Tag: Goodwin Procter

Real Estate Crowdfunding

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Real estate investing has a long history of crowdfunding. Prior to the 1986 changes to the tax code, there was a large syndication business for getting investors into real estate. Although the investment was usually more for the tax breaks involved instead of income and capital appreciation.

With the surge of product crowdfunding through sites like Kickstarter, the regulatory changes for equity crowdfunding from the SEC, and state-level implementation of crowdfunding, investors and sponsors are once again looking to crowdfunding for real estate. Currently, it’s largely limited to accredited investors due to SEC limits or limited to state specific projects and investors.

Goodwin Procter put together a publication full of real estate crowdfunding articles: A Guide to Real Estate Crowdfunding Today.

The guide hits one major theme: crowdfunding is new and there are few success stories. No one site has been very successful at pulling investors and meaningful projects together.

Real estate investing is capital-intensive. It should be a natural area for crowdfunding. The big concern is fees. The crowdfunding platforms I’ve looked at are expensive. It’s expensive for the sponsor and its expensive for the investor.

The other concern is execution. To purchase or sell real estate, you need to decide quickly on the best deals and convince the other side that you can close. If you are buying a property and sourcing the capital with crowdfunding, there is the possibility that you won’t raise the money and not be able to close. You would have to include the successful crowdfunding as a closing condition, or have a backup source of more expensive capital to cover the failed crowdfunding. As a real estate seller, why would you accept an offer contingent on crowdfunding?

The alternative is that the crowdfunded real estate is already warehoused with the sponsor and is looking to lay off some of the equity or fund capital improvements. The sponsor is looking to crowdfunding as a cheaper source of capital or a quicker source of capital. So far, crowdfunding does not seem cheaper or faster than other sources of capital. And if other sources of capital are not interested in the investment, perhaps that is an indication of the investment’s quality.

Sources:

FINRA and Placement Agents

Will FINRA step in to prevent a ban on placement agents working with government investors?

You may remember that last August, the SEC published a proposed rule that would create a prohibition on paying a third party, such as a placement agent, to solicit a government client on behalf of the investment adviser: IA-2910. The rule has generated lots of comments. The intent of the proposed rule is to prevent “pay-to-play” scandals. A noble and worthy goal.

The SEC seems to be softening its position on the placement agent ban. In a December 18 letter, the SEC asked FINRA if they would interested in crafting some rules for registered broker-dealers in dealing with government investors. Legitimate placement agents (such as FINRA-registered broker-dealers) “could be subject to separate regulations that might restrict their ability to engage in pay to play activities on behalf of their investment adviser clients.”

It took three months, but FINRA responded to the SEC with a “yes“.

“I am delighted to state that we are in a position to promulgate such a rule. We believe that the FINRA proposal should impose regulatory requirements on member broker-dealer placement agents as rigorous and as expansive as would be imposed by the SEC on investment advisers. We believe that a regulatory scheme targeting improper pay to play practices by broker-dealers acting on behalf of investment advisers is both a viable solution to a ban on certain private placement agents serving a legitimate function.”

It sounds like SEC is getting closer on making a decision about its pay to play rule. Perhaps the FINRA rule will make it easier to deal with.

In the interest of disclosure, my company uses placement agents in its dealings with investors, including government investors.

Sources:

Bits and Pieces on Compliance

Here are a few stories and items that caught my eye recently, but I have not had time to build-out to a full post:

Role of Federal Sentencing Guidelines in FCPA Cases from the WrageBlog

Given the tremendous fines imposed upon Siemens AG and Kellogg Brown & Root LLC (“KBR”) in the past 10 months, many have asked how the DOJ calculates criminal fines in FCPA cases and how statutory penalties and the United States Sentencing Guidelines (“U.S.S.G.”) interact in that calculation.

Behind the Numbers: The Anatomy of a Ponzi Scheme from The Fraud Guy

Many articles have been out in the press since Ponzi schemes have begun unraveling over the course of the last year which either describe Ponzi schemes inaccurately or really don’t help the public understand how the schemes actually work and what happens with the money.  This article (publication pending), “The Anatomy of a Ponzi Scheme” may help people understand how Ponzi schemes and their orchestrators work.

Complying With Mass. Data Security Regs Proves Costly from Melissa Klein Aguilar for Compliance Week

For those organizations already tackling the task of complying with a new Massachusetts data security regulations that are currently slated to take effect March 1, compliance is proving costly, a recent survey shows. . .  A joint survey of more than 200 members of the International Association of Privacy Professionals conducted by the IAPP and the law firm Goodwin Procter found that 33 percent of the organizations polled have already spent more than $50,000 on complying with the rules.

Massachusetts Holds Public Hearing on Information Security Regulations — Regulators Contemplating Additional Revisions in Final Rulemaking from Security, Privacy and The Law

The Massachusetts Office of Consumer Affairs and Business Regulations (OCABR) held a public hearing in connection with its promulgation of revisions to the Commonwealth’s information privacy regulations, 201 CMR 17.00. The standing-room-only crowd endured a modest, unventilated conference room in the Transportation Building to make comments on the stringent regulations. OCABR Undersecretary Barbara Anthony led the meeting with OCABR Deputy General Counsel Jason Egan and Assistant Attorney General Diane Lawton. The principal author of the original regulations, OCABR General Counsel David A. Murray, could also be seen in the audience.

Due Diligence Failure Leads to SEC Enforcement Action? from Mark J. Astarita of SECLaw.com

The SEC has charged Detroit-area stock broker Frank Bluestein with fraud, alleging that he lured elderly investors into a $250 million Ponzi scheme.

Lehman Bankruptcy Court Declares “Bankruptcy Default” Under Swap Agreement To Be Unenforceable from Goodwin Procter

On September 17, in one such closely watched matter, U.S. Bankruptcy Judge James Peck ordered Metavante Corporation (“Metavante”), a counterparty to Lehman Brothers Special Financing (“LBSF”) in an interest rate swap transaction in which Lehman Brothers Holdings, Inc. (“LBHI”) is the credit support provider, to perform its obligations to pay quarterly fixed amounts owing under the transaction, notwithstanding the bankruptcies of LBSF and its parent. Judge Peck concluded that Metavante could not rely solely on the filing of the Lehman bankruptcy cases to refuse to make payment to Lehman while also not terminating the agreement.

Some of these have been in my personal Twitter feed (@dougcornelius) or my Posterous (Compliance Building’s Posterous).

FBAR Filing Deadline Extended (For Some)

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The deadline for Foreign Bank Account Reporting was June 30. The Report of Foreign Bank and Financial Account is IRS TD F 90-22.1 (.pdf). Any United States person who has a financial interest in or signature authority, or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year must file the report. An FBAR must be filed whether or not the foreign account generates any income.

Although FBAR requirement has been around for a few years, the IRS recently revised the filing requirements. It seems to have caught many people by surprise.The IRS had extended the FBAR Filing deadline to September 23 for taxpayers who reported and paid tax on all their 2008 taxable income, but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR.

There are a few instances that the filing requirement seems unclear and really unexpected, so the IRS further extended the filing deadline in two instances:

  1. Persons with no financial interest in a foreign financial account but with signature or other authority over the foreign financial account.
  2. Persons with a financial interest in, or signature authority over, a foreign financial account in which the assets are held in a commingled fund.

If that is you, then then you have until June 30, 2010 to file FBARs for the 2008, 2009 and earlier calendar years.

In the first instance, company officers and employees were caught off guard that they need to personally file an FBAR for company accounts. As part of IRS Notice 2009-62 (.pdf), the Department of the Treasury is requesting comments regarding when a person with signature authority over, but no financial interest in, a foreign financial account should be relieved of filing an FBAR for the account. Especially, when the person with a financial interest in the account has filed an FBAR.

The second instance was triggered by statements made by the IRS in June indicating their view that the term “foreign commingled fund” includes private investment funds organized outside the United States. As part of IRS Notice 2009-62 (.pdf), the Treasury Department is asking for comments on this approach.

References:

Enterprise 2.0 at Goodwin Procter

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Can law firms jump on the Enterprise 2.0 bandwagon? Lawyers are generally seen as conservative users of technology, preferring to use a quill and inkwell over a web-based publishing platform. David Hobbie shares some of the successes he has encountered in the adoption of Enterprise 2.0 at Goodwin Procter (.pdf – page 13) in the June 2009 issue of KM Pro Journal (.pdf)

Goodwin Procter was one of the early adopters of collaboration and knowledge sharing tools and has begun adopting the internal use of blogs and wikis as tools. This is a great article, summarizing some of the theory behind Enterprise 2.0, comparing it to knowledge management, and giving practical uses of these tools in a legal environment.

“More knowledge has been captured and stored because communications have been opened up to more authors and have been moved out of email “silo” and into public spaces. More knowledge transfer has occurred because the Enterprise 2.o tools are built to communicate, whether through alerts of new information, easy browseability through user-created structure, or through better search.”

I had the pleasure of working with David at Goodwin Procter during the initial deployment of the tools. I am happy to see that they continue to grow and succeed. You can read more from David at his blog: Caselines.

Electronic Filing of Form D and Amendments Becomes Mandatory on March 16

Beginning March 16, 2009, Form D filings are required to be made electronically on EDGAR. See SEC Release No. 33-8891 (February 6, 2008).  Form D is commonly used for offerings made under the Rule 506 safe harbor to accredited investors. While the filing of a Form D is not a condition to the exemption, it is a requirement pursuant to SEC Rule 503.

To prepare for the transition, issuers need to obtain access codes for the SEC’s EDGAR system.

The electronic format is intended to make it easier for the SEC and state regulators  to spot compliance problems in private offerings.  As Katten points out in its client advisory:

Form D filers should also be aware of the federal and state regulatory enforcement implications of the Form D data being readily available to the regulators. For example, whenever placement commissions are contemplated, an issuer should obtain the proposed recipient’s CRD number in advance to confirm that the placement agent is properly registered with the SEC and with any state in which it intends to make solicitations. There is little doubt that the states (and possibly also the SEC) will be screening this aspect of the filing for persons acting in a placement capacity without appropriate licensure.

In a client alert from Goodwin Procter, they summarize three choices for filing in the near future, depending on your business plan:

Electronic Form D Amendments. Electronic amendments may – and starting March 16, 2009 must – be made using the new Form D adopted by the SEC. Electronically filed Form Ds will be publicly searchable through the EDGAR system, and involve new disclosure requirements, including: (i) the date of first sale of Fund securities; (ii) a CRD registration number for every person who receives compensation for sales of Fund securities, including brokers, dealers and finders; and (iii) the specific exclusion from registration under the Investment Company Act of 1940 upon which the Fund may be relying (e.g., Section 3(c)(7)). Electronic amendments will be most appropriate for Funds that expect to continue an ongoing offering after March 16, 2009, particularly open-end Funds.

Paper Amendments Using New Form D. The SEC has provided a transition period during which issuers can make filings using a paper version of the new electronic Form D. After the transition period ends on March 15, 2009, all Form D filings must be made electronically. This method may be appropriate for Funds that wish to manage the time schedule of their transition to the new electronic Form D and defer obtaining EDGAR access codes until a later date.

Paper Amendments Using Temporary Form D. Issuers also have the option to file a paper amendment using a Temporary Form D that is essentially the same as the previous paper Form D. This method may be appropriate for Funds that wish to defer disclosures on the new Form D because they expect their securities offering to cease in the near future.

See:

Proposal to Tax Carried Interests as Ordinary Income

2010budgetThe Obama Administration has labeled their 2010 budget as A New Era of Responsibility. Part of that responsibility appears to be taxing carried interest as ordinary income.

On page 122 of the budget there is a single line item: “Tax carried interest as ordinary income,” with projections of $2,742 million in 2011, $4,347 million in 2012 and an overall $23,894 million for the ten year period.

There is no corresponding text about how the tax would be implemented, so it is premature to be thinking about how this might affect the business plan of a private investment fund.

Unlike a fixed fee, a carried interest aligns the interests of sponsors and investors with the success of the fund. Under current law, the grant of a carried interest generally is not taxable. Instead, the sponsor recognizes income and gain when allocations of partnership income and gain are made. For a partnership that generates long-term capital gains, the carried interest share of the gains would be taxed at the long-term capital gains rates (currently 15%) instead of ordinary income.

See also:

Amendment to Mass. Data Privacy Law

goodwinprocter_logoGoodwin Procter has published a client alert describing the amendments to the Massachusetts Data Privacy Law (my posts on this topic).

They detail three changes.  First is pushing bck the complaince deadline to January 1, 2010. Second, theyhave lifted some of the contract amendments and certifications from vendors. Third, they clarified the  wireless encryption requirement.

The text of the amended regulations (.pdf).

Recent Changes to the ADA and FMLA

goodwinprocter_logoGoodwin Procter presented a webinar on recent changes to the Americans with Disability Act and the Family and Medical Leave Act. Rob Hale moderating the presentation.

Heidi Goldstein Shepherd led off with a background on the ADA. The key concept for employers is that it is up to the employee to request a “reasonable accommodation” by the employer. New amendments to the ADA went into effect on January 1.

The new term is “substantially limited” which is supposed to be defined by the EEOC. Unfortunately, the EEOC has not promulgated this definition.

The question of disability is still considered on a case-by-case basis. Employer needs to determine if the accommodation requested is reasonable. Employer is not required to lower quantitative or qualitative standards as a “reasonable accommodation.” Conduct standards can be enforced if  “job related and consistent with business necessity” and applied consistently.

Steve Feldstein looked closer at the EEOC enforcement guidance. An employee who first requests the accommodation during a discipline process still remains subject to the discipline. If you go to fire a person and person first claims a disability, it is too late for the employee.

An employer should not raise the possibility of disability in discussing a performance problem. Leave it up to the employee.

California has a different standard than the federal law for disabilities. It is not a “substantial impairment of a major life activity.” It is just an “impairment of a major life activity.”  In making a reasonable accommodation it requires you to engage in an interactive process.

Rob Hale moved on to the new FMLA regulations. There were many changes and extensive. But the substance did not change much. Rob focused on three types of changes: (1) National Defense Re-Authorization act and military leaves, (2) some substantive leave changes, and (3) changes in the notice and information right.

The military change only applies to reserve and national guard being called up for military service.  Allows time off for when the soldier returns. Also allows leaves for childcare when a family member leaves for service.

Rob moved on to new substantive changes.

  • There is longer period for counting the 12 months of service
  • If the person is out on leave that could count as part of the 12 months of service
  • Serious health condition standard changed for 2 doctors visits, now within 30 days
  • Paid leave during FMLA leave, then the paid leave provisions overrule so you can get kicked out the paid leave to the unpaid FMLA leave
  • Intermittent leave allows you to count part of day absence as a full day absence under the “physical impossible rule”  (Rob used the example of a clean room worker.)
  • You can deny a perfect attendance bonus if the employee was out on FMLA leave.
  • Releases of past FMLA claims are now permissible. (You cannot release future FMLA claims.)

Rob moved on to the new notice changes. There is a new poster you need to put up. (Ours is up.) Rob points out that you can also post it electronically.

The designation notice needs to be delivered in five days. Employee notifications have largely not changed. They have to state that they want to take a FMLA leave. Saying you want to take time off to take care of a sick child (etc.)  may not be enough. There is more pressure on frontline managers to determine if the reason is FMLA eligible.

Employer can impose requirements on FMLA request that they do with other leave request. So you can require written notice or require them to call a certain number.

There are new forms for medical certification. There are also some new procedures for completing the form and what to do if the form is incomplete.

Rob emphasized the need to have a leave counting period. Employers need to designate the 12 month period during which they can use the 12 weeks of leave.  He has seen some employees win suits by using an alternative counting method.

Steve pointed out that California has an alternative law covering medical leave: California Family Rights Act.  California allows leave for domestic partners (registered with the state and living in the same residence). Pregnancy gives you a longer time off.  Interestingly, the domestic partner situation allows a longer time off because you can take the CFRA leave and then the FMLA since the domestic partner leave is not recognized under the FMLA.

Goodwin also made some materials available:

The New Massachusetts Data Security Regulations

goodwinprocter_logoGoodwin Procter sponsored a webinar on the new Massachusetts date security rules

Deb pointed out that you may now need to collect the state of residence of the client to figure out if they are in Massachusetts. That may have the perverse effect of collecting additional information about the person.

Deb points out that “financial account” is not well defined. She looks back to the statute and sees that it is focused on identity theft. If the “financial account” can lead to identity theft or the loss of money from that account then it would probably be a financial account.

In evaluating compliance you can include these factors:

  • size, scope and type of business,
  • entity’s resources,
  • amount of stored data, and
  • seed for security and confidentiality of both consumer and employee information.

Deb points out that the Massachusetts regulators think the rules align with the federal data breach notification requirements. The regulators also think the rules are merely applying more detailed requirements to the broad principles under the federal rules.

The regulators are deferring to the Attorney General for enforcement. The new rules do not provide a private right of action.

The Written Information Security Program has four main groups.

Implementation

  • identify all records use to store information. The rules do not require an inventory. The regulators want you to know the answer. They suggest an information flow to see where information is gathered, where it goes and where it gets stored.
  • Identify and assess risk.
  • Evaluate and improve safeguards. This includes the security system and compliance training.
  • Limit collection and use. Personal information should only be available to those who need it and then only the information they need. Don’t gather it if you do not need it and don’t keep it if you do not need it.

Administrative

  • designate a responsible employee
  • develop security policies
  • verify the capacity of service providers to protect personal information
  • The certification must specifically address the Massachusetts rules and must state that the signatory was authorized to sign it.

Technical and Physical

  • establish a security system
  • restrict physical access
  • prevent access by former employees
  • document responsive actions in event of data breach

Maintain and Monitor

  • post-incident review
  • disciplinary measures for violations
  • regular monitoring
  • annual review (if not more often)

Jacqueline Klosek focused on the computer system requirements. She put together specific requirements:

  • encryption – of stored information on portable devices and information in transit. Portable memory sticks are a big problem.
  • secure user authentication protocols
  • reasonable monitoring of systems
  • firewall
  • malware and virus protection
  • education and training

Agnes laid out 3 things to get done by May 1, 2009:

  • Implement internal policies and practices
  • encrypt company laptops
  • amend contracts with service providers to incorporate data security requirements

By January 1, 2010:

  • obtain written certifications form service providers
  • encrypt other portable devices (non-laptops)