SEC Considering Revising Accredited Investor Standard

Just before the holidays, the SEC released a report detailing a review conducted by the SEC staff of the accredited investor standard. As a quick recap, the accredited investor standard is, for individuals, a net worth of at least $1 million (either alone or in conjunction with one’s spouse) or an annual income of at least $200,000 for the past 2 years with a reasonable expectation of such income in the current year (or $300,000 in conjunction with one’s spouse); for companies, trusts, and other legal entities, the accredited investor standards typically require assets of at least $5 million.

The purpose of the review, conducted pursuant to the Dodd-Frank Act, is to determine whether the accredited investor standard should be modified in order to achieve the securities regulations’ objectives of protection of the investing public. The report published in 2015 is the first report drafted under Dodd-Frank, and is the first meaningful review of the accredited investor standard since its adoption in 1982. In particular, the review looks at whether the financial standards of the accredited investor rule are still effective to protect the investing public, given the changes in the economy, and whether other standards should be adopted in addition to or in place of the financial limitations. The report’s proposed standards include consideration of an investor’s investment history, current investments, professional and educational background, and the use of an “accredited investor” examination to qualify investors. The report addresses many criticisms of the accredited investor rule as being solely focused on an investor’s financial ability to absorb risk of loss, instead of whether the investor is actually capable of evaluating the merits and risks of a potential investment.

The SEC’s report discussing the review of the accredited investor standard, and suggested revisions to the rule, can be read here: The SEC is also seeking public comment on the proposals contained in the report, as well as general comments on the accredited investor standard, which can be submitted at the following link: 

Fiduciary Duties in a LLC

Entrepreneurs who are organized in a limited liability company may not realize they have fiduciary duties to the company and to their fellow members. When we talk about fiduciary duties in a LLC, we typically mean the duties of care and loyalty — that is, to work in the best interest of the company and its members, and not for one’s own self-interest to the detriment of the company and its members. The issue of fiduciary duties in a LLC usually come up in the context of a member with a controlling interest using that control to benefit himself or herself at the expense of the LLC or fellow members, or the context of a member starting a venture that competes with the LLC.

Different states impose fiduciary duties upon actors in a LLC in different circumstances, although the general rule provides that managers of a manager-managed LLC, and members of a member-managed LLC owe fiduciary duties to the LLC and its members, while non-managing members of a manager-managed LLC do not owe such duties. However, it is unclear whether, in a nominally member-managed LLC that is in practice or by operating agreement managed by fewer than all of the members (such that the LLC effectively has “silent partners”), “non-managing” members are subjected to fiduciary duties. Finally, regardless of how the LLC is managed, some states also impose fiduciary duties upon a member that has a controlling membership interest (such as a majority of the equity or voting interest, depending on how the operating agreement, if any, is written).

Implementing and Enforcing Website Terms of Service

Any website or mobile app operator should have “terms of use”, “terms of service”, or “terms and conditions” that govern users’ use of the website or app. However, this document is effectively the contract between you, the operator, and the user, governing your relationship over the use of the website or app. As a result, it is imperative that website or app operators ensure that their users have affirmatively accepted the terms of service before use.

The worst thing an operator can do in attempting to enforce terms is attempting to have mere use of the website or app constitute acceptance of the terms, even if users are provided a link to the terms to read. Instead, best practices dictate, when having users “agree” to use the website or app, such as upon user account creation or on a purchase page for e-commerce websites and apps, conspicuously posting the full text of the terms (including any privacy policy) for users to read, before having to click a box or button that says “I accept” the terms. The best acceptance pages actually require users to scroll through the entire terms before being able to check or click an accept button or box. However, where presenting the full terms may be impractical, such as on a mobile page, it is acceptable to have a link to the terms in lieu of the full text, provided that it is made clear to the user that the link connects to the full terms and that clicking or checking “I accept” indicates acceptance of those terms.

However, once a user has affirmatively accepted terms, it is important for website/app operators to keep a record of that acceptance. Courts have recently refused to enforce terms against users where operators have been unable to produce evidence that the user ever accepted the terms. While it has been possible to demonstrate acceptance by proving that use of the site could not have occurred without acceptance of the terms, it can be difficult to prove what terms were in effect at the time of the relevant use. Some operators have taken to sending users email confirmation of their acceptance of the terms, either as a separate email or as part of an account registration or purchase confirmation email, and then archiving said emails as proof of acceptance.

Finally, it is important to ensure that terms remain enforceable once they are changed. It is not practical to have the operator have the unilateral right to change the terms without any action by the user since the terms are a contract, which cannot be amended without mutual agreement. Ideally, anytime an operator changes its terms, it would have users go through the same acceptance process as when the user initially accepted the terms. However, operators are understandably wary of making the user experience too cumbersome by having users go through an agreement page anytime they wish to use the website or app anytime terms are updated. Courts have permitted unilateral changes to terms, provided that the operator gives the user sufficiently advance, conspicuous notice. Such notice should be conspicuously posted on a user’s account page or the main website/app, or emailed/messaged to the user’s address or account. The notice should also inform users that continued use of the website/app after updated terms go into effect will constitute acceptance of the modified terms.

Can My Startup Sponsor A H-1B Visa?

If you’re looking to move to the U.S. to launch a startup, you may be wondering if your U.S. startup could sponsor you for a H-1B work visa to come to the U.S.. Beyond the numerical difficulties of obtaining a H-1B visa — the U.S. only issues 65,000 H-1B visas, plus an additional 20,000 for holders of advanced degrees, per year, and applications typically outnumber available visas by 3 to 1 — startups may have other logistical difficulties sponsoring their foreign founders for a H-1B visa.

One of the major requirements for a H-1B visa is that the sponsoring employer must be able to hire, pay, supervise, and fire the sponsored employee. This means it is pretty much impossible for a startup whose foreign founder is the sole owner to sponsor, though a startup with other founders or employees can meet this requirement, though with some difficulty. As long as there are other founders or employees who can supervise the work of the foreign founder, and fire him or her if performance is deficient, then it may be possible to meet the requirement. However, the startup will need to demonstrate the startup’s ability to supervise and fire the founder through supporting documentation, such as business plans, corporate bylaws, operating or founder/shareholder agreements, or employment contracts.

Additionally, the startup will need to demonstrate through supporting documentation that it has sufficient capital to pay the sponsored founder’s salary. The H-1B visa requires that a sponsored employee be paid the higher of either the actual wage (the wage paid to another employee in a similar position in the organization), or the prevailing wage in the overall industry. Aside from establishing the prevailing wage for a startup, many startups may not have sufficient capital to demonstrate to the government’s satisfaction that it can afford the founder’s salary.

Finally, the sponsored founder will need to comply with other requirements of the visa, including having job responsibilities constituting a “specialty occupation”, along with having at least a bachelor’s degree or its equivalent in the field. The H-1B application is also quite expensive with no guarantee of success, including both application fees and legal fees for an immigration attorney to help you thorough the process. In any event, if a startup is trying to bring a foreign founder to the U.S., it should consult with an immigration attorney who may be able to identify other visas for which the founder may qualify.

Making Sure You Stay Up to Date With Employment Forms

When hiring employees, there are a couple of administrative forms that employers are required to collect from their hires, and in some cases store and keep updated.

The first form is the I-9, or the Employment Eligibility Verification Form. The I-9 identifies employees and determines whether they are eligible for employment in the U.S. I-9s must be fully completed within 3 days of an employee’s start; filing an incomplete I-9 or filing late can subject an employer to significant fines and penalties. Employers are further required to keep I-9s on file through the employee’s separation from employment, until the later of 3 years after the start date of employment or one year after the date of termination/resignation.

Employers are also required to collect W-4s from employees, which sets forth the amount of tax employers must withhold from employees’ paychecks. Employees are permitted to amend their W-4 at any time to reflect a change in their status (e.g., marriage, birth/adoption of a child), such that employers are responsible for ensuring that employees’ W-4s are up to date. It is often good practice to have employees update (or verify as correct) their W-4s on an annual basis — annual performance reviews, if used by the company, provides a convenient event to have employees update their information.

Of course, these documents contain sensitive personal information such as social security numbers and identity documents, so employers must ensure that physical or electronic copies of these records are secure. There are a number of companies that provide online systems for companies to collect and maintain these records.

Finally, employers should check federal state employement laws to see what other documents or information must be provided to or collected from employees, sometimes depending on the position the employee is filling — such information may include background check questions, sick leave procedure, or notices of at-will employment.