Articles Posted in Banking & Finance

HackCybersecurity is a critically important concern for businesses of all sizes and in all sectors of the economy. The growth of various electronic data systems, not to mention the internet, has brought almost countless new risks from hackers and others, who use new technologies to perpetrate traditional crimes like theft. Businesses that collect and maintain consumers’ personal information must be particularly careful, since cybersecurity breaches can affect their customers’ financial interests as well as their own. The New York State Department of Financial Services (DFS) announced new proposed cybersecurity regulations several months ago for businesses in the financial sector. The proposed regulations, which are reportedly the first of their kind in the country, would require covered businesses to undertake extensive measures to safeguard their data.

New York law currently requires state agencies and private businesses to notify the state’s attorney general of any cybersecurity breaches that result in the release of “private information” to unauthorized persons. “Private information” includes information that may be used to identify a particular individual and that includes details like a Social Security number, a driver’s license or other identification number, or information that could enable access to a credit card or another financial account. N.Y. State Tech. L. § 208, N.Y. Gen. Bus. L. § 899-AA. State law does not currently impose affirmative obligations on businesses to protect private information or to guard against cybersecurity breaches.

The governor announced the proposed DFS regulation in mid-September 2016. The regulation, which will be codified in Title 23 of the New York Codes, Rules, and Regulations (NYCRR), applies to any business or organization under the jurisdiction of the New York Banking Law, Insurance Law, or Financial Services Law. 23 NYCRR § 500.01(c) (proposed). It requires “covered entities” to perform a risk assessment on a periodic basis, initially to identify cybersecurity needs and vulnerabilities, and subsequently “to respond to technological developments and evolving threats.” Id. at § 500.09.

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chess gameDebt collection is, unfortunately, an inevitable part of doing business for just about every business in New Jersey, the country, and probably the world. Whenever a business relies on customers or clients for revenue, it runs the risk of unpaid bills. Any business or individual engaging in debt collection should be aware of the time limit to bring a lawsuit, known as the statute of limitations (SOL). The New Jersey Appellate Division recently ruled in a case involving a dispute over retail store credit account debts. The parties disagreed over whether the six-year SOL for breach of contract claims should apply, or the four-year SOL for sales of goods. The court ruled that the four-year time limit applies. Midland Funding v. Thiel, et al., Nos. A-5797-13T2, A-0151-14T1, A-0152-14T1, slip op. (N.J. App., Aug. 29, 2016).

State and federal laws, such as the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 et seq., regulate businesses that engage in debt collection activities on behalf of third parties. Creditors that attempt to collect their own debts are also subject to various laws and regulations. Prohibited conduct under the FDCPA includes excessive or harassing attempts to contact debtors. The law establishes a procedure for alleged debtors to dispute a debt and to receive documentation of the alleged debt from the debt collector. Violations of these provisions can result in civil liability to the debtor.

Most debt collection efforts do not lead to lawsuits, but a lawsuit offers the only legal means of compelling payment by a debtor. Under New Jersey law, a plaintiff alleging a breach of contract must bring suit within six years of the date of the alleged breach. N.J. Rev. Stat. § 2A:14-1. A four-year SOL, however, applies to “contract[s] for sale” in New Jersey. N.J. Rev. Stat. § 12A:2-725. State law defines a “contract for sale” as any contract for the “present sale of goods” and “to sell goods at a future time.” N.J. Rev. Stat. § 12A:2-106. Parties to a contract for sale may agree to reduce the SOL to a minimum of one year, but the law expressly states that they cannot extend it beyond four years.

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dollarsNew business ideas and practices spring up all the time. Some, but not all, find a niche that leads to success. Government officials at the city, state, and federal levels often keep a close eye on new or unconventional business practices to see how they fit into existing laws and regulations. If regulators determine that a particular business activity falls under their jurisdiction, they may attempt to rein in what they view as regulatory violations. The businesses, of course, might disagree with this assessment. Any new business should be aware of regulations that apply—or might potentially apply—to them. A lawsuit currently pending in a New Jersey federal court demonstrates this sort of dispute. RD Legal Capital, LLC v. U.S. Securities and Exchange Commission, No. 2:16-cv-05104, complaint (D.N.J., Aug. 22, 2016).

The plaintiff alleges that the Securities and Exchange Commission (SEC), a federal agency charged with enforcing securities laws, exceeded its authority under both federal law and the U.S. Constitution by initiating a regulatory action against it for alleged violations of the Investment Advisers Act (IAA) of 1940, 15 U.S.C. § 80b-1 et seq. While businesses in New Jersey and New York that do not provide financial services of any kind are not likely to find themselves subject to this specific statute, the case is illustrative of how the government can seek to impose an existing regulatory framework on a business, even if the business believes in good faith that it is not subject to that framework.

The statute at issue in RD Legal Capital defines an “investment adviser” in part as someone “in the business of advising others…as to the value of securities or as to the advisability of investing in, purchasing, or selling securities.” 15 U.S.C. § 80b-2(a)(11). Congress originally passed this law in the wake of important Great Depression-era statutes like the Securities Act of 1933 and the Securities Exchange Act of 1934. Each law uses a substantially similar definition of a “security,” id. at § 80b-2(a)(18), 77b(1), 78c(a)(10), and each has generated a considerable amount of regulatory opinions and caselaw regarding the scope of this definition.

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Tax Credits [CC BY 2.0 (https://creativecommons.org/licenses/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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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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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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295128_6656.jpgA business may decide to sell all or a substantial amount of its business assets to another individual or company for a variety of reasons. These types of transactions are known as “bulk sales” if they are not part of ordinary business activities. Both New York and New Jersey require businesses that collect sales tax to disclose a planned bulk sale to state tax authorities. This disclosure is the purchaser’s obligation, since the purpose is to allow the state to determine the seller’s tax liability. If the purchaser does not make the required disclosures, it could become liable for the seller’s outstanding tax debt to the state. The disclosure process is not terribly complicated, but it appears to be one that many businesses forget in the course of purchasing another business’ assets.

What Is a “Bulk Sale”?

Any sale of business assets that is not part of the normal course of business could qualify as a bulk sale under state law. A bulk sale may occur if a company is going out of business, upgrading its equipment, or making significant changes in its business activities. Bulk sales may also occur in mergers or acquisitions, or if a business is converting from a sole proprietorship to a corporation or other business entity.

“Business assets” include any assets used in the course of business, including:
– Personal property, such as computers, office furniture, and inventory;
– Intellectual property, including patents, trademarks, and trade secrets;
– Certain types of real property; and – Intangible assets, like business goodwill.
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Bitcoin_ATM_Plate.jpgThe New York Department of Financial Services (DFS) recently issued proposed regulations for businesses that deal with “virtual currencies,” defined by the U.S. Department of the Treasury as a medium of exchange that operates much like traditional currency, but only in some environments. Virtual currencies are gaining in prominence as an alternative to fiat currencies like the dollar and the euro, although they have been highly controversial. New York appears to be one of the first states to take serious steps towards regulating businesses that perform virtual currency transactions for customers.

Bitcoin is probably the most famous virtual currency, but it is far from the only one. The currency only exists in the online world, having no physical representation like actual coins or bills. The process by which new Bitcoins are created, known as “mining,” involves performing increasingly complex computer calculations. Bitcoin has grown as a form of payment for goods and services online, but it is also the subject of scrutiny based on allegations that it is used for illegal online purchases, such as drugs and identity theft information.

Bitcoin is treated somewhat like a commodity by some people, as suggested by the fact that the value of one Bitcoin is typically expressed in terms of U.S. dollars. Online exchanges allow people to exchange various other currencies for Bitcoins. As of mid-November 2014, one Bitcoin is worth about $400. One presumably happy Norwegian man discovered in late 2013 that the $27 worth of Bitcoins he purchased in 2009 had appreciated in value to about $886,000.
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1.12.02NewYorkStockExchangeByLuigiNovi1.jpgThe number of initial public offerings (IPOs), in which a company first offers its stock for sale on public exchanges, has skyrocketed during the first nine months of 2014. 220 companies went public during that time, raising about $77 billion. The record-breaking IPO of the Chinese company Alibaba alone raised $21.8 billion, but the vast majority of 2014 IPOs reportedly consist of “emerging growth companies” (EGCs), a category established in 2012 by the Jumpstart Our Business Startups (JOBS) Act. EGCs are smaller companies that have often been unable to meet the regulatory requirements for IPOs, but now they account for most or all of the growth in the number of IPOs in recent years.

The JOBS Act was introduced in Congress as H.R. 3606 in March 2012. It quickly passed both houses of Congress, and the President signed it into law that April. The law relaxes various regulatory requirements for smaller public companies and expands their eligibility to go public. It also increases, from 500 to 2,000, the number of record stockholders a company may have before it must register with the Securities and Exchange Commission (SEC).

The JOBS Act amends the Securities Act of 1933 and the Securities Exchange Act of 1934 to include “emerging growth companies.” H.R.3606 §§ 101(a) – (b), 15 U.S.C. § 77b(a)(19), 15 U.S.C. § 78c(a)(80). An EGC is defined as a company that began issuing securities to the public after December 8, 2011, and that had less than $1 billion, adjusted for inflation, in annual gross revenues during the most recently ended fiscal year.
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