About Our Law Firm:

We strive to be both responsive to our client’s needs and tireless promoters of their best interests. Our objective is to enable our clients to reach their goals with practical and efficient solutions. We do this by combining high quality, experienced legal representation, with resourceful approaches and prompt service, for a reasonable cost.

We emphasize the maintenance of our attorney/client relationships based upon mutual respect and trust. This requires dealing honestly with costs and benefits and keeping our clients well-informed about the progress of their matters.

Our attorneys have expertise in business, finance and real estate legal matters. We provide our clients with first-line legal representation in an economic and efficient manner. To more fully service clients, the firm’s attorneys will work with other attorneys and professionals to provide more specialized services. The skills of the firm’s attorneys coupled with its state-of-the-art technology platforms provide the foundation upon which the firm operates.

Practice Areas:

We have a general corporate practice, providing advice, counseling, transaction and dispute resolution assistance to our business clients. We assist with the organization of the most appropriate business form and the maintenance and reorganization of that form throughout the business’s evolution. We also assist our clients with the legal matters commonly confronting them as they operate their businesses, including employment, intellectual property, contracting, regulatory compliance, finance, real estate, tax, business succession, collection and dispute resolution matters. We seek to partner with our business clients, and become the valued legal resource they need to execute their business plans. In doing so, we strive to work in an economically efficient and responsive fashion. We seek to proactively identify and provide for legal risks before they become a problem. We take pride in facilitating business through proper structuring and documentation. Our corporate clients have included mature and development stage companies that operate regionally, nationally and internationally. Our clients have included companies operating across diverse industries, including: energy, business & financial services, manufacturing & distribution, general industry, technology, telecommunications, specialty materials & processes, health care, biotech and life science, media, communications & publishing, and consumer products & services.

We assist financial institutions and corporate borrowers with all types of financing transactions. Lenders we represent range from national banking associations and state chartered banks to non-bank financial institutions, governmental lenders and Federal lending regulatory agencies. We also represent a diverse group of privately held corporate borrowers. Financings include lines of credit, term loans, construction loans, equipment financing, asset based loans, government guaranteed loans and other secured and unsecured loans and credit facilities, as well as project financing, involving a variety of business sectors, including real estate, manufacturing, service, health care, non-profit, distribution, utilities and transportation. We advise our clients from the earliest stages of the process, before any commitments have been issued or accepted, through the closing and funding of the transaction. We also provide our lenders with debt restructuring and workout services, and assist borrowers with out-of-court finance restructuring.

Our lawyers regularly advise our clients in matters relating to federal and state securities laws and regulations — whether in connection with private placements and other capital raising transactions, the issuance of equity-based compensation or other strategic business transactions. We are experienced in working with issuers to raise capital through sales of equity, and in helping them manage the stakeholders they acquire through that process. We have experience in representing both public reporting and privately held business issuers, having provided on-going compliance advice and assistance with the preparation of SEC periodic reports, handling of disclosure issues, compliance with securities trading rules and other federal and state securities laws and regulations. In addition, we have represented institutional and individual investors in finance transactions. We have also represented issuers and investors with regard to disputes over individual investments.

We  provide services in connection with the purchase, sale, leasing, development, management and financing of real property. We assist clients in all phases of development due diligence activities, including title insurance, surveys, subdivision, street closing, transfer and recordation tax planning, zoning and other land use issues.  Additionally, we advise clients in environmental matters, real estate tax issues, including tax sales, transaction tax structuring, and tax incentives such as easements and credits; condominiums or cooperatives; construction management, including contracting and dispute resolution; and land use planning and zoning.

We represent developers in property acquisition, development, syndication, leasing, management, financing, and joint ventures. We assist our clients through permit, zoning, licensing, site plan and other approval stages of projects involving real estate. We negotiate, document and manage contractual relationships with development, environmental, architect and engineering design professionals, as well as construction contractors and subcontractors. We represent clients in landlord-tenant disputes, foreclosure, purchase and sales transactions, tax sale, ground lease and all other aspects of modern real estate law.

We are affiliated with a title company our attorneys helped establish, American Land Title Corporation. This company conducts settlements and writes title insurance for Chicago Title Insurance Company and their offices are contiguous to our office space. We work closely with this title agency and its principal insurance underwriter on real estate transactions.

We represent companies in a broad range of merger and acquisition transactions, including asset and stock acquisitions, business combinations, real estate acquisitions and dispositions. Our attorneys have represented acquirers and target companies, boards of directors, management buyout groups, subordinated lenders and equity participants across a broad range of industries including technology, manufacturing, health care, and financial services.

We provide a legal services to health care providers as they face an increasingly regulated and constantly changing regulatory environment. We provide operational, transactional, and regulatory advice to health care providers in the core areas of:

  • Corporate and regulatory compliance (state and federal)
  • Patient care and privacy (including HIPAA compliance)
  • Clinical research
  • Federal and state anti-kickback and self-referral counseling and litigation
  • Credentialing matters
  • Licensing and certification
  • Certificate of Need matters
  • Medicare and Medicaid compliance and reimbursement
  • Board Disciplinary matters
  • Provide Compliance and Billing Issues

We have drafted and enforced business acquisition agreements, negotiated and drafted contracts with physicians, rendered numerous formal and informal opinions and reviewed and drafted policies. We also offer practical solutions and problem solving to health care clients concerning general business and employment matters, contracts, and litigation related matters.  They have substantial experience:

  • Handling transactions between and amongst all types of providers, including merger and acquisitions of institutional and physician practices
  • Reviewing and developing contracts
  • Resolving contractual claims including insurance coverage issues, non-compete claims and partnership disputes
  • Litigating medical malpractice claims
  • Giving general risk management advice, including advice about HIPAA and the maintenance of medical records
  • Representing health care providers who have disability claims
  • Handling electronic medical records issues (EMR)
  • Insurance matters, including self-insured issues, captive issues and coverage issues

Our health care practice includes representation of Maryland health care providers before all government agencies including the Maryland Health Care Commission, as well as representation of individual providers in front of their respective licensing boards.

We provide counsel on intellectual property protection strategies.  We develop and oversee the implementation of trade secret policies, and we register trademarks and copyrights, where appropriate.   We document and negotiate contracts relating to intellectual property, including licensing agreements, confidentiality agreements and collaborative development agreements. We work with companies in developing and implementing a patent protection strategy and we work in association with patent attorneys and agents to prosecute patent applications and protect patent rights.

We assist clients in complying with federal and state employment and labor laws.  We draft and revise company policies and procedures including those related to termination, substance abuse and testing, employee privacy, sexual harassment, civil rights and occupational health and safety.  We structure employment agreements that balance the needs of both the employer and the employee and we structure and implement qualified and non-qualified employee and executive benefit plans.  We counsel businesses about the impact of the law on business decisions such as classifying workers (independent contractor vs. employee status), structuring pay (compliance with the FLSA and the Equal Pay Act), and laying off workers (observing the ADEA, WARN Act and OWBPA)

We are available to meet with our clients’ managers, senior staff and in-house counsel to discuss training, investigate personnel situations, review employee handbook contents, conduct sexual harassment training, and to engage in collective bargaining. If administrative or judicial proceedings become necessary, we can prepare statements of position for the agencies, obtain injunctive relief and damages, defend employment lawsuits in the courts, and provide appellate litigation services in the courts of appeals, if necessary.

We provide estate planning, probate and trust administration services. We advise clients concerning the legal aspects of personal, financial and estate planning, and provide assistance in connection with decedents’ estates and counseling trustees and other fiduciaries with regard to their duties and responsibilities.

We prepare trust and will documents using, where appropriate, such techniques as revocable and irrevocable trusts, testamentary and non-testamentary trusts and generation-skipping trusts, charitable gifts and gift programs to family members. We also provide advice on and prepare health care powers of attorney, durable powers of attorney, advance directives and living wills.

For our business clients, we provide business succession planning for the orderly transfer of their business interests during life or at death. We have extensive experience advising business owners in all aspects of business succession planning including the preparation and negotiation of Buy-Sell Agreements (with or without funding mechanisms), structuring sales or gifts of business interests, reorganizations, family limited partnerships and other structures suited to fit our client’s needs.

We work with clients to conserve assets, and if possible, qualify a person for government programs to help pay long term care costs.  We help clients designate an appropriate person to act for a family member who becomes disabled, and guide clients through the process of obtaining a guardianship.  Our estate administration staff can help you efficiently administer a loved one’s affairs after his or her death.

We represent clients in federal and state courts and before state and federal agencies, commissions, boards, and other regulatory and administrative authorities. Our litigation practice includes counseling and alternative-dispute-resolution (including arbitration and mediation). We represent clients with all aspects of the litigation process, from the prosecution or defense of discovery, pretrial, and trial proceedings, to post trial remedies and review in appellate courts. Our litigation practice includes a wide variety of administrative, trial, and appellate cases.

Our attorneys are admitted to practice law in multiple jurisdictions and courts. On the federal level, we have represented clients in U. S. District Courts and U.S. Bankruptcy Courts throughout the country and in several of the U.S. Circuit Courts of Appeal. At the state level, our attorneys regularly appear before trial and appellate courts in Maryland and our attorneys have resolved many cases pending in the District of Columbia, Virginia and New York.


Businesses often procure supplies and services on a line of credit. The authority to access this line of credit can often be evidenced by credit cards. Companies will often distribute company credit cards to those employees who are responsible for purchasing supplies and services used in the business. The company credit card will often be issued in the name of, and bear the name of, the company and the individual employee authorized to use the card.

The issue then arises as to who is liable to repay the credit advances? Is management liable for the advances? Are the employees whose names appear on the credit cards liable for the advances?

These issues usually arise when a company becomes insolvent and can’t repay the credit card advances. Almost always, the credit card companies look to the company to pay first. But, when the company can’t pay, the credit card companies look to secondary sources for repayment of the debt. Specifically, these lenders may look to management and company employees to pay.

Whether the company’s management and employees are liable for these debts will depend on the applications and agreements, if any, between the lender and the company. For management and employees to be held liable, there must be evidence that managers and/or employees “agreed” to assume personal liability for the company debts.

To determine whether there is an agreement, courts examine the terms and signatures on the credit card application and the credit card agreement – what some term, “the fine print.” The recent Maryland Court of Special Appeals case, Ubom, etal. v. SunTrust Bank, No. 2862 (April 2011), involved such an examination and provides cautionary instruction to executives and employees using this mechanism to pay for business expenses.

Case Analysis

In 2006, a professional limited liability company (“LLC”) applied for a business line of credit account in the amount of $100,000 from SunTrust Bank. In section one of the credit application, Sun Trust required information about the applicant, the LLC; in the second portion of the application, Sun Trust required information about the “Guarantor.” The Managing Member, the managing attorney and sole owner of the LLC (hereinafter, the “Managing Partner”), signed his name twice on the Agreement, once on the signature line for “Applicant” and once on the signature line for “Guarantor.” After both signatures, the Managing Member included his title of “Managing Partner.” The Managing Partner also provided his personal information under the section titled “Guarantor Information,” but did not include his name in the section labeled “Legal Name of Guarantor.” The credit line was approved and the loan booked.

The LLC defaulted on repaying the loan, and Sun Trust filed a Complaint against the LLC and The Managing Partner asserting that the LLC had failed to repay the loan and that the Managing Partner had “personally guaranteed the payment…of all obligations and liabilities.” The Complaint requested that the Court grant judgment in Sun Trust’s favor against the LLC and The Managing Partner, jointly and severally. The Managing Partner acknowledged that the LLC had defaulted on the Agreement, but argued the Agreement was signed in his official capacity as Managing Partner, not as a personal guarantor of the loan and that he should therefore be dismissed from the suit or judgment should be granted in his favor. Further, he claimed that Sun Trust’s representative told him that even though he was signing as guarantor on the LLC’s Line of Credit, personal liability could be avoided by not including his name on the page of the Agreement that asked for legal name of guarantor, and by writing his title of “Managing Partner” after his signature on the last page of the Agreement.

The trial court below granted summary judgment in favor of Sun Trust and against the LLC and The Managing Partner. The Managing Partner appealed.

In the Appeal, the legal question before the court was whether The Managing Partner, by signing solely in his capacity as an officer or manager of the Company, had obligated himself personally as a Guarantor of the Company’s obligation to Sun Trust. In analyzing this issue, the Court focused on the language of the agreement between the Company and Sun Trust, and noted that “Maryland courts adhere to a principle of objective interpretation of contracts”, and only go outside the express terms of a written contract to determine the contract’s meaning, if the language of the contract is ambiguous. Ubom, etal. v. SunTrust Bank, No. 2862 (April 2011). The Court noted that there are several factors that should be used to determine if an agreement is ambiguous: 1) what information was included under the section regarding the “Applicant”; did that language suggest that the lender intended to bind only the corporation for repayment of the debt; 2) do sections that create require authorizations require agreement of the company or a person or both; 3) is the entire agreement when read as a whole clear? When applying these factors, the Court found that when looking at this Agreement as a whole “the clear language of the Agreement…shows that [the Managing Partner’s] signature as Guarantor was in a personal capacity, resulting in personal liability.”

The Court noted that that the applicant section of Sun Trust’s application required not only information on the company, but also information on the Guarantor. The Managing Partner signed the credit or loan agreement with Sun Trust in the section for the Company and in the section for the Guarantor. The fact that he signed the Guarantor section as a “Managing Partner” did not alter the clear intention of the documents that he was personally guarantying repayment of the Company’s debts. The Court recognized that it if the Managing Partner signed the guarantee in his official representative capacity only, the second signature would be superfluous and inconsequential; it would have been unfruitful for Sun Trust to have a company guarantee a credit obligation in which it was already liable as the primary borrower. Also the application included language which stated that “each of the individuals signing this application as a ‘Guarantor’…hereby jointly and severally guarantees repayment to the Bank of all obligations…”

Because the court concluded that the contract language was clear and unambiguous and that the Agreement as a whole showed an intent to create personal liability for the Managing Partner in his personal capacity, the Court granted summary judgment in favor of Sun Trust.

The Court’s decision provides a cautionary tale to business executives in opening lines of credit, including credit card facilities. Executives opening these facilities, and employees using them, should be very careful not to sign any documentation which could be construed to create personal liability for the company’s debts. As a firm, we have been involved in representing many executives and employees that have been pursued by lenders to pay corporate obligations. In all of these cases, the lenders have sought to leverage their arguments that the executives and employees have personal liability by negatively reporting the nonpayment against the personal credit records of the executives and employees. We have been successful in each instance in resolving these claims and stopping the unwarranted lender activity. However, in each case, we have had proper contractual documentation with which to work. If you have any question about whether lender documentation may create personal liability for you, we encourage you to consult with an attorney before signing “the dotted line.”

Through a direct equity offering, a company’s management capitalizes its business by selling ownership in the company directly to groups of qualified investors for cash, services or something of value. The use of equity in financing emerging companies follows a predictable pattern, with money being raised from the same types of investors over and over again. The regulatory scheme contemplates that financings will start small and grow larger. A typical equity investment cycle for a start-up company might be: issuance of founders’ shares, sales to “friends, family and affinity group”, sales to a mixed bag of accredited and non-accredited investors, venture capital financing (VC) and initial public offering.

Early on, a business needs to keep its financing activities private in nature, whether they are between the business and investors or between a placement agent and investors. Following the market crash of 1929, Congress determined that to offer and sell securities to the public (a “distribution”) requires the filing with and review by the SEC of a registration statement containing financial and other information about the issuer and its securities as well as delivery to investors of a prospectus.

After balancing the need for business to raise money quickly and cheaply against the need for investor protection, Congress determined that a “public” versus a “private” offering was the appropriate place to draw the line and require SEC registration of the offering, which can be costly and time consuming.

In limited circumstances, exemptions are provided for privately negotiated sales that by definition must not involve any public solicitation or public advertising. In very general terms, exemptions are premised either on the small size of the offering, the private nature of the offering, or the extent to which purchases need the protections of the securities laws. In addition, since one attribute of a public offering is a large amount of capital raised over a short period of time, federal exemptions look at the total financing activity taking place within a 12-month window (six months before and six months after). Offerings that are not registered, and do not qualify for an available exemption, are illegal.

What Types of “Private” Equity Offerings May A Company Make?

The principal exemptions to registration used by companies to sell its securities for small or limited offerings are set forth in Regulation D of the Securities Act of 1933, as amended. Three separate but interrelated exemptions are contained in Regulation D as follows:

I. Rule 504 exempts certain offerings not exceeding $1 million within a 12-month period.

Rule 504 provides an exemption for the offer and sale of up to $1 million of securities in a 12-month period. A business may use this exemption so long as it is not a blank-check company and is not subject to Exchange Act reporting requirements. A Rule 504 offering may be either a public offering or a limited offering depending upon which path an issuer chooses. The path an issuer chooses will depend on securities laws of the state where the issuer wants to conduct the offering. These state laws may permit offerings to state residents accompanied by general solicitations and advertising and with the securities sold being unrestricted in subsequent resales under the following circumstances:

•A business registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors.

•A business registers and sells in a state that requires registration and disclosure delivery and also sells in a state without those requirements (only in New York and DC), so long as the business delivers the disclosure documents mandated by the state in which the business registered to all purchasers.

•A business sells exclusively according to state-law exemptions that permit general solicitation and advertising, so long as your business sells only to “accredited investors”, described in more detail below.

Even if a business makes a private sale where there are no specific disclosure-delivery requirements, the promoters of the offering, which are typically the business’s management, should take care to provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. That means that any information the offering’s promoters provide to investors must be free from false or misleading statements. Similarly, a business should not exclude any information if the omission makes the information that is provided to investors false or misleading.

II. Rule 505 exempts certain offerings not exceeding $5 million within a 12-month period to an unlimited number of accredited investors and to no more than 35 purchasers who
are not accredited investors.

Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period. Under this exemption, a business may sell to an unlimited number of “accredited investors” and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions. Purchasers must buy for investment only, and not for resale. The issued securities are “restricted”. Consequently, a business must inform investors that they may not sell for at least a year without registering the transaction. An issuing business may not use general solicitation or advertising to sell the securities.

An “accredited investor” is:
•a bank, insurance company, registered investment company, business development company, or small business investment company;

•an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or the plan has total assets in excess of $5 million;

•a charitable organization, corporation or partnership with assets exceeding $5 million;

•a director, executive officer or general partner of the company selling the securities;

•a business in which all the equity owners are accredited investors;

•a natural person with a net worth of at least $1 million;

•a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or a trust with assets of at least $5million, not formed to acquire the securities offered, and whose purchases are directed by a sophisticated person.

It is up to the offering’s promoters to decide what information he or she gives to accredited investors, so long as the promoters do not violate the antifraud prohibitions. But a promoter must give nonaccredited investors disclosure documents that generally are the same as those used in registered offerings. If a promoter provides information to accredited investors, the promoter must make this information available to the nonaccredited investors as well. This is a frequent area of misstep for entrepreneurs. You must also be available to answer questions by prospective purchasers.

Here are some specifics about the financial-statement requirements applicable to this type of offering:
•Financial statements need to be certified by an independent public accountant.

•If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company’s balance sheet, to be dated within 120 days of the start of the offering, must be audited.

•Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under the federal income tax laws.

III. Rule 506 exempts certain offerings without regard to dollar amount to an unlimited
number of accredited investors and to no more than 35 purchasers who either alone or with their purchaser representatives have (or who the issuer reasonably believes have), the knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the prospective investment.

Rule 506 is a “safe harbor” for the private offering exemption. If the following standards are followed, an issuing business can be assured that it is within this exemption:
•a business can raise an unlimited amount of capital.

•a business cannot use general solicitation or advertising to market the securities.

•A business can sell securities to an unlimited number of accredited investors and up to 35 other purchasers. Unlike Rule 505, all nonaccredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;

•It is up to the offering’s promoters to decide what information to give accredited investors, so long as he or she does not violate the antifraud prohibitions. But the promoters must give nonaccredited investors disclosure documents that generally are the same as those used in registered offerings. If a promoter provides information to accredited investors, a promoter must make this information available to the nonaccredited investors as well.

•An issuing business must be available to answer questions by prospective purchasers.

•Financial-statement requirements are the same as for Rule 505.

•Purchasers receive “restricted” securities. Consequently, purchasers may not
freely trade the securities in the secondary market after the offering.

Section 4(6) of the Securities Act exempts from registration offers and sales of securities to accredited investors when the total offering price is less than $5 million. The definition of accredited investors is the same as that used in Regulation D. Like the exemptions in Rule 505 and Rule 506, this exemption does not permit any form of advertising or public solicitation. There are no document-delivery requirements. Of course, all the transactions are subject to the antifraud provisions of the securities laws. Section 4 (6) also requires that a notice of sales on Form D be filed with the SEC.

Section 4(2) of the Securities Act of 1933, exempts from registration, offers and sales of securities “not involving any public offering.” In SEC v. Ralson Purina Company, 36 U.S. 119 (1953), a key case in the interpretation of Section 4(2), the U.S. Supreme Court stated that “[a]n offering to those who are shown to be able to fend for themselves is a transaction ‘not involving any public offering.” Although not considered by the Ralson Court, additional factors that other courts have indicated as important to establish a section 4(2) exemption include:

• The size of the offering (i.e. the number of securities offered and the aggregate offering price thereof); and
• The presence of a relationship between the offerees and the issuer.

Rule 701 is a particularly useful exemption. It exempts sales of securities if made to compensate employees according to a written plan of compensation. This exemption is available only to private companies that are not subject to Exchange Act reporting requirements. It is useful because it frequently will exempt stock awards to employees that are not otherwise qualified purchasers under Section 4(2). An issuing business can sell at least $1 million of securities under Rule 701, no matter how small the company is.

An issuing business can sell even more if it satisfies certain formulas based on its assets or on the number of its outstanding securities (for example, up to 15 percent of assets). If an issuing business sells more than $5 million in securities in a 12-month period, an issuing business needs to provide limited disclosure documents to his or her employees. Regardless of the amount of securities sold, each employee receiving a stock award must receive a copy of the written equity compensation plan. As with any exempt offering, employees receive “restricted securities” in these transactions and may not freely offer or sell them to the public.

When making a private sale of securities, in addition to complying with federal law, a company needs to comply with state law in the jurisdictions where it is offering and selling securities. These laws are commonly known as “Blue Sky” laws. In most cases, “Blue Sky” state exemptions from registration generally parallel federal exemptions. Maryland allows a local company to offer $150,000 in securities during any 12 month period to no more than 10 purchasers. This type of “intrastate” offering is exempt under federal law pursuant to Section 3(a)(ii) of the Securities Act. Maryland also permits other types of private offerings of securities to its residents, in connection with federal law.

With private exempt offerings of securities, a company must be careful to comply with all of the applicable federal and state requirements for the offering. Failure to meet one requirement could void the availability of the exemption. In that event, an unhappy investor may be able to demand its money back from the company’s principals if the investment goes sour. Often there is a requirement to pay a filing fee, supply state securities regulators with a copy of the offering document, and file a Form D with states in which securities are offered or sold. Such is the case, for example, with offerings under Rule 701 in Maryland. For Rule 701 employee stock awards, you file a copy of the Equity Compensation Plan. Form D filings as well as other securities filings, can be done electronically with the SEC and many State regulators.

In addition to private exempt offerings of securities, a company, through its principals can make direct public offerings of its securities.

What is a Direct Public Offering?

A direct public offering is a mechanism by which a company’s management sells equity ownership in the company directly to the public, free from having to qualify investors before making an offer and free from restrictions on general solicitation and advertising. Generally, these offerings raise less than $20,000,000 for companies. These offerings are an alternative to the traditional underwritten public offerings, where securities are sold by brokers to their customers. The price of the stock sold, the rights that attach to the stock sold, and the amount of stock sold is determined by the company’s management. In this way, management controls the valuation placed on its company and price of participating in the equity of the company.

Regulation A Offerings. Section 3(b) of the Securities Act authorizes the SEC to exempt from registration requirements securities offerings based purely on their small size. Regulation A was created under Section 3(b) to exempt public offerings not exceeding $5 million in any 12-month period. If an issuing business relies on this exemption, it must file an offering statement (called a “Form 1-A”) with the SEC for review. The offering statement consists of a notification, offering circular and exhibits.

Regulation A offerings share many characteristics or requirements with full registered offerings. For example, an issuer must provide purchasers with an offering circular that is similar in content to a prospectus. Like registered offerings, the securities can be offered publicly and are not “restricted”, meaning they are freely tradable in the secondary market after the offering. The principal advantages of Regulation A offerings, as opposed to full registration, are:

•The financial statements are simpler and do not need to be audited.

•There are no Exchange Act reporting obligations after the offering (unless the company has more than $10 million in total assets and more than 500 shareholders).

•Companies may choose among three formats to prepare the offering circular, one of which is a simplified question-and-answer document.

•An issuer may “test the waters” (make limited general solicitations) to determine if there is adequate interest in its securities before going through the expense of filing and review with the SEC.

All types of companies that do not report under the Exchange Act may use Regulation A, except “blank Check” companies, those with an unspecified business, and investment companies registered or required to be registered under the Investment Company Act of 1940. In most cases, shareholders may use Regulation A to resell up to $1.5 million of securities.

If an issuer “tests the waters”, it can use general solicitation and advertising prior to filing an offering statement with the SEC. This allows an issuer the advantage of determining whether there is enough market interest in its securities before running up significant legal, accounting and other costs associated with filing an offering statement. An issuer may not, however, solicit or accept money until the SEC staff completes its review of the filed offering statement and the issuer delivers prescribed offering materials to investors.

Regulation A offerings historically have not been popular with investors, probably because there are other exemptions that are easier to use. However, because general solicitations are permitted in a Regulation A offering and are not permitted under other exemptions, Regulation A offerings have become slightly more popular as a means to offer securities over the Internet.

“SCOR Offerings”

The Small Company Offering Registration (“SCOR”) offers an optional method of registration that utilizes a question and answer disclosure document and enables corporations and limited liability companies (“LLC”s) to raise up to $1 million during a period of up to 12 months through the sale of securities to the public.

SCOR offerings are designed to be exempt from registration under federal securities laws by virtue of Securities and Exchange Commission (“SEC”) Rules and Securities Statutes. Issuing companies may use commissioned selling agents or sell the securities to the public themselves through classified ads or other means of mass solicitation, such as the internet. Investors are not limited as to number or type, not is there any restriction on the amount that may be sold to any one person.

The core of the SCOR registration is the Form SCOR Disclosure Document (Form U-7), which is presented in a question and answer format. The questions presented in the form are designed to elicit specific types of information of special relevance to small businesses including the background of persons operating the company (including compensation paid, percentage of ownership in the company and any transactions between the individuals and the company), intended uses of the proceeds of the offering, the terms of the offering and the type of security being offered, the assets, liabilities and cash flow of the company, and risks associated with investing in the company. Because a registration is involved, examiners from the State Regulatory Agencies will comment on the disclosure provided and request different or more detailed disclosure if the answers are not sufficiently responsive.

SCOR offerings must be registered in the State where they are conducted by qualification. Registration by qualification requires the filing of the SCOR form and other documents with State Securities Regulators. The State Securities Regulators review the SCOR form for adequacy of disclosure and compliance with certain substantive criteria.

Past regulatory problems by potential selling agents in the offering, the selling agents’ management, or 10% or greater owners may result in the disqualification of the selling agents. Selling agents must sell only on behalf of the company and not on their own behalf. Accordingly, firmly underwritten offerings are prohibited.

A selling agent or finder engaged in the business of selling securities must be registered as a Broker-Dealer with the State Securities Regulator. Individuals receiving commissions or other compensation for selling securities in the offering must be registered as securities salespersons and have passed appropriate examinations. If the corporation is selling the securities directly without paying commissions, officers and directors of the company may sell the offering without being registered.

Proceeds of the offering must be placed in an impound with an independent bank or similar institution until the minimum amount necessary for the company to achieve its stated objectives is raised. The company may raise additional funds so long as their anticipated use is clearly disclosed.

Financial statements for the company’s last fiscal year must be attached to SCOR Disclosure Document. Financial statements must be prepared in accordance with generally accepted accounting principles (GAAP), complete with appropriate footnote disclosure. They may need to be reviewed or audited by an accountant.

Coordinated Review-SCOR (CR-SCOR) is a coordinated review program available for companies that intend to conduct a SCOR offering in more than one state. This program streamlines the review process for the company, since the review of the offering is coordinated amongst the states in which the company desires to register. A lead review state is appointed to coordinate the review and a single comment letter is generated for all the states participating in the review. The company must work with only one state to resolve any registration issues, rather than having to deal with each individual state in which the issuer desires to register.

Small Business (SB) Registered Offerings

Other than SCOR and Regulation A offerings, the SEC has adopted simplified registration forms (Forms SB-1 and SB-2) for use by small business issuers. A small business issuer is a United States or Canadian issuer that had less than $25 million in revenues in its last fiscal year, provided that the value of its outstanding securities in the hands of the public is no more that $25 million.

These formats are alternatives to Form S-1. Form SB-1 for small business issuers offering up to $10 million worth of securities in a fiscal year, permits the use of disclosure similar to that required in a Regulation A offering, including the use of the question and answer format. It requires, however, audited financial statements.

Form SB-2 permits the offering of an unlimited dollar amount of securities by any small business issuer. The form may be used again and again as long as the issuer meets the definition of small business issuer. Form SB-2 offers certain advantages, including the location of all disclosure requirements in a central repository, Regulation S-B.

Form SB-2 also permits the issuer to:

• Provide audited financial statements, prepared in accordance with generally accepted accounting principles, for two fiscal years (Form S-1 requires the issuer to provide audited financial statements, prepared in accordance with more detailed SEC regulations, for three fiscal years);
• Include less extensive narrative disclosure, particularly in the areas of the description of business, and executive compensation, than that required by Form S-1; and
• File its initial public offering with either the SEC Regional Office nearest to where the company conducts its principal business operations (the Atlanta District Office for issuers in the Southeast Region) or with the SEC Division of Corporation Finance in Washington, DC. The primary advantage of regional filing is that regional office personnel may be more familiar with local economic conditions, the business community, the financial environment, and, in some cases, the background and history of the company.

Registration statements are examined for compliance with disclosure requirements. If a statement appears to be materially incomplete or inaccurate, the registrant usually is informed by letter and given an opportunity to file correcting or clarifying amendments. The Commission can refuse or suspend the effectiveness of any registration statement if it finds that material representations are misleading, inaccurate, or incomplete.

What Is The Process For A Direct Public Offering?

A company should generally plan on a commitment of a significant amount of time and resources over a six-month period to successfully conduct a direct public offering.

The company management will first need to determine the amount of stock it will offer and the pricing on the offered stock. This will necessarily implicate a valuation of the company prior

to the offering and a thorough review of the company’s business plan, financial statements and financial projections.

The company will also need to determine the type of securities regulation filing it will make and where it will conduct its offering. This will implicate the type of financial statements it will need to prepare and the States where it will register its securities for sale. As indicated above, the most commonly used registration forms for DPOs are (1) the Rule 504 Small Corporate Offering Registration (SCOR) statement for offerings of $1,000,000 or less; (2) a Regulation A Offering Circular for offerings of $5,000,000 or less; (3) a SB-1 registration statement for offerings of $10,000,000 or less; and (4) a SB-2 registration statement for offerings in unlimited amounts.

The company will need to plan the manner by which it will market and sell its offering. It will need to develop a marketing plan for offering to prospective investors and determine how best to reach them. It will need to determine the best media to reach investors.

The company will also need to plan and think through the aftermarket for its stock. All investors will be concerned with liquidity; at some point, they will want to liquidate their investment. For this reason, the company will need to address this issue up front in the offering. Not all offerings require a public trading market in the traditional sense. It is possible to structure order matching services that match potential buyers and sellers of the company’s stock. Alternatively, if the company qualifies, it can obtain a listing on one of the exchanges or be cleared for quotation on the electronic bulletin board. The company will need to address this issue in the offering and how it plans to deal with it in both the short term and the long term.

Prior to conducting the offering, the company will need to review its own structure and tie up any loose ends that may compromise the offering. For example it should review its corporate structure and make any changes to its corporate charter that may assist it when it has additional shareholders. It should examine its board of directors, management structure and corporate organizational chart. The company should review its contracts, documenting where necessary, and its employment and intellectual property arrangements.

Finally, the company will need to determine the group of inside and outside professionals that will assist with the offering. The company may need professionals to help them address the following areas: finance and accounting, public relations/investor relations, legal/regulatory requirements, graphic and printing and internet/electronic commerce. In planning any offering, the company will need to develop a budget, timeline and list of assignments among the team.

What Will A Direct Public Offering Cost

Generally, a company should plan on a direct public offering costing about 3-5% of the amount raised. The majority of the costs of this offering will come from professionals and employees and the costs of the communications media for the offering.

Some of the costs of the offering will need to be paid up front, and some of the costs of the offering can be deferred to closing on the offering. Below is an estimated itemization of the costs that will need to be paid prior to closing:

a. SEC filing fee: $0 (Regulation A is zero, SB-2 is based on a dollar amount per million of an offering)
b. State filing fee $1,000 (average, per state where registered, runs from $0 to $2,500)
c. Audit $5000 (average, required by many states and very desirable)
d. Printing/EDGAR $7,000 (average for 1,000 copies. Note: offerings on the Internet can lessen this charge and save postage as well.) Plus misc. copying, $500.
e. Preparing the Offering $10,000 – 15,000

What Are The Benefits/Disadvantages Of A Direct Public Offering?

There are advantages and disadvantages to direct public offerings. The reasons for choosing to do a public offering usually include accessing capital that does not have to be paid back and does not require any interest and dividend payments; getting capital without giving up control over the business decisions management can make; creating a liquid trading market for shares that the company’s founders, management and major owners may use to begin cashing in on their investments; and having a security to use, instead of cash for compensating key employees and acquiring other businesses. The disadvantages to a public offering include operating the company so that its former owners/managers are now stewards of money entrusted to them by strangers; filing regular reports with regulatory agencies and issuing new releases to keep shareholders informed; monitoring the trading activity and price of the stock; and having to disclose information to the company, such as salaries, transactions with insiders and material contracts.

By being freely advertised, a DPO can educate the public about a company’s products and services and may develop business and markets for the company. As well, it might be marketed to potential strategic partners, vendors and customers. Oftentimes, these same groups provide investment, which, in turn, can serve to strengthen important business relationships.
Can the Internet Be Used For Private or Small Direct Public Offerings?

The SEC and most state securities regulators allow electronic delivery of disclosure documents. The issue for using the internet to deliver disclosure documents is whether the issuer, or its placement agent, has a pre-existing relationship with the offeree. If there is no pre-existing relationship, then the issuer might be accused of a general solicitation or a public offering. This would void the exemption for the private offerings discussed above. Even for the small direct public offerings discussed above, if the offering is not registered in all fifty (50) states, then using the internet might subject the issuer to a claim that the issuer is making an illegal offering in a state where its offering is not registered. Therefore, if an issuer is going to use the internet in making an offering, it needs to use special care in how it structures that use. The internet can be an important tool to facilitate offerings.


Raising capital is one of the most important activities that emerging companies engage in. To be successful, it requires planning, good counseling and common sense. As you can see, many of the legal requirements are complex and interrelated. However, there are things a business can do to benefit itself now to move the process along. A business can begin by writing a good business plan and keeping corporate records and documents in good order for review.

About Jiranek Company, P.A.

We help companies raise capital through direct sales of its securities. We have helped companies formulate and implement equity offerings, complying with the complex and myriad of legal requirements associated with these offerings. We assist companies in identifying and implementing the types of permissible sales and marketing techniques that are likely to be successful with these offerings. We have established relationships with professionals, lenders and investors that can assist the company with successfully capitalizing their business.

Private companies frequently use equity compensation plans as a means to attract, incentivize, retain and compensate employees. Use of these plans raises a host of legal issues for management of these companies and, accordingly, such use must be planned and implemented with care. If company management does not take proper actions in connection with these plans, then management may create personal liability for themselves. However, if proper planning and implementation is undertaken, these plans can provide an important tool fostering development in emerging companies. This article briefly discusses the legal issues to address with these plans.

Types of Equity Compensation Awards.

Equity compensation plans take many forms. The most common forms are direct stock grants, restricted stock awards and stock options.

Direct Stock Grant – A company may award a direct grant of company stock to an employee or consultant as compensation for services. For example, the direct stock grant may be awarded as a performance bonus or as partial or full payment of what the company would otherwise owe to the employee or consultant in cash.

For tax purposes, a direct stock grant is treated as compensation and the recipient is subject to income tax in the year that the stock is received on the fair market value of the stock, which can be the value as reasonably determined by the Board of Directors. The company will recognize a corresponding business expense deduction at that time.

Restricted Stock Award – A restricted stock award is a grant of stock with vesting restrictions that lapse over time (e.g., lapse upon achievement of performance goals or employment for certain length of time).

Unless an 83B election is made (discussed below), the recipient of a direct stock grant is not taxed until the stock vests, at which time the recipient will owe income tax on the fair market value of the vested stock at the time of vesting. When later sold, the employee/consultant recognizes capital gain/loss on the difference between the sale price and the fair market value of the stock at the time it vested. For capital gains purposes, the holding period begins on the date of vesting. The company recognizes a business expense deduction at the time of vesting (unless 83B election made as discussed in the next paragraph).

An individual who receives a restricted stock award can make what is known as an 83B election (under Section 83B of the Internal Revenue Code) and elect to recognize income on the stock award in the year that it is granted rather than later when it vests. The company gets a corresponding business expense deduction at the time of the grant. This is advantageous to the employee/consultant if it is anticipated that the share price will go up by the time the stock vests. For capital gains purposes, the holding period begins on the date of the grant, rather than the vesting date. Thus, the employee/consultant pays less in income tax (assuming the stock price goes up) and starts the holding period for capital gains purposes sooner than if an 83B election had not been made.

To be effective, the 83B election must be made by the employee/consultant within 30 days of receipt of the restricted stock by filing a written statement with the IRS where the individual files his or her return (there is no IRS form for this) stating the date the stock is transferred, the nature of the restrictions on the stock, and the fair market value of the stock on the transfer date. The employee must give copy of the statement to the company and attach a copy to his individual tax return.

An 83B election has no negative impact on the company as long as the company and the employee agree on the amount that is reported to the IRS. However, there are risks to the individual in making the 83B election. For example, if the stock is forfeited (e.g., employee leaves before the stock vests), the individual cannot recover the income tax paid at the time the stock was awarded. The recipient also takes the risk that the stock price will go down over time, meaning that the recipient would have paid less income tax if the 83B election had not been made. The 83B election can only be revoked if approved by the IRS and only when the individual makes a mistake of fact (which does not include a mistake in understanding the consequences of making an 83B election).

Stock Options – A stock option gives the recipient the option to purchase company stock. Stock options usually have vesting requirements restricting the right to purchase the stock (i.e., the right to exercise the option) until certain vesting requirements have been met (e.g., after a certain period of service to the company or upon a change of control of the company.)

There are two types of stock options – Incentive Stock Options (“ISOs”) and what is known as “non-qualified stock options” (“NQSOs”). ISOs have favorable tax consequences to the employee (i.e., no ordinary income tax on exercise, capital gains tax will apply as long as certain holding requirements are met) but must meet all of the requirements of Section 422 of Internal Revenue Code. Among other restrictions, ISOs can only be granted to employees and the exercise price must be equal to the fair market value of the stock on the date of the grant. Fair market value can be determined by reference to a trading price of the stock in a public market. Because private companies generally do not have a public trading price for their stock, they generally can not issue ISOs. Because NQSOs are not subject to the same requirements as ISOs, private companies will usually issue NQSOs.

NQSOs are not taxed at the time of grant or at the time of vesting (assuming the requirements of 409A are met as discussed below). Instead, at the time the employee/consultant exercises the option, he or she recognizes ordinary income on the difference between the exercise price and the fair market value of the stock at the time of exercise. The company at that time gets a business expense deduction. When the stock is later sold, the individual recognizes capital gain/loss on difference between sale price and the fair market value of the stock on the exercise date.

Note that an 83B election is not applicable to non-qualified stock options where there is no readily ascertainable fair market value of the option. Options issued by a private company generally will not have a readily ascertainable fair market value pursuant to the Internal Revenue Code.

Companies must be careful to structure their non-qualified stock options to meet the requirements under the new Section 409A (of the Internal Revenue Code) tax regulations. Failure to meet these requirements can result in severe penalties to the employee (taxation at the time of vesting rather than exercise, an additional 20% penalty tax in addition to the regular income tax and potential interest charges) and liability to the company if the employee fails to pay.

One way companies can avoid the harsh consequences of 409A is to ensure that the exercise price of the option is at least equal to the fair market value of the stock on the date of the grant. The regulations contain mandatory guidelines for establishing fair market value as well as safe harbor methodologies which are given a presumption of reasonableness by the IRS. The guidelines include a valuation method for illiquid stock of a start up company by experienced personnel. Failure to establish fair market value using the IRS guidelines could result in additional tax and penalties for the optionee. In addition, it is possible that the individuals who approved the valuation may have personal liability if the valuation is later found to be in correct and the recipient is subject to additional tax and penalties as a result.

Securities Issues

A company’s issuance of stock to its employees and consultants, whether through direct stock grants, restricted stock awards, or options, is subject to federal and state securities registration unless an exemption from registration applies. One exemption is Rule 701 of the Securities Act, which provides an exemption from federal securities registration. Most states (including Maryland) have adopted similar exemptions.

Under Rule 701, the issuance of an equity award by a private company will be exempt from federal registration if all of the following are satisfied:

1. The equity award is issued in connection with written equity compensation plan.
2. The aggregate value of the equity awards during any consecutive 12 month period does not exceed the greatest of (a) $1,000,000, (b) 15% of total assets, or (c) 15% of outstanding amount of securities of the class being offered.
3. The equity award is being issue to an employee, director, officer, or consultant or advisor; provided that the consultant or advisor is not being compensated for services in connection with the offer or sale of securities in a capital-raising transaction, and they do not directly or indirectly promote or maintain a market for the issuer’s securities.
4. The recipient of the equity award is provided a copy of the equity compensation plan. Note that in the event the aggregate value of the stock awards during any consecutive 12 month period exceeds $5,000,000, there are additional disclosure requirements (e.g., distributions of a summary of the plan, risk factors, and financial statements).
Contractual and Employment Issues.
Stock compensation arrangements should be carefully documented. Generally, a company should have an equity compensation plan adopted corporately and an agreement(s) with the employee or consultant to which the award is being made. It is not uncommon to make the agreement governing the stock grant separate from the agreement governing the terms of the employment or consulting arrangement. In all events, these documents form the terms of the stock arrangement and will be looked to in the event of any dispute over the arrangement. If the recipient of the grant is an employee, then these documents will be interpreted in the context of federal and state employment law. Employees may have enhanced protections not otherwise available to consultants.

One of the first considerations to starting a new business is selecting the structure the business will use. There are eight business structures to consider.

(1) A sole proprietorship;

(2) A corporation taxed under Subchapter C of the Internal Revenue Code of 1986 (the Tax Code);

(3) A corporation taxed under Subchapter S of the Tax Code;

(4) A general partnership;

(5) A limited partnership;

(6) A limited liability partnership (LLP);

(7) A limited liability limited partnership (LLP); and

(8) A limited liability company (LLC)
The choice of legal structure requires an analysis of many considerations, including, principally, limitation of liability, income and other tax consequences, flexible management structure and distribution of ownership.

Sole Proprietorship

The sole proprietorship (i.e., where an individual is the creator, manager, and owner of the business) is the simplest form of business organization. It can be organized informally; is easily transferable; and involves few problems of management, organization, and control. Although a sole proprietor may be required to apply for special licenses, permits, an employer’s identification number, and the like, the sole proprietorship generally is subject to a minimum of governmental regulation and organizing expenses.

In large and relatively complicated enterprises, such a simple structure is usually impractical or risky. No one, except “agents,” may act for the owner on behalf of the business. Even if insurance can be obtained, the owner is subject to unlimited personal liability for all of the obligations and risks of the business. The sole proprietorship is subject to disintegration upon the death or incapacity of the owner.

No formal documents are required for the sole proprietorship to achieve legal status. A sole proprietor, however, should file a trade name certificate with the appropriate state jurisdictions. This form of doing business receives the least complicated tax treatment of all entities. All profits or losses of the business are passed through to the individual owner as income or loss in the year earned on Schedule C of the sole proprietor’s tax return.


A general partnership is an association of two or more persons who work together to form a business for profit. A “person” includes an individual, other partnerships and corporations. While the partnership is a separate entity from its owners and requires a separate “notice” tax return, the income earned and losses incurred by a partnership “flow through” to each partner and are reported on his or her federal individual tax return on Schedule K. Any resulting income tax is the responsibility of the partners and not the partnership.

There is no limit to the number of partners in a partnership. Any individual or entity, including corporations, estates, trusts, etc., may qualify to be a partner in a partnership. A general partnership lacks any type of limited liability for its partners.

A limited partnership is a partnership that has both general and limited partners. A limited partner is one who does not participate in the management of the business and whose liability is limited to his/her investment in the partnership. A general partner is subject to tort and contractual liability claims filed against the partnership from outside parties. Thus, to the extent the partnership’s assets are not sufficient to satisfy a creditor’s claims, a general partner may be liable for the deficiency. The formation of a limited partnership must be in accordance with the applicable state laws. Unlike a general partnership, a limited partnership must register with the state in which the partnership is organized.

Limited Liability Companies

A limited liability company (LLC) is an unincorporated business that allows its members to be taxed as a partnership, yet have the limited liability associated with a corporation. The LLC will be treated as a partnership for federal income tax purposes and the members will have limited liability for any debts owed by the LLC, if the LLC elects to be taxed as a partnership. The owners of an LLC are its members. In establishing the operations of an LLC, its owners have tremendous flexibility in structuring economic and management arrangements. There is no restriction on multiple classes of interests, each with different rights or responsibilities. Members may elect to manage the LLC themselves or they may designate one or more “managers,” who may or may not be members, to manage the business and operations of the LLC. An LLC is formed upon filing of articles of organization and the rights and responsibilities of members are generally defined in an operating agreement that is negotiated among the members.

Capital contributions to the LLC may be in the form of cash, property, or services, and profits and losses may be allocated among the members in any manner they choose (subject to compliance with applicable state and federal tax law and regulations). Members are allowed to include in their tax basis for their interests in the LLC their allocable shares of the LLC’s liabilities. Thus, subject to other applicable restrictions, each member can deduct his or her share of the LLC’s tax losses and receive distributions without recognition of gain, even if such losses and distributions exceed the member’s investment in the LLC.


A corporation is an independent legal entity organized under the State laws chosen by the corporation’s owners. It provides limited liability to its shareholders. If the corporation elects to be taxed under Subchapter C of the Internal Revenue Code, its income is subject to tax at the corporate level. In addition, the dividends paid by the corporation to its shareholders are subject to the shareholder’s income tax. This type of corporation is generally known as a “C corporation.”

If a corporation meets certain requirements, it may elect to be taxed under Subchapter S of the Internal Revenue Code. As such, it has its net income and losses “passed through” to the shareholders. The “flow through” income is reported on the shareholder’s individual income tax returns and, accordingly, is subject to tax only one time. For this election to be valid, the S corporation may not have more than 100 shareholders.

Only individuals who are United States citizens or resident aliens, estates, and certain qualified trusts may own shares of stock in an S corporation. Nonresident aliens can be beneficiaries of an Electing Small Business Trust that can qualify as a shareholder of a trust. Tax-exempt organizations described in section 401(a) of the Code (generally qualified retirement plans) or in section 501(c)(3) (tax-exempt charitable organizations) can be shareholders. An S corporation may now have a wholly owned S corporation subsidiary which will itself be treated as an S corporation A Qualified Subchapter S Subsidiary (the “QSSS”). For tax purposes, the QSSS will not be treated as a separate corporation. Rather, its assets, liabilities, items of income deduction, and credit will be treated as though they belong to the parent corporation.

There may only be one class of stock in an S corporation. However a distinction can be made between voting and non-voting stock within that one class. As a result of the recently enacted Small Business Job Protection Act, an S corporation may own any percentage of a C corporation’s stock.

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