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Texas eMediaLaw Legislative Update: 2015

Kate bluebonnets

It’s Spring in Texas which means one of two things – the bluebonnets are out and in odd years, our legislature is back at work.  One makes me grateful to be in Texas and the other only meets every other year.  Here are a few bills we are watching this session:

Service of Process Via Social Media- HB 241

The Legislature is making another effort on this.

The bill provides:

Sec. 17.032.  SUBSTITUTED SERVICE THROUGH SOCIAL MEDIA PRESENCE.
(a)  If substituted service of citation is authorized under the Texas Rules of Civil Procedure, the court, in accordance with the rules adopted by the supreme court under Subsection (b), may prescribe as a method of service an electronic communication sent to the defendant through a social media presence.

(b)  The supreme court shall adopt rules to provide for the substituted service of citation by an electronic communication sent to a defendant through a social media presence.

It looks like the bill stalled in committee.

Codifying a fair reporting privilege – SB 627

The Legislature continues to show its disdain for defamation suits.  This time, they are considering a bill that would codify a sometimes-recognized common law fair reporting privilege.  The privilege allows for a fair reporting of public records and allegations as long as done in good faith.  It looks like this one may become law.

The bill provides:

(b)  This section applies to:

(1)  a fair, true, and impartial account of:

(A)  a judicial proceeding, unless the court has prohibited publication of a matter because in its judgment the interests of justice demand that the matter not be published; (B)  an official proceeding, other than a judicial  proceeding, to administer the law; (C)  an executive or legislative proceeding (including a proceeding of a legislative committee), a proceeding in or before a managing board of an educational or eleemosynary institution supported from the public revenue, of the governing body of a city or town, of a county commissioners court, and of a public school board or a report of or debate and statements made in any of those proceedings; or (D)  the proceedings of a public meeting dealing with a public purpose, including statements and discussion at the meeting or other matters of public concern occurring at the meeting; [and]

(2)  publication of allegations made by a third party regarding matters of public concern, regardless of the truth or falsity of the allegations; and

(3)  reasonable and fair comment on or criticism of an official act of a public official or other matter of public concern published for general information.

(c)  This section does not abrogate or lessen any other defense, remedy, immunity, or privilege available under other constitutional, statutory, case, or common law or rule provisions.

(d)  This section shall be construed liberally to effectuate its purpose and intent fully.

Civil Penalties for Frivolous Patent Claims – SB 1457

This bill also looks like it might be headed for passage.  The pertinent part of the bill states:

       Sec. 17.952.  BAD FAITH CLAIM OF PATENT INFRINGEMENT PROHIBITED.

(a)  A person may not send to an end user located or doing business in this state a written or electronic communication that is a bad faith claim of patent infringement.

(b)  A communication is a bad faith claim of patent infringement if the communication includes a claim that the end user or a person affiliated with the end user has infringed a patent and is liable for that infringement and:

(1)  the communication falsely states that the sender has filed a lawsuit in connection with the claim;

(2)  the claim is objectively baseless because:

(A)  the sender or a person the sender represents does not have a current right to license the patent to or enforce the patent against the end user; (B)  the patent has been held invalid or unenforceable in a final judgment or administrative decision; or (C)  the infringing activity alleged in the communication occurred after the patent expired; or

(3)  the communication is likely to materially mislead a reasonable end user because the communication does not contain information sufficient to inform the end user of:

(A)  the identity of the person asserting the claim; (B)  the patent that is alleged to have been infringed; and (C)  at least one product, service, or technology obtained by the end user that is alleged to infringe the patent or the activity of the end user that is alleged to infringe the patent.

The bill only allows for enforcement by the Attorney General and not private litigants.

We will keep on eye on these any other bills of note.

Will Net Neutrality Kill the Internet 3.0?

fcc_logoAs expected, the FCC passed the net neutrality rules today.  Other than spokesmen for the large telecoms (and perhaps some politicians who listen to that lobby), you don’t hear much reasoned opposition to net neutrality.

I have to admit that my views have been changing on the issue from a position of: (1) a solution in search of a problem; (2) to a desire to help make sure start-ups have a fair shake and access to the consumers; (3) to let the market take care of any ISP’s that throttle content; (4) to what about the people who don’t have more than one option for an ISP?

Now, I feel like we are at a Hobson’s Choice.  Do we trust the Government, or do we trust Big Business?  More precisely, who do we trust not to be a jerk in the future?

  • Do you think the likes of Comcast would throttle competitors’ content or force the big content providers into fast lanes leaving all start-ups back at dial-up speed?
  • Do you think the Government can stay at this minimally invasive level of regulation whereas before the Internet has thrived, at least in part, because of the lack of government regulation.

Leave it to the BBC Radio to have Mark Cuban on as a guest to provide additional interesting arguments as to why the new regulations are bad–by focusing on the future?  Listen here.  In effect, Cuban asks whether we want companies to be able to manage their networks as we start to see more driverless cars and online virtual reality applications.  Will the next new thing have to ask the government for permission to run online?

The regulations, as currently written, take a soft hand approach.  But, we should be vigilant to make sure they stay that way.  You know the story of the cooked frog, right?  If you put him in boiling water, he will jump out of the pot.  You put him in cool water and gradually turn up the heat, you will end up with a cooked frog.

For a good analysis prior to today’s release, read this.

GUEST POST: Left Shark, Katy Perry and 3D Printing – Someone is getting bit

Today, we have a guest post from Gray Reed & McGraw attorney Cleve Clinton (the one on the far left).  He is one of the writers of the enlightening and entertaining blog over at Tilting the Scales where they share common sense, practical insights and a little humor, all to help clarify interesting and timely business legal issues that pop up.

Their most recent post fits in perfectly for what we cover here — intellectual property rights of out-of-sync dancing costumed sharks and 3D printing.  You can check out the original post and more of Titling the Scales here.

Left Shark and Lawsuits – Who Gets Bitten in the End?

By Cleve Clinton on February 10th, 2015 
Halftime was just the Beginning: A backup dancer in Katy Perry’s Super Bowl halftime show goes viral upstaging the singer, Tom Brady and Russell Wilson for MVP. Thanks to social media, “Left Shark” became a “thing” overnight and an enterprising entrepreneur (Frederick Sosa) sells internet 3D printed figurines to cash in on the immediate success of the carefree creature.

The Real Shark? Katy Perry’s lawyers issued a cease and desist letter claiming copyright violations and threatening a lawsuit. No surprise there.

The Victim?  Protecting some 10 sales of a $24.99 “Left Shark Desk Figurine” versus litigation threatened by a 1,000+ attorney law firm?  No contest – Frederick Sosa of Orlando. Even assuming he did have the resources to fight, it’s not worth the time or the argument. At $24.99 a pop, the economics are obvious. The good news is that Sosa got a lot of airtime for his 3-D online printing business. In the social media world he and Left Shark upstaged everyone on the big stage.

Legal Issues? Plenty to go around on Copyright Law and 3D Printing.

Copyright. Generally speaking: Can a non-generic animal costume be copyrighted? Probably. But, who owns the right to the copyright? If used before, it may be in the public domain. If not, it depends. Who designed the shark costume? What do the contracts say among any number of possible claimants – a third party designer, Perry’s team, the NFL, NBC or someone else? Finally, if it is protectable, was it properly perfected? For the real answer to any specific copyright questions, our very own Gray Reed copyright, trademark and patent experts David Lisch and David Henry can provide the right answers to the hard questions.

Last Bite? After removing the figurine for sale from Shapeways.com, Sosa put his Left Shark figurine design on MakerBot’s Thingiverse site as a free download for anyone with a 3D printer. A modified version is still available as “Blue Drunk Shark.”

3D Printing. The more novel question? Can a 3-D printing-on-demand company be liable for the infringements of its users? The 3D printing industry blog notes that federal law provides a safe harbor for websites and services that provide a platform for users to publish their own works. Manufacturing-on-demand services could be considered analogous to sites such as YouTube and Tumblr; the only real difference is that their products are physical, not virtual. Yet a federal judge ruled last year that CafePress, which makes T-shirts and coffee mugs on demand, didn’t qualify for that safe harbor, allowing a photographer’s infringement claims against the company to proceed. A year ago, Tilting wrote about 3D printing of guns, the fact that the innovative emerging ideas of 3D printing is a disruptive technology and its likely impact on copyright issues. No doubt, more to come.

Tilting the Scales in Your Favor. Evaluate the risk. Be realistic. Identify the opportunity and the near term goal. In this case, better to use sound judgment at the beginning and maximize the social media limelight, then be prepared graciously bow out.

Previous Tilting Articles: There’s a Printer for That!

 

Getting Pictures Off the Internet – Not Easy To Do

I love college basketball.  Given that my Missouri Tigers haven’t given me much to talk about, I thought we could discuss the efforts by this upset Duke fan to have her image removed from the Internet captured during the Miami – Duke game that snapped Duke’s incredible 41-home-game winning streak.  You can read about it here.

I am not a Duke basher (nor fan) and I don’t want to pile on this poor fan.  Believe me, after what Kentucky did to Mizzou last night, I felt worse.  This does, however, raise some interesting legal questions.

How do you remove images from the Internet?

 

1. Copyright

The primary way is to use the Digital Millennium Copyright Act.  If you own the copyright to the image, it is usually pretty easy to get images removed from websites operated in the U.S. and to have the search engines de-index them.  You can read more about the DMCA here.  Generally, if you take the picture, you own the copyright.  The copyright to this image belongs to ESPN and probably the ACC or NCAA.  You know that really quick copyright notice for broadcasts – any use of images is prohibited, blah, blah, blah.  Screen shots would be included.  The fan could ask ESPN to get these images removed.  ESPN may be a little busy, however, because I think Tom Brady may have sneezed.

2.  Invasion of Privacy

There is little expectation of privacy in the stands of a nationally televised sporting event.  Do a search for certain NSFW conduct at sporting events to see how people forget this sometimes.  Also, look at the back of your ticket next time you head to a game.  There is a lot of fine print about the lack of privacy you may experience.  Nevertheless, let’s go through the common law claims of intrusion upon seclusion, publicity to private facts, appropriation of likeness and false light.

Intrusion upon seclusion.  The elements of the claim are: (1) intentional intrusion; (2) upon private affairs of another; (3) that is highly offensive to another.  Being upset at a basketball game is not a private affair.  Most states follow the stand in doctrine which provides that if the media stands where the general public could observe the events, then there is no intrusion.

Publicity to private facts.  To prevail on a claim, the information must not be a matter of legitimate public concern and its publication would be highly offense to a reasonable person.  I am not suggesting comments to a blog are true indications of what is offensive, but a quick view of them reveal that using that screenshot is not highly offensive to most.

Commercial appropriation of likeness.  This requires the (1) appropriation of one’s name or likeness; (2) for a commercial purposes.  Although ads are sold on blogs, the use of the name is not for a commercial purpose.  This cause of action usually applies to celebrities when a store tweets about them without permission or makes video games about them.  If a UNC fan used this picture to start selling t-shirts, then she may have a claim, but not for the use of the image on Twitter or blogs.

Portrayal in false light.  It requires: (1) publishing information that creates a false impression; (2) thereby casting the person in a false light; (3) creating emotional (as opposed to commercial) harm; and (4) the act is highly offensive.  I suspect there is nothing false about this fan’s feelings.  Like I said, no one saw me in my living room with a look of disgust last night, but there is nothing false impression about how she is feeling and why she is upset.

3.  Approach the websites

According to the article, the first image appeared on Twitter.  Under the Twitter Rules, posters are not supposed to abuse others, infringe on the rights of others or violate copyrights.  If you ask nicely and point out how posts violate a site’s terms, sometimes the wesbites will take it down although they may not legally have to.  In fact, in the terms of service, Twitter says it may not monitor the tweets and:

You understand that by using the Services, you may be exposed to Content that might be offensive, harmful, inaccurate or otherwise inappropriate, or in some cases, postings that have been mislabeled or are otherwise deceptive.

In addition to being at the mercy of Twitter’s whims that day, the problem is now that the image is on many other sites as well.

The Streisand Effect

We have talked about the Streisand Effect before.   It’s the name given to the phenomena resulting from increased attention to online posts, stories, websites, etc. only after someone complains about them or raises a legal issue about them.  Had the fan not asked to remove the image, I would not have read about it and would not be blogging about it. Sometimes, the wiser move is to let it go (no, I will not sing it).  It’s a bad business development strategy on my part, but is often the best advice I have ever given.

On the bright side, at least the fan was not wrongfully accused of being caught cheating on her boyfriend at the Ohio State v. Alabama game.

 

 

 

 

5 Most Popular eMediaLaw Posts of 2014

5.  Using Images Without Permission is No Monkey Business

From the Wikimedia Commons website

This was one of the more interesting stories of the year – does the photographer who set up everything to allow for a monkey to take a selfie own the copyright to that selfie?  This year we learned that no, the photographer does not.

 

 

 

4.  Infographic: The Use of Images From The Web on Your Site, Newspaper or Broadcast – Enough Said:

3.  The Law on Unpaid Interns – This post makes the list almost every year because I repost the guest post by Michael Kelsheimer of the Texas Employer Handbook every year as tech start-ups look to hire unpaid interns.  It’s a little more complicated than you may think.

2. #SMH-butnotacontestorasweepstakes – Check your online promotion hashtag or face scrutiny from the FTC – This post covered the surprise investigation of the Wandering Sole contest by Cole Haan.  The FTC basically said if you are going to have customers “endorse” your products by and through a contest, you better make sure the connection between the endorsement and contest is disclosed.  The legality of online contests is a popular topic with an older post Is Your Online Sweepstakes or Contest Legal still remaining popular.

1.  When Online Behavior Crosses the Line – The Law on Threats, Libel and Just Being Rude – Online defamation and related topics continue to be popular.  In fact, this post from 2012, remains one of the most popular on the site, How to Identify the Anonymous Online Defamer.  My suspicion is that SEO on these topics leads to more page views.  Nevertheless, it continues to be a very important issue for individuals and businesses and will likely continue in 2015.

 

Top 10 Legal Mistakes For Start-Ups

1. You Haven’t Lawyered Up.

OK, that may be a little dramatic, but the worst case scenario is that you have a handshake deal with your co-founders. After all, we are all buds, this won’t go wrong. Even if it never goes wrong, you need to have your agreements done and done correctly. Too many times, people come see us because there is a fight about who owns what or some software or web developer claims they own a piece of the company based on a conversation at the bar. Having proper shareholder or operating agreements is not a pleasant experience because sometimes it is the equivalent of a prenuptial agreement for an engaged couple – not exactly the romantic way to start things. The old adage, however, is often true . . . you can pay me a little now to get this done right or pay me a lot later to help try and clean up the mess. Once you grant an interest in the company and it vests to the co-founder, it is his forever without the proper agreements. The co-founder decides to chase his dreams of being a professional fisherman in Cabo and you are stuck slaving away trying to create value for him. You can easily avoid this with vesting and repurchase agreements.

2. Don’t over lawyer.

I know I just told you to lawyer up, but this is the internet so I can contradict myself with impunity. If you are a sole founder without any partners and are still at the stage of trying to figure out if you have a marketable product or idea, then go to a website and set up your company on the cheap (don’t tell anyone I said that was OK). Even if you have partners, you don’t need overly-complicated documents and financing as if you were already a multi-national company. You don’t need employee handbooks and agreements, complex vesting structures, ESOPs. If you are bootstrapping, get your product on the market first and then decide whether all this other stuff will be needed. The odds that you are the next Facebook are slim – you don’t need to act as if you will be attracting millions of VC money three months from set up. If it looks like that is a possibility, it is not that expensive to put the shine on your corporate documents and structure. Don’t pay for that until you need it.

3. Protect Your IP.

Just because the Secretary of State said you could use the name and the domain name was available does not mean you are free and clear. You may be infringing on someone’s trademark. You may need to take additional steps to protect your own trademarks. The last thing you want to do is invest in product launch only to get the cease and desist letter a few months later. If you are doing this on the cheap, Google the name and several close variations. Don’t use a generic or geographic name. Do your own search on the USPTO TESS search found at www.uspto.gov. This should help you sleep a little better at night although it is not foolproof. Also, if you can’t afford to get a patent (timing is important so don’t wait too long to visit with a patent lawyer if you have truly novel product) or you are not eligible for patent protections, don’t forget about trade secrets. If you keep the secret sauce from being disclosed contractually, you may get all of the protection you need.

Is all the IP owned by the company or the individuals who created it before the company was formed? Do the contract web designers or coders own the IP? Do the founders’ prior employers have any rights to the IP? If you don’t know the answers to those questions, you need to find out–now.

4. Don’t Over Protect Your IP.

I know, I did it again. Most start-ups do not really have earth-shattering IP. If you are approaching serious investors or VC’s, you are often only going to have one shot with them. Take it. Don’t demand a non-disclosure agreement unless there is really some secret sauce worthy of protection and be prepared to explain it. Investors don’t sign blanket generic nondisclosure agreements. You can still talk about the business, what it does and protect the secret technology or algorithm. Truth be told, you are probably not the only person to think of the idea and not the only one working on it. Your job is to be first to market and be the best. Demanding nondisclosures from investors may prevent any investors from showing any interest.

5. Don’t Go Asking Everyone For Money.

Despite what you may have heard about crowdfunding, general solicitation of anyone and everyone is not legal. Even if it becomes legally acceptable, it may not be the best idea for your company. There are securities laws and they can get complicated. Before you start seeking investors, visit with counsel and do it right.

6. Don’t Turn Away Good Money.

Are you sensing a pattern? The friends and family that want to support you really want to support YOU. They will often entertain convertible notes so you don’t have to value the company early on or invest in large legal fees. Having ten friends and family invest in you (preferably accredited ones; hence the “good money”) should not turn off future investors.

7. Don’t Go Chasing Money.

I don’t know how many times I have seen the entrepreneur spending all of their time chasing money rather than improving the product. Yes, some companies thrive in a very short time frame and there is a financially rewarding exit. You read about the latest one in the newspaper, right? You read about it, because it does not happen often. It is not likely to happen to you and most investors are turned off by the entrepreneur who thinks they are going to sell off in three to five years and move on to the next thing. Unless you are someone who has already sold off a handful of start-ups for millions, investors want someone that is passionate about the project they are investing in—not someone looking for the early exit. While not exactly legal advice, this misguided mindset can cloud your legal strategies. I’ve heard numerous entrepreneurs tell me they have to be Delaware corporations because that is what the venture capital firms want. If you are good enough, your state of incorporation won’t matter and if the money is right, it is something you can fix. In the meantime, you have made your start-up costs more expensive and your administrative burden worse. Others disagree with me, but don’t let the one-in-a-million chance take you away from focusing on your product and overcomplicate matters. You don’t plan your life on winning the lottery, you should not plan your business life on winning the lottery either.

8. Get a good accountant.

A lot of the times I tell entrepreneurs to ask their accountants. Lawyers deal with risk mitigation, accountants are more attuned to tax and accounting advantages. The right accountant can help with vesting strategies and 83(b) elections. The accountant should be one the primary persons to decide whether you should form a corporation, an LLC or limited partnership and what the effect and cost of conversions down the road and the administrative cost of each is in the meantime. You have probably figured out by now that just because you read online that Silicon Valley VCs prefer Delaware corporations, it does not mean it is the right fit for you. If your company and idea are strong, you will find money. If you are told no because you are not a Delaware corporation, that is simply a cop out.

9. Get your e-commerce protections in place.

If you are primarily an e-commerce site, get your terms of service in order and make them enforceable through a click-wrap agreement. You may think many of that is boiler-plate, but when it is applied to a dispute, it very well may save your company. Make sure you are DMCA compliant so that you don’t get sued because someone violated copyrights when they posted comments to your site. Make sure you are complying with any applicable FTC or other regulations. While this sounds expensive, experienced counsel can easily spot the issues and has probably handled them before.

10. Take Your Lawyers/Accountant to Lunch.

I didn’t include this because I am hungry or lonely. It is the little-known industry secret. Lawyers have to eat lunch. I would rather eat lunch with you than by myself and it is a convenient time “off the clock” to hear about everything that is going on in the company and get the quick diagnosis. We really are interested in you and the company and enjoy these conversations without having account for every minute.

 

Thinking of buying your child their own laptop or smart phone? Read this first – a look at whether parents are liable for their kids’ online behavior

A Georgia seventh-grader created a fake Facebook profile that defamed a classmate, according to this Wall Street Journal story.   In middle school fashion (I am not looking forward to parenting through this period), a boy created a fake Facebook profile of a female classmate, used a “Fat Face” app to alter her appearance and posted “false, profane, and ethnically offensive information” on the page.

The school found out, punished the boy with in school suspension for two weeks and told his parents.  At home, the boy was grounded for a week.  Despite this punishment in school, the page stayed up for 11 months before Facebook finally took it down.

The girl’s family sued claiming the parents were negligent and contributed to the girl’s suffering.  Parents have money and insurance and make a better target than a seventh-grader in a lawsuit for damages.  The trial court dismissed the negligence claims against the parents in a summary judgment ruling.

On appeal, the court upheld the dismissal  of the claims related to the original creation of the fake profile, but wrote:

Given that the false and offensive statements remained on display, and continued to reach readers, for an additional eleven months, we conclude that a jury could find that the [parents’] negligence proximately caused some part of the injury [the girl] sustained from [the boy’s] actions (and inactions).

You can read the full opinion here.

The court noted:

During the 11 months the unauthorized profile and page could be viewed, the Athearns made no attempt to view the unauthorized page, and they took no action to determine the content of the false, profane, and ethnically offensive information that Dustin was charged with electronically distributing. They did not attempt to learn to whom Dustin had distributed the false and offensive information or whether the distribution was ongoing. They did not tell Dustin to delete the page. Furthermore, they made no attempt to determine whether the false and offensive information Dustin was charged with distributing could be corrected, deleted, or retracted.

Georgia law is similar to the law in many states — parents are not simply liable based on the parent-child relationship.  Usually, there has to be some liability based on the parents’ alleged failure to supervise or control their child where there is a foreseeability of harm. Applying this standard the court wrote:

The [parents] contend that they had no reason to anticipate that [son] would engage in that conduct until after he had done so, when they received notice from the school that he had been disciplined for creating the unauthorized Facebook profile. Based on this, they contend that they cannot be held liable for negligently supervising [son]’s use of the computer and Internet account. The [parents]’ argument does not take into account that, as [son]’s parents, they continued to be responsible for supervising [son]’s use of the computer and Internet after learning that he had created the unauthorized Facebook profile.

This appears to be the first published opinion dealing with parental liability for a child’s online behavior.  I have dealt with this issue at the trial court level, but usually resolve the issues rather than force minors to go through a public trial and discovery.  The unfortunate aspect is the case returns to the trial court and continues.  If only there were a teachable moment.

Stealing a theme from Morrison Foster’s Socially Aware blog post entitled “Forced to Cyber-Spy” about the case, when your kids complain that you don’t give them any privacy online – you can tell them that until they pay the homeowners’ premiums or the lawyers, you get to monitor their social media use.

Catching Up on the Issues with Last Week Tonight

With a couple of trials and teaching Digital Media Law this semester, I have fallen behind. Luckily, Last Week Tonight With John Oliver has been doing summaries of some of the recent hot topics on the Internet.  So, let me take the short cut and have John Oliver explain the following:

Net Neutrality

Native Advertising

Questionable Endorsements

The Right to Be Forgotten

If John Oliver keeps it up, I can save lots of time reading and watch an hour of television on Sunday nights instead.

 

What exactly does Texas Intrastate Crowdfunding Look Like?

As you probably read, the Texas Securities Board approved intrastate crowdfunding yesterday without limiting it to accredited investors.  You can read the rules here.

For those wanting to issue equity through intrastate crowdfunding:

  • Companies may raise up to $1 million per 12-month period
  • Offerings must be carried out online through a registered dealer or crowdfunding portal.
  • The company must be a non publicly-traded Texas entity (see below) and can only offer the securities to Texans (see below for more specifics).
  • The company must have a defined business plan, investment goals and list disclosures.  This means you will have to post a summary of the offering on the portal at least 21 days before any securities may be sold. The disclosures must include risk factors, a description of the issuer’s business, operations, and management, a description of the securities and other material information.
  • Customary bad actor disqualifications apply.
  •  Non-Accredited investors may contribute up to $5,000 per offering.
  • To obtain more than $5,000 from accredited investors, the company must verify the investor qualifies as “accredited.”
  • Investor funds must be placed in escrow until the specified minimum offering amount has been raised.
  • You are allowed to provide a limited notice about your efforts and provide a link to the portal, but you can only distribute this to investors located in Texas.
  • You do not have to publish reviewed or audited financial statements unless audited financial statements are already available for any of the three years prior to the offering. Instead, the CEO can certify the financial statements are accurate and complete as of the date of the offering.

With regard to the portals:

  • Fill out a Form 133.17 with the State Securities Board, complete a background check and pay the registration fee for securities dealers in Texas registering as a restricted dealer.
  • You are not  required to pass the General Securities Registered Representative (Series 7) Exam or the Uniform Securities Act State Law (Series G5) Exam.
  • You have to limit access and trading activity to Texas.
  • The portal must confirm residency before allowing access by the investor.  The portal also has to conduct  background and regulatory checks for bad actor compliance.
  • You cannot offer investment advice, manage investor funds, or facilitate secondary market transactions, along with other restrictions.
  • You will be required to maintain certain records for five years and you will have post-registration reporting requirements and renewal fees.
  • All communications between the investors and the company raising the money must take place on open forums on the portal.
Some of the Details

Now, for those that like to dig into the details, intrastate crowdfunding in Texas is made possible because Section 3(a)(11) of the Securities Act of 1933 exempts from federal registration securities offered and sold only to persons within a single state or territory, in which the issuer is also a resident.

To issue stock as a Texas entity, you must:

  • be organized in and have your principal place of business in Texas;
  • have at least 80% of your gross revenues during the most recent fiscal year prior to the offering be derived from the operation of business in Texas;
  • have at least 80% of the your assets at the end of its most recent semiannual period prior to the offering located in Texas; and
  • use at least 80% of the net proceeds of the offering for your operations in Texas.

To invest, you must be a Texas resident which means, you must be:

  • A corporation, partnership, trust or other form of business organization with its principal office in Texas.
  • An individual who,  at the time of the offer and sale, has her principal residence in Texas.
  • If an entity is set up for the specific purpose of buying the stock, all of the beneficial owners have to be residents of Texas.

We will follow up with a more thorough analysis of this method as we digest the new rules.

 

 

Former FTC Regional Director and Court of Appeals Justice Answers What To Do When the FTC Investigates

We like to give you information that helps you stay off the radar of the Federal Trade Commission with posts like this, this, this, this, this and this.  But, what do you do if the FTC does investigate?  I asked newly-minted Gray Reed & McGraw shareholder Justice Jim Moseley to help us answer some questions.  Before serving on the Texas Court of Appeals in Dallas, Justice Moseley was the Regional Director of the FTC’s Dallas Regional Office during the Reagan Administration.

Q:           When and in what capacity does the FTC investigate?

A:            The FTC has enforcement authority under 70 different statutes and federal rules.  Many of its investigations are brought under the broad powers of Section 5 of the FTC Act which declares unlawful “unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(1).  Its trade regulation rules attempt to set forth what it considers to be “unfair or deceptive” in the context of a particular industry or particular type of consumer transaction.   In addition, the FTC is the primary enforcement arm responsible for privacy and false advertising.

FTC investigations are usually triggered by complaints from a consumer or from a competitor.  The FTC may start an informal investigation by sending an “access letter” which is a non-enforceable voluntary request for information.  However, it may also conduct a more formal investigation through the issuance of a “Civil Investigative Demand” or CID.

 

Q:           What should a company do if the FTC investigates?

A:            Although a response to an access letter is voluntary, if you refuse to cooperate the FTC is likely to follow up with a CID.  The CID is a judicially enforceable request for information much like a subpoena that you cannot ignore.

The first thing you should do is carefully read the demand and make sure you preserve your records on the topic of inquiry.  You are likely to get in more trouble if you attempt to hide or conceal evidence related to the investigation.   Special rules also apply to preserving electronically stored information (ESI).  Make sure your information technology personnel properly maintain the necessary ESI and revise any regular document or data retention procedures as necessary.

Next, you need to note the deadlines of compliance and consider contacting qualified experienced counsel immediately.   Now is not the time to attempt to save a few dollars.

 

Q:           What are my options?

A:            Most of the investigations will require you to produce documents and will often request a meeting with FTC personnel.  Normally, the most prudent course is to cooperate.  You do, however, have the option to try and limit the scope of the inquiry or quash the CID in its entirety.  Your ability to seek court intervention is often on a deadline, so you should not delay.

You are usually better off opening up a dialogue with the FTC to try and limit the scope and the scope of the CID if it is burdensome.  You can often learn more about their concerns and better address the FTC’s concerns by keeping open the lines of communications.  The FTC will often work with you to limit the parameters of the production or give you more time when the circumstances call for it. Likewise, if something comes up that causes a delay on your part, it is better to tell them in advance than leave them surprised and suspicious.

Although you are providing documents to a governmental entity, they will be treated as confidential and not subject to a FOIA request.  They can and will be used against you, however.  Someone from your company will usually also be asked to sign off on a certification of some kind that should be read carefully to avoid creating any personal liability that may not otherwise be there.  Finally, read the requests carefully and only produce what is being requested.  There is no need to give them additional fodder that may only open new lines of inquiry.  Then, you usually have to sit and wait for the FTC to review the materials and get back with you.

 

Q:           What are my risks?

A:            You can usually identify the FTC’s concerns in the CID or in follow-up communications to determine the law or regulation the FTC is pressing.  When evaluating whether a representation is deceptive under Section 5(a) of the FTC Act, for example, the FTC generally looks at three issues: (1) whether the respondent disseminated the representations alleged; (2) whether those representations were false or misleading; and (3) whether those representations are material to prospective consumers.

The FTC has broad authority to act against what it perceives to be deceptive practices under Section 5(a) of the FTC Act.  The FTC also has broad discretion in determining whether a proceeding brought by it is in the public interest.  The FTC has equally wide discretion in its choice of a remedy in addressing unlawful practices which can include injunctions, compliance orders and monetary damages.

Q:           What is the procedure?

A:            If the FTC staff concludes there has been a violation, it will usually push first for a “consent order” in which the company agrees to stop the harmful conduct and to pay consumer redress in the form of fines or civil penalties.  If no agreement can be reached, the FTC staff will ask the Commission itself to start a formal proceeding before an administrative law judge; this procedure is similar to a trial before a judge.

If the administrative law judge rules in favor of the FTC, a “cease-and-desist order” is usually issued.  The company can appeal an adverse decision by the judge to the full Commission. If either party is not satisfied with the outcome at that level, it can appeal the Commission’s decision in the federal courts.   In cases where the FTC believes the respondent knew or should have known the conduct was “dishonest or fraudulent,” the FTC may follow up the administrative proceeding by asking a federal court to order consumer redress, such as an order to pay monetary restitution to victims of the violation.

The FTC also has the ability to go straight to a federal court to seek an immediate order to stop ongoing consumer fraud and to seek to freeze the assets of the defendant.  The FTC will often seek to hold individuals financially responsible for any egregious acts.