Posts Tagged ‘Incorporations and Formations’

Foreign Founders in US Startups

July 31st, 2014 By Virtual Paralegal Services

What are the basics when foreign founders, who neither are dual citizens nor have a green card, start up an LLC in the United States, but operate it from their native country?

Company Status:
Requirements vary according to the native country. For example:

  • Canadian: In addition to the US LLC, a Canadian citizen may also need to form a US C Corp to own the LLC, which would be owned through the local LLC.
  • Spanish: Spanish law would generally treat the US LLC as a corporation.
  • Belgian: Setting up a US LLC, but checking the box for corporate taxation, will generally result in the founder being listed as a shareholder and income as dividends.

It is recommended to consult a tax advisor and attorney in both the US and in the foreign jurisdiction to be certain that the foreign founder of a US start up is following the correct protocol.

Obtaining an FEIN:
Foreign founders of US startups will need to obtain an FEIN for their LLC, but they are not required to have an SSN or ITIN. When completing form SS-4, be sure to write foreigner in line 7b (requesting SSN or ITIN). Contact Virtual Paralegal Services for assistance.

This aspect of starting up a foreign owned US LLC is more complicated and generally must be done after the founder has obtained an FEIN. There are several options:

  • Choose a mega bank that has branches or affiliates in the founder’s country. This will enable him to set up his account in his own country and build a US banking relationship from home base.
  • If the country is an official signatory of The Hague Convention, as is the US, and his chosen bank accepts it, he can get an apostille attached to his paperwork to avoid coming to the US.
  • The foreign founder makes a trip to the US and appears in person at the bank with passport, and corporate documents in hand.

For assistance with US LLC startups, contact Virtual Paralegal Services.

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Securities and Rule 144A

July 10th, 2014 By Virtual Paralegal Services

144A is a SEC rule that allows (within specified circumstances) qualified institutional investors to trade unregistered securities on the NASDAQ Portal Market for investment purposes – but not for resale to the general public. The purpose of 144A is to enable a more efficient and liquid resale market for unregistered securities. This makes it easier for:

  • Private companies to raise money in US capital markets
  • Institutional investors to trade restricted non-registered securities

While section 5 of the Securities Act of 1933 requires all offers and security sales to be registered, it allows for exemptions. The US Securities and Exchange Commission states that Rule 144A provides the exemption, permitting the resale of restricted securities (securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer) if specified conditions are met, including:

  • Holding period: the issuer must have held the securities for one year – if the issuing company was subject to the reporting requirements of the 1934 Act, the required holding period is reduced to six months.
  • Current Public Information: The issuing company must provide the public with sufficient information regarding the nature of the business. They must also provide a complete list of all officers and directors and an up-to-date financial statement.
  • Trading Volume Formula: the amount of equity securities which can be sold in a given 3-month period are bound by the 1% measurement guideline.
  • Ordinary brokerage transactions:

 – Affiliates must conduct sales as routine trading transactions
 – Brokers and sellers may not solicit orders to purchase securities
 – Brokers are limited to standard commission

  • Filing Proposed Sale Notice with the SEC: A notice must be filed using Form 144

 – For sales of 5,000+ shares to totaling $50,000+ w/in a three-month period
 – Securities must be sold within three months of filing the notice
 – If sales are not completed, an amendment notice must be filed

  • The legend has been removed:

 – Only transfer agents can remove legends
 – Transfer agent must obtain the issuer’s consent
 – If a dispute over the removal of a legend arises, said dispute is covered by state law, rather than federal

Rule 144A also allows for general solicitation and reduced publicity restrictions, freeing the issuer from compliance with rule 135c under the securities act. The new rule permits offering participants to communicate with prospective investors in Rule 144A offerings with no limit as to the method of communication or the number or type of investors (QIBs or non-QIBs) contacted using the following methods:

  • Mass emails
  • Advertisements
  • Cold calls
  • Articles, Interviews, and other communications

All of the above can be distributed via printed materials, television and radio broadcasts, or online. They, however, remain subject to anti-fraud provisions under federal security laws. In addition, there must be reasonable evidence that all sales are made to qualified institutional buyers.

Virtual Paralegal Services provides senior securities paralegal support to law firms and businesses across the United States. Contact us to learn how we can assist you.

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1099 Independent Contractors – Are you Compliant?

July 3rd, 2014 By Virtual Paralegal Services

In a study conducted by Intuit, 40 percent of the American workforce will be freelancers, contractors, and temp workers by 2020. Even now, many companies are replacing some of their full-time employees with part-time professionals, freelancers, and independent contractors. Some are keeping a present employee, but changing the status from employee to independent contractor. The changing workforce requires employers to be ever more vigilant about the questions and compliance requirements surrounding independent contractors.

Is that former employee – now contractor – or the new contractor truly a 1099 independent contractor or does he/she require a W-2? The difference is significant. You withhold and manage taxes for employees; while independent contractors pay their own based on the 1099s they receive (Form 1099 is the independent contractor’s equivalent of a W-2). The IRS expects you to know the difference between a W-2 employee and a 1099 independent contractor. In addition, you must make the correct annual filings with the IRS for both W2 employees and 1099 contractors. If you get it wrong, the penalties are high.

So how do you know the difference?
Ask the right questions.

1. Do you set the hours or does the worker set his or her own hours?
2. Naturally, you know what work you want accomplished, but who sets the guidelines for how, when, and where the work will be accomplished – you or the worker?
3. Does the worker furnish his or her own tools and equipment and hire his own assistants if needed?
4. Does the person have a workplace, home office, equipment storage, etc. that belongs specifically to him and is at a separate location from your business?
5. Does the individual work only for you – or is he/she free to obtain work for other companies simultaneously?
6. Do you set an hourly wage/salary or does the worker set his/her own rates/commissions per job?
7. Do you receive an invoice from the worker for his services?
8. Did you sign a contract for the work he/she is accomplishing on your behalf?

Using independent contractors to perform a multitude of tasks is beneficial for most businesses, involving far less liability and obligations than W-2 employees, and potentially eliminating the provision of employee benefits, insurance, tax withholding, etc. It is crucial; however, to not only classify an individual correctly, but to understand 1099 compliance.

Before hiring an independent contractor and signing a contract:

• Assess the independent contractor’s business and require pertinent documentation.
• Ask the independent contractor to complete a questionnaire specific to 1099 workers. Include a checklist that helps to determine if the worker is accurately classified as an independent contractor versus an employee.
• Sign a written contract with and maintain a separate file for each independent contractor. This file may include, but isn’t limited to the following documentation:
1. Copies of tax returns showing the contractor filed a Schedule C for the past couple years if he or she is a sole proprietorship
2. Copies of 1099 forms by other companies for whom the consultant has provided services
3. Professional licenses and proof of insurances
4. The signed independent contractor employment agreement and any other drafts of it
5. W-9 form signed by the consultant
6. List of equipment and materials the 1099 professional will use to perform services and costs
7. All invoices submitted for billing purposes

Written contracts are imperative and protect both your business and the independent contractor. Make sure your agreements include an Independent Contractor clause that clearly identifies the roles of the parties. Also, make sure you are managing your 1099 contractors and tracking 1099 payments correctly in order to comply with annual filing requirements.

Hiring independent contractors can be a tremendous benefit to your business.Contact Virtual Paralegal Services. We will help you create your questionnaires, draft your contracts, and help manage and maintain 1099 compliance.

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Blue Sky and the Prospectus

June 26th, 2014 By Virtual Paralegal Services

The registration of securities under the Securities Act of 1933 was designed to provide potential investors with full and fair disclosure of all material information relating to the issuance of securities, including such information as the principal purposes for which the offering’s proceeds will be used. Individual states have also enacted “blue sky” laws to protect investors against securities fraud by requiring sellers to register the securities they are offering and to provide financial details.

Unless exempt, a registration for all public offerings, which is signed by the issuers executive officers, financial and accounting officers, and a majority of its board of directors, is submitted in triplicate to the SEC along with the required filing fee and a prospectus.

A legitimate prospectus will have the SEC’s no approval clause on the front page, which indicates that the SEC does not give an opinion of the security’s merit or promises the adequacy of the information in the prospectus. The role of the SEC is simply to protect against misleading information and to assure the registration of a new issue is completed.

The prospectus does not offer investment advice; it does not indicate that the SEC approved the issue or verified the information. It simply means the company has filed all the paperwork needed to go ahead with the issue. The prospectus contains the following required information.

• Name under which the issuer is doing business
• State or sovereign nation under which the issuer is organized
• Statement of purpose of the issuer’s business; its general nature
• Copies of the articles of incorporation
• Copy of underwriting agreement, including the underwriter’s commissions and discounts
• The location of the headquarters plus the names and addresses of:
o All directors
o The chief executive, financial and accounting officers
o The underwriters
o All persons owning 10% or more of the company

Financial information:
• A statement of the issuer’s capitalization, including the authorized and outstanding amount of stock
• Specific amount of shares held by the senior officers, directors and underwriters
• Estimated proceeds from offering the securities and its proposed use
• The public offering price of the security – if not established, then the method which will be used to determine the price
• Financial statements, including earning statements from the past three years
• The balance sheet as of a date not more than 90 days prior to the date of the registration statement filing
• An income statement showing profits or loss
A twenty-day cooling-off period follows the SEC’s reception of the registration statement. During this time, the issuer may send prospective investors a preliminary prospectus, known as a red herring. (A copy of the red herring must be included in the information sent to the SEC.) It is wise to note, however, that the purpose of the red herring is simply to give the issuer of the new securities an indication of interest from the potential investors. While it presents the essential facts of the new issue and may even include an expected price range, it contains neither the actual price nor the effective date. No sales are legal before the effective date and only the preliminary/red herring prospectus may be sent to prospective investors.

Contact Virtual Paralegal Services for assistance with writing your prospectus.

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Are You Providing Maximum Value to Your Clients?

June 24th, 2014 By Virtual Paralegal Services

Many solo and small firm attorneys perform 100% of their firm’s billable and even non-billable work, regardless of the task.  This not only limits the attorney’s capability to provide more and greater value, but it creates a diminishing rate of return on the attorney’s time and value to his or her clients.  A recent survey of law firms by LexisNexis revealed a thirty-three percent discrepancy between overall hours worked and hours billed. That wouldn’t be so bad if the 33% were hours spent on business development and generating new clients, but that is not the case.  A full one-third of the work day is lost to performing non-substantive legal tasks such as research, document review, and a host of other lower value tasks.  The keys to maximizing your value to clients – and to raising your bottom line – are analysis and leverage. Know what you are doing, why you are doing it, and continuously ask should someone other than me be doing it so that I can be doing something more valuable.

Virtual Paralegals Can Help!

For the solo and small firm that doesn’t have or need a full-time paralegal, delegating the less substantive tasks to a virtual paralegal will free up more of your time to perform higher value tasks and focus on generating more revenue.  Many attorneys believe they are saving money by doing the task themselves or that they couldn’t afford to pay an on-demand paralegal.

But consider this:

If you are doing every task yourself, even if you bill 75% of your time (well above the average attorney), you are still losing 25% of your billable opportunity.  Let’s assume a 40-hour work week and your billable rate is $250 per hour. Multiply $250 per hour by the 10 hours you are losing – it costs you $2,500 per week to do it all yourself.  If you hired an on-demand paralegal for the same 10 hours and it costs you $1,000 to allow you to bill the other 25% of your time, you will have made $1,500 extra – a 15% increase in revenue to your practice – just by delegating non-substantive legal tasks to a virtual paralegal.

Don’t believe it – try it. Virtual Paralegal Services has assembled a team of senior paralegals, each an expert in practice areas such as corporate, securities and blue sky, or contract administration. You can trust that VPS will be able to expertly handle the routine and research intensive tasks that steal the higher value you could be providing your clients.

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Contract Playbooks: The Reason to Outsource your Contract Lifecycle Management

June 18th, 2014 By Virtual Paralegal Services

The contract process in many companies is often a conglomeration of fragmented procedures and labor-intensive processes. Key players don’t have the visibility they need to understand contract terms and conditions, compliance, governance, or analysis. CLM software promises to streamline the process, but every company is unique in its requirements and best practice procedures for investing, or any contract-based professional course of action. Outsourcing your contract lifecycle management to a paralegal service, instead of one-size fits all software, brings rich rewards. A significant plus factor is the Contract Playbook, which is custom-designed for each individual business based on that business’ past contracts, priorities, practices, investing guidelines, acceptable compliance limits, etc.

Creating a contract playbook begins by evaluating all present contracts and the creating a code of standards for all future contracts.

For example:

Parties and Forms of Agreements
The first chapter in your company’s playbook will likely deal with issues related to the contacting parties and the permitted and preferred forms of agreement. It establishes acceptable party information. Concept of purchase orders, and standard contractual terms-including term length and acknowledgement – are also typical. Additional guidelines cover signing authority and requirements.

Additional chapters in the contract playbook typically include:

  • Acceptance of goods and conditions
    • Inspection
    • Nonconformity
    • Delivery timeframes
    • Indemnity – IP infringement and other causes
  • Insurance
  • Liability Limitations
    • Risk
    • Damages
    • Cumulative
  • Terms of Payment
    • Price
    • Discount
    • Interest
  • Termination Rights
  • Warranties
    • Intended use
    • Product specifications
    • Non-conformity
    • Representations
    • Conditions

Additional miscellaneous provisions may include information about attorney fees, general releases, lien waivers, party relationships, mutuality, notices, audit rights, arbitration and dispute resolution, Force Majeure, and governing law.

Your company’s contract playbook is customized, and then updated with each new contract. It provides quick and easy access for all personnel involved in the creation, negotiation, and/or approval of a contract, guiding each step of the process, including “language” samples in each section. The playbook provides guidelines for negotiation, approval, tracking, and contract analysis. Finally, a customized contract playbook helps to ensure compliance to contract milestones.

Organize and simplify your contract process. Save time and resources by outsourcing your contract lifecycle management to the experts. Contact Virtual Paralegal Services to learn more.

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JOBS Act and the new 506 Ruling

June 4th, 2014 By Virtual Paralegal Services

In April 2012, President Obama signed the ‘Jumpstart our Business Startups Act’ – known as the JOBS ACT. A significant section of the JOBS Act pertained to rule 506, informing the SEC that they were to amend rule 506 accordingly. The amendment would allow startup companies the right to use general solicitations (ie internet, web sites, advertisements, etc.) and advertising to raise unlimited investment capital from the public, providing that sales were reserved for accredited investors and the issuer had taken sufficient steps to ascertain that the investor was indeed accredited. Accredited investors being those whose:

Net worth exceeds $1M (excluding the value of their primary residence , but including any debts on said residence that is greater than the market value).
Or their annual income for the previous two years is 200,000+ (300,000+with spouse).

Since the old rule 506 did not allow a startup company to seek investors until first submitting a complete disclosure document to the SEC and then receiving a declaration of effectiveness, the proposed changes created great controversy – especially since startup businesses can be prone to failure.
Although the SEC drug its feet, they finally adopted the proposed changes on July 10,2013 and made them effective on September 23, 2013.
The new 506 ruling:

Allows issuers to use public solicitations and advertising to raise unlimited capital from unlimited, but accredited, investors.
Does not require a disclosure/prospectus or an SEC review
Holds the issuer accountable for taking reasonable steps to ensure all investors are indeed accredited.
Determines that reasonable steps require obtaining two years tax returns or a written confirmation from an investor’s financial advisor, attorney, or CPA to substantiate his/her net worth.
Forbids a startup, who has an executive officer, director of a corporate issuer or manager of an LLC issuer, or a 20% owner of the issuer, who has been convicted of certain crimes, became subject to certain judicial orders or suspended from certain securities activities, to utilize the new 506 ruling.
Requires an issuer using Rule 506 to file a Form D with the SEC within 15 days after the first sale in an offering. (This includes filing the Form D in each state where sales are anticipated and the issuer is asserting reliance on federal Rule 506 for compliance with that state’s blue sky regulations.)

While the new ruling removes the regulatory burden of preparing disclosure documents, it does not eliminate the business prudence of preparing such documents. Under the old rule, a comprehensive disclosure document was invaluable in describing an issuer’s business, management, use of proceeds, and the company’s potential for success. It also openly stated the risks. Without this disclosure or the benefit of SEC review and clearance, having experienced securities drafters, such as Virtual Paralegal Services, to draft and prepare these documents is imperative. Furthermore, if the startup should fail, having a complete and candid prospectus, though not required, becomes a significant tool for refuting any allegations of misrepresentation.

Are you considering a business a startup under the new 506 ruling? Contact Virtual Paralegal Services for assistance.

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Creating the Win-Win Contract

May 29th, 2014 By Virtual Paralegal Services

Creating win-win contracts has less to do with bargaining, compromise, and competition and much more to do with reaching a mutually beneficial business-to-business relationship. When the contract is completed and signed, both sides of the negotiation should walk away feeling like they were listened to, understood, and dealt with fairly. Both sides should feel confident that they achieved their goals and the contract will be honored. Finally, there should be a sense of looking forward to continuing their business relationship with the other party.

This is possible when both businesses:
• Strive to understand the other business’ needs and desires
• Attempt to solve problems on both sides of the equation
• Maintain a mindset of flexibility, rather than rigidity
• Focus on enlarging the pie rather than dividing it
• Aim for win-win outcomes

When creating the contract

Focus on key issues:
• Value: what is an accurate representation of the value being exchanged, not just monetarily, synergy value, etc?
• Performance: conformance to an agreed upon set of requirements and clear criteria for when those requirements are met
• Expectations: specified itinerary of actions, events, milestones, and completion
• Budget: systematic plan for expenditures – who owes who what; when is it due, how is it to be paid
• Liability: what is a fair allocation of liability and limits to that liability?

• Each party’s responsibilities
• Exactly what constitutes conformance
• Elements critical to success
• Definition of terms
• Identify external variables
• Specific task, events, and milestone schedule
• Liability and risk

• Paraphrase each other’s statements’ to affirm understanding
• Avoid finger pointing – use third party evaluation when appropriate
• Keep issues in writing
• Focus on the goal
• Ask questions

• Limitations of liability
• Indemnities
• Dispute resolution procedures

Consider clauses
• Recognize which party benefits from clause and which one will benefit from the default at law
• Have a clear picture of which party is more likely to breach the contract and which one is most likely to suffer damages
• What are the underlying interests of each party
• How should risk be allocated

In the end, win-win contracts share multiple traits
• User friendly – both parties find them easy to understand
• Concise
• Simple to add-on new agreements rather than having to renegotiate
• Uncomplicated contract administration

When both sides focus on creating a win-win contract, and follow sound principles for creating those contracts, they significantly increase their chances of long-term mutually beneficial relationships. Contact Virtual Paralegal Services.

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Securities and Blue Sky

May 14th, 2014 By Virtual Paralegal Services

While the SEC directly, and through its oversight of the NASD and the various Exchanges, is the main enforcer of the nation`s securities laws, each individual state has its own securities laws and rules known as “Blue Sky Laws.” These regulate the offer and sale of securities and the registration and reporting requirements for broker-dealers, individual stockbrokers, and investment advisers doing business or offering services in the state. Blue Sky Laws are designed to stop fraudulent exploitations. Each state has a regulatory agency, which administers the law, typically known as the state Securities Commissioner. A list of state securities commissioners, and their addresses, is available in our Guide to State Securities Regulators.

Recently, federal legislation, designed to eliminate the duplicative nature of the federal and state securities laws, was enacted. This has limited the ability of the states to review, limit, or otherwise restrict the sale of most securities, particularly offerings that are offered on a national basis. There are notices and filing requirements in each state, however, which must be complied with and the legislation did not affect the ability of the state regulators to conduct investigations and respond to fraudulent actions.

Registration of Securities Transactions

With few exceptions, before a security is offered or sold in a state, there must be (unless exempt) a registration covering:
• the transaction
• the brokerage firm
• the stock broker
• issuers selling their own securities

Though most states securities laws are modeled after the Uniform Securities Act of 1956 (“USA”), Blue Sky statutes vary widely and there is very little uniformity among state securities laws. Even when using identical statutory language or regulations covering particular activities or conduct, interpretation may differ dramatically from state to state. However, state Securities Commission staff is available to assist in answering questions regarding particular statutory provisions or regulations.

Fortunately, many types of securities, and many transactions in securities, are exempt from state securities registration requirements. For example, many states provide for transactional exemptions for Regulation D private offerings, provided there is full compliance with SEC Rules 501-503. However, through certain types of offerings or transactions may not require registration, many states require filings or place additional conditions on exemptions available for many different offerings.


To complicate matters further, The National Securities Markets Improvement Act of 1996 (“NSMIA”) was enacted in October 1996 in response to the states’ failure to uniformly regulate certain types of national securities offerings. Among other changes, NSMIA created a class of securities – referred to as “covered securities” – the offer and sale of which (through licensed broker-dealers) are no longer subject to state securities law registration requirements. NSMIA only preempts state securities registration requirements, however, and preserves the right of the states to investigate and prosecute fraud. Therefore, although covered securities are no longer subject to substantive state review, blue-sky action with respect to offerings of covered securities is still necessary.

Brokers, Dealers and Agents

Blue Sky laws regarding broker-dealer and agent (stockbroker) registration are equally convoluted, with each state having different requirements. Though many states have permit the registration filings for broker-dealers and agents to be made through the National Association of Securities Dealer’s Central Registry Depository system (CRD), and utilize the examinations conducted by the NASD for testing purposes, they follow their own particular regulatory procedures for registering broker-dealer firms. Some states require certified or audited financials, (which are not required by the NASD) and nearly every state requires a stockbroker to take and pass the NASD Series 63 exam. In addition, some states have failed to comply fully with federal rulings. For example, NY has used The Martin Act to wage its war against Wall Street, refusing to regulate private offerings.


The myriad of state regulations continues to plague the securities industry, causing untold delays and inadvertent violations by even the most careful brokerage firm. For registered representatives, even a simple matter like changing brokerage firms can result in a loss of business, for the transfer of the registration from one broker-dealer to the next can take days or weeks.

Blue Sky laws are a complicated web of regulations, from 50 different jurisdictions. (in addition to the complex series of SEC rules and regulations, and regulations from the NASD and the various securities exchanges.) It is crucial then, to obtain legal review of a state’s statutes and regulations be reviewed before embarking upon any securities sales activities to determine what is permitted, or not permitted, in that particular state. Experienced Blue Sky counsel should be retained to review the applicable state blue-sky laws and take any action necessary to permit the offering.

Contact Virtual Paralegal Services for help navigating through the various rules and regulations.

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