New York & New Jersey Business Lawyer Blog

By Kevin Hutchinson (Flickr) [CC BY 2.0 (http://creativecommons.org/licenses/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 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], 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 http://complianceandsafety.com on the same page that uses this image. [CC BY-SA 3.0 (http://creativecommons.org/licenses/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 (http://creativecommons.org/licenses/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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geralt [Public domain, CC0 1.0 (http://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe attorney-client privilege, which safeguards communications between an attorney and a client, is a cornerstone of our legal system. Attorneys must maintain a high standard of confidentiality, and the attorney-client privilege builds on this by stating that a lawyer may not be compelled to testify about communications with a client, or to disclose such information in response to a subpoena or other demand. The privilege can apply to almost any sort of legal matter, not just communications related to litigation. Business clients face complicating factors that may not be present for individuals. For example, an employee of a business must be authorized to speak on behalf of the business in a conversation with the business’ attorney for the conversation to be privileged. A New York federal court issued a ruling earlier this year addressing whether documents transmitted by a business to its attorney constituted a privileged attorney-client communication. It held that the documents, which were not prepared by legal counsel for the business, were not privileged. Wultz v. Bank of China Ltd., No. 1:11-cv-01266, opinion and order (S.D.N.Y., Jan. 21, 2015).

The lawsuit’s claims arise from a suicide bombing in Tel Aviv, Israel in 2006. The plaintiffs, whose son died in the bombing, allege that the person responsible was a Bank of China (BOC) customer, and that BOC facilitated the attack by executing millions of dollars in wire transfers for the person. The documents at issue in the court’s recent order reportedly describe an internal investigation by BOC into the lawsuit’s allegations. The plaintiffs’ counsel sent a letter to BOC’s New York branch (BOC-NY) in January 2008, stating an intention to file suit in connection with the bombing and inviting BOC to enter into settlement negotiations. BOC-NY sent the letter to BOC’s head office (BOC-HO) in Beijing. The General Manager of the bank’s Legal Compliance Department in Beijing instructed the Chief Compliance Officer to investigate the plaintiffs’ allegations. According to the court, neither of these individuals were attorneys.

While BOC-HO was conducting an investigation, the Chief Compliance Officer at BOC-NY, who was also not an attorney, was conducting a parallel investigation. The two offices exchanged information and preliminary findings, and the executive at BOC-HO directed the New York office to continue investigating. The bank branch in Guangdong, China (BOC-GD) also conducted an investigation. At some point between January and March 2008, BOC executives discussed retaining outside counsel, but they did not formally do so until the end of March. No one involved in the investigation up to that point was an attorney, nor was any inside counsel for BOC involved in the investigation.

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QWERTY_keyboard.jpgA lawsuit against a New Jersey insurance company sought damages for a November 2013 data breach that reportedly resulted in the theft of personal information of hundreds of thousands of policyholders. The plaintiffs sought to certify the suit as a class action on behalf of other policyholders whose information was compromised. They asserted causes of action for breach of contract, negligence, and violations of the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 et seq., and the New Jersey Consumer Fraud Act (CFA), N.J. Rev. Stat. § 56:8-1 et seq. In March 2015, however, the district court dismissed the lawsuit, holding that the plaintiffs lacked standing to sue under the FCRA. In re Horizon Healthcare Services Inc. Data Breach Litigation, No. 2:13-cv-07418, opinion (D.N.J., Mar. 31, 2015).

The defendant is a New Jersey-based health insurance company that provides services to about 3.7 million individuals. At some point over the weekend of November 1-3, 2013, an unknown individual stole two laptop computers from the defendant’s office in Newark. The laptops, which were protected by passwords, contained the personal information of over 839,000 policyholders, including names, dates of birth, member numbers, and addresses. The computers also contained Social Security numbers and clinical information for some policyholders.

The defendant issued a press release several days after the theft describing the extent of the data breach. It stated that it was not clear if the thief or thieves would be able to break the password protection to access the information on the laptops. It individually notified the policyholders whose information was contained on the laptops, and it offered free identity theft protection and credit monitoring services to policyholders whose Social Security numbers might have been compromised.
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10939979096_cab7741637_z.jpgTitle III of the Americans with Disabilities Act (ADA) of 1990, 42 U.S.C. § 12181 et seq., prohibits businesses classified as “public accommodations” from discriminating against individuals with disabilities, and it may require them to make modifications to their facilities and services to allow reasonable access. The definition of “public accommodation” has been a matter of dispute for all 25 years of the law’s existence. Several recent court cases have addressed whether businesses that provide services exclusively via the internet may be considered “public accommodations” within the meaning of Title III. Federal courts have reached different conclusions, so the dispute is likely to continue.

“Public accommodation” is broadly defined by Title III to include hotels, restaurants, theaters, public meeting spaces, retail stores, service establishments, train and bus stations, museums, parks, and schools, to name but a few. 42 U.S.C. § 12181(7). A common Title III claim might involve the alleged inaccessibility of a business’ physical location, such as due to a lack of wheelchair ramps. What about businesses that provide all their services online, with no physical facilities for customers? Claims against this type of business have included claims that video-streaming services do not accommodate deaf customers, and that websites do not accommodate blind customers.

Whether a web-based business meets the definition of a “public accommodation” is still a matter of dispute in the federal court system. The Third Circuit Court of Appeals, which has jurisdiction over New Jersey, has ruled that Title III only applies to physical locations. Ford v. Schering-Plough Corp., 145 F.3d 601, 613 (3rd Cir. 1998). That case involved loss of access to insurance benefits, not services offered by a web-based company, but the decision could apply to that sort of business. The court based its ruling on the definition of “public accommodation” found in Title II of the Civil Rights Act of 1964, which is limited to “places.” Id., citing 42 U.S.C. § 2000a(a).
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