process. This allows small businesses and startups to approach angel investors, venture capital firms, and others.

Public vs. Private Offerings

The process of raising capital for a small business or startup is commonly known as “private equity,” since funding comes from a limited pool of potential investors. A company that registers with the SEC and meets all of the requirements of the Securities Act of 1933, 15 U.S.C. § 77a et seq., can offer their stock for sale to the general public on exchanges like the New York Stock Exchange. It then becomes known as a “publicly-traded” company.

When a company offers its stock for sale to the public for the first time, it is known as an initial public offering (IPO). Obtaining SEC approval for an IPO is complicated, expensive, and out of reach for startups and many small businesses. These businesses need to raise capital, but they must do so in a way that does not inadvertently become an unauthorized public offering of securities.

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PublicDomainPictures [Public domain, CC0 1.0 (], via PixabayThe word “license” comes up quite often in discussions of starting, owning, and running a small business, but it can be easy to get confused about what a business owner or entrepreneur must do to remain in compliance with the law. In a very general sense, “license” means the freedom to act. More specifically, it means official permission to engage in a particular activity, such as driving a car. In a business context, a license confers the right to engage in certain types of business or professional activities. A license may be held by an individual, as in the case of a professional or occupational license, or by a business organization. Operating without a required license can have serious consequences, ranging from substantial fines to criminal penalties. New Jersey and New York business owners should be aware of the various types of licenses in order to determine what they need for their own businesses.

Licensing Authorities

Most licenses needed to do business in New Jersey are issued and managed by local or state agencies. State agencies typically handle occupational and professional licenses based on qualifications and criteria that apply statewide. Licenses and permits that pertain to a specific location, such as construction or use permits, are often the responsibility of officials at the city or county level, who might have greater knowledge and understanding of local circumstances and issues. Businesses in certain industries might need licenses from one or more federal agencies.

Professional and Occupational Licenses

Licenses are reportedly required for more than 200 occupations in New Jersey, which is slightly below the national average. About 20 percent of New Jersey’s workforce need a license for their job.

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By Urbanrenewal (Own work) [Public domain], via Wikimedia CommonsSmall business owners and entrepreneurs in New Jersey and New York have a wide range of options for financing their businesses. Venture capital (VC) financing is a rather well-known method of financing a startup business. While it accounts for only a small percentage of total business financing, venture capital has gained prominence in recent years because of its role in the technology sector in California’s Silicon Valley region and other areas of the country. Even if your company is not able to catch the interest of any VC firms, the VC process still offers useful ideas for business financing in general.

What is venture capital?

The term “venture capital” generally refers to private equity invested in startup businesses that demonstrate a high potential for growth and a return on investment. A VC firm manages a VC fund, which provides the capital to invest in promising business ventures.

Stage 1: Seed Financing

All businesses, to some extent, begin as an idea. In some cases, an individual or new business venture may be able to convince an angel investor or VC firm that their idea, which could involve a product or service, has a high potential for growth and is a worthwhile investment. Since an investment at such an early stage carries a high degree of risk, VC firms often require a “feasibility study” showing that the idea is both technologically and economically feasible.

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By Peosoldier photographer [Public domain], via Wikimedia CommonsEvery business may begin with an idea, but without money, a business cannot operate and grow. Most aspiring business owners fund their businesses from their own savings, or from credit cards or bank loans. A wide range of investment sources are available for businesses that can demonstrate a solid product or service, and the potential for growth and scalability, and profitability.

Stages of Business Financing

New businesses often follow several stages in obtaining financing:

– Seed stage:  The business solely consists of an idea or a product.
– Startup financing:  The business is ready to launch its product or service. In venture capital financing, this is sometimes known as the “Series A” financing round.
– Second-stage financing:  The business has demonstrated its viability and needs additional capital. This is sometimes called “Series B” financing.
– Line of credit, additional financing:  The business is nearing profitability and secures a line of credit from a commercial bank for “working capital.” It may also seek additional rounds of financing, beginning with “Series C” and continuing through the alphabet.
– Acquisition or IPO:  The business is acquired by another business or makes an initial public offering (IPO), which makes its shares available for purchase and sale on one or more stock exchanges.

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By Employeeperformance (Own work) [Public domain], via Wikimedia CommonsBuilding a team is a critical step in the process of growing a small business, but it brings unique issues and challenges. Employment laws at the federal, state, and local levels affect almost every aspect of the employer/employee relationship. Here is a brief overview of some laws that New Jersey small business owners should know, with a focus on laws at the state level.

Minimum Wage

The New Jersey Wage and Hour Law (WHL), N.J. Rev. Stat. § 34:11-56a et seq., governs wage rates throughout the state. As of January 1, 2015, the minimum wage for employers in the State of New Jersey is $8.38 per hour. The federal minimum wage has been $7.15 per hour since 2010. 29 U.S.C. § 206(a)(1)(C).

The minimum wage for employees, such as food servers, who receive gratuities or tips from customers is $2.13 per hour. This is the same as the federal rate. If an employee’s tip income is less than $6.25 per hour for a pay period, however, the employer must make up the difference to bring their wage up to $8.38 per hour.

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Identify the image source as Compliance and Safety LLC and include a working hyperlink to on the same page that uses this image. [CC BY-SA 3.0 (], via Wikimedia CommonsCybersecurity, the process of protecting a company’s digital assets from theft and other harm, is an important issue for every business, regardless of size or complexity. Almost every business now relies on computers to some extent, and criminals are constantly developing ways to access business computer systems to steal customer information or company financial information, or even just to cause damage. Hackers may be able to penetrate a company’s computer security remotely, but many high-profile data breaches are accomplished by stealing laptop computers, hard drives, and other hardware. A company’s legal liability for a data breach is still a developing area of law, and few answers are certain in that area. Avoiding legal liability, however, is far from the only reason to take precautions against data breaches.

Recent data breaches have led to lawsuits against the affected companies by customers and shareholders, and a data breach could also result in administrative fines or penalties in some circumstances. Few statutes directly address a company’s liabilities with regard to cybersecurity, but numerous legal claims are possible:

– Negligence:  One or more customers whose personal information was compromised in a data breach could claim that the company breached a duty of care to safeguard that information, and that this caused them financial damage.

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By Pictofigo (Own work) [CC BY-SA 3.0 (], via Wikimedia CommonsGreat business successes often begin with a single idea, or so we often hear from people who have succeeded in business. It is certainly true that an idea can mark the beginning of a process that, hopefully, results in “success” by whatever metric a business owner wants to measure it. That process has many steps, and it requires the assistance and involvement of many other people, businesses, and organizations. How does a business owner or entrepreneur embark on this path while keeping others from stealing their idea? Intellectual property laws are not much help for something that is still in the “idea” phase, but New Jersey’s trade secrets law may provide some protection. Caution is still a good strategy, however, and no business venture is free of this sort of risk.

The first question to address, of course, is what we mean by a “business idea.” In order to qualify for legal protection, a business idea cannot be too general or vague. New Jersey law states that a “trade secret” must be kept secret, must have “actual or potential” economic value, and must not be something that a competitor could easily figure out on their own. N.J. Rev. Stat. § 56:15-2. New Jersey law allows a person to obtain injunctions and recover damages, including actual damages and unjust enrichment, for misappropriation of trade secrets.

If an idea must be kept secret in order to have protection under the trade secrets law, how does anyone ever work with other people on their business ideas? This is the part that involves some inherent risks. A person may ask other people, prior to meeting to discuss the idea, to sign a non-disclosure agreement (NDA). This can be effective, since it is enforceable both under the trade secrets law and breach of contract law. Some larger companies, however, may refuse to sign NDAs, often on the grounds that they do not want to risk exposure to a legal claim if they reject the idea, but then later develop a similar idea entirely on their own.

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