The U.S. Securities and Exchange Commission (SEC) has been busy over the past several weeks rapidly issuing interpretations and procedures to implement the JOBS Act. Here is how the JOBS Act is shaping up so far:

Confidential Submission Process

The SEC has implemented a secure email system that allows Emerging Growth Companies (as defined in the JOBS Act) to confidentially file draft registration statements with the SEC. Instructions on how to use the secure e-mail system are fairly easy to follow.

The change to allowing confidential submissions is a fairly radical, and welcome, change to companies filing their initial public offering.

Whether the confidential submission process becomes widely used is still up for debate. While there are large advantages for keeping initial submissions private (keeping information secret from competitors until you decide to go forward with the IPO, shortening the “in registration” period to better time the markets, and avoiding embarrassing registration statement withdrawals) – there are also some potential disadvantages.

For example, often companies filing initial registration statements are simultaneously reviewing other strategic options such as selling the company. Filing the registration statement publicly effectively alerts the markets that your company is “in play.” In addition, the initial filing of a registration statement usually prompts potential plaintiffs with claims to file their lawsuits, which gives management time to amend the registration statement to disclose the risks of the lawsuit. By not filing a publicly available registration statement until 21 days before the road show, plaintiffs may not have an opportunity to file the lawsuit before marketing commences.

Emerging Growth Companies

The SEC has issued a set of FAQs regarding Emerging Growth Companies; here are some of the more important questions and answers:

• An Emerging Growth Company needs to identify itself as such on the cover page of its prospectus.
• Other than accounting standards (which must either be fully adopted or delayed), Emerging Growth Companies may elect the new scaled disclosure on an á la carte basis. This gives a company going public extra flexibility in its disclosures.
• The SEC confirmed that an Emerging Growth Company’s selected financial data needs to cover only two years.
• If an Emerging Growth Company elects to take advantage of the extended transition period for complying with new or revised accounting standards, the company should make this election at the time the initial submission is made. Once an Emerging Growth Company elects to “opt out” of the transition period, the decision is irrevocable. Companies should refer to Staff Accounting Bulletin Topic 11M for guidance on providing disclosure on adoption dates of the delayed accounting standards. The extended transition period applies only to standards that also apply to nonpublic companies.
• Even if a company exceeded $1 billion in revenue in a previous year, it may still qualify as an Emerging Growth Company if revenue was less than $1 billion in the most recently completed fiscal year.
• Comment letters and issuer responses (even those submitted confidentially) will be released publicly 20 business days following the effective time of the registration statement.
• Emerging Growth Companies must comply with XBRL. No relief will be provided.
• If a company restates financial statements after submitting a draft registration statement (even confidentially), the company must include the restatement disclosures in its financial statements.

Crowdfunding

Until the SEC adopts rules to implement the new crowdfunding exemption under the JOBS Act, offers or sales of securities attempting to rely on the crowdfunding exemption are unlawful, according to the SEC.

Under the crowdfunding provisions of the JOBS Act, an issuer must use a “funding portal” to take advantage of the new crowdfunding exemption from registration. A funding portal is merely an intermediary between the investor and the issuer. The Division of Trading and Markets has issued a set of FAQs related to the crowdfunding intermediary provisions. Generally, these FAQs remind potential intermediaries that they will need to register with the SEC and FINRA, but such registration cannot occur until the SEC has issued rules on the registration process.

Deregistration Process

The SEC issued a set of FAQs in April specifically addressing the deregistration process. Some of the most pertinent questions and answers related to the process of deregistration, including how to terminate Sections 12(g) and 15(d) registration obligations. This process, known as “going dark,” while not as prone to litigation risk as a “going private” transaction, is a fairly complicated process.

One of the stumbling blocks we have found is that while a company may be eager to suspend its reporting obligations, if it has an outstanding registration statement on Form S-3 or Form S-8 and it has filed its Form 10-K already, then the company will likely be compelled to continue filing its periodic reports through its next Form 10-K because of its Section 15(d) obligations. For further information, you can listen to our recent podcast at the thecorporatecounsel.net.

Find out more about Gunster’s Emerging Growth Companies Task Force and read our Special Summary White Paper on the topic.

The NRA Regulations represent the Treasury’s most recent effort to obtain similar exchanges of information with other countries regarding U.S. persons maintaining accounts in foreign jurisdictions  and, according to Treasury, to make it more difficult for U.S. taxpayers with U.S. deposits to falsely claim such deposits are held by nonresidents.

The NRA Regulations follow the enactment of the Foreign Account Tax Compliance Act (“FATCA”) and Treasury’s proposed FATCA regulations issued in February. FATCA, when implemented, will essentially require foreign financial institutions to identify customers who are U.S. persons or U.S.-owned foreign entities and report payments to, or activity in the accounts of, those persons to the Internal Revenue Service or face significant withholding taxes. 

Implications:

The new reporting rule will affect institutions that pay interest on deposits, such as:

• commercial banks
• savings institutions
• credit unions
• securities brokerages
• some insurance companies

Interest reporting is required for interest paid to residents of certain countries. The list of countries covered under this rule will be published annually by the Internal Revenue Service. Currently, the only country on the list is Canada, but 80 more countries may be included.

The NRA Regulations allow institutions to opt to report interest payments made to all nonresident alien individuals, regardless of country of residence, in an effort to alleviate the potential reporting burden. Although the Internal Revenue Service says it will not automatically exchange that information with foreign tax authorities without an appropriate agreement in place, the NRA Regulations may have a chilling affect on a domestic financial institution’s ability to attract foreign deposits.

As a result of the foregoing, domestic financial institutions will need to assess the adequacy of their existing data collection and reporting programs and consult their advisors in order to ensure compliance with the NRA Regulations. Nonresident alien customers may likewise wish to consult with their advisors in order to better understand how thes NRA Regulations might also affect them.

Coauthor: Mark J. Scheer

For more information:

• Final rules on reporting of interest for nonresident aliens, Gunster Banking & Financial Services news alert (April 19)
• IRS Revenue Procedure 2012-24
• Final Regulations (TD 9584)

The big question for the tech economy, however, is what comes next? There are two important areas that deserve careful consideration here:

The post-IPO Facebook. Many industry observers are questioning whether Facebook can maintain its edge after its IPO is completed.

The company will have vast resources of cash, but it will also be subject to the very strict levels of compliance and restrictions (and substantial liability exposure) to which all public companies and their officers and directors are subject. Mark Zuckerberg will retain voting control over Facebook after the IPO, but he will no longer be able to unilaterally run the company without substantial additional and restrictive corporate governance policies and procedures.

The recent $1 billion acquisition of Instagram by Facebook epitomizes the way in which Zuckerberg has operated in the past as he apparently did this deal (which was large, even by Facebook standards) without much input or involvement from his board of directors or officers.

The big question here is whether this fast-moving entrepreneurial culture is essential to Facebook’s success, or whether Zuckerberg and his team can adapt to the processes and restrictions that public company status demands.

I believe that Facebook will successfully meet these challenges and continue to excel, but it won’t be easy.

The next wave of tech IPOs. The successful consummation of the Facebook IPO will pave the way for a new wave of tech company IPOs.

I believe that many of these IPOs will involve enterprise technology companies.

There are a few other potentially big nonenterprise technology IPOs out there – Twitter? Probably not, but fun to consider – but the next wave of technology company offerings will likely feature companies developing software for large enterprises or providing products or services related to enterprise software.

The reason for the coming popularity of these companies? They develop products and services for businesses that can afford to pay for them, and thus many of them have strong, regular revenue streams. Some of these next wave IPOs include Workday (human resources software), Splunk (collection and analysis of business information and data), Palo Alto Networks (security software), ServiceNow (technology management software) and Atlassian (tools for enterprise software development).

When faced with these types of scenarios, it is comforting to know that Florida law provides some flexibility to deal with unanticipated circumstances, changes in estate planning goals, or later-discovered mistakes in drafting.

Here are some situations in which trusts or wills may be modified or reformed:

Changed circumstances. Florida law permits a court to modify or terminate a trust when: (1) the purposes of the trust have been fulfilled or have become illegal, impossible, wasteful, or impracticable to fulfill; (2) changed or unanticipated circumstances would defeat or impair a material purpose of the trust; or (3) a material purpose of the trust no longer exists.

This concept applies to a variety of circumstances where the proposed modification is consistent with the original purpose and intentions of the person who created the trust (the trust “settlor”). For example, this process may be used to restructure access to trust assets.

Modification in the best interests of the beneficiaries. Many irrevocable trusts created after January 1, 2001, can be modified by a Florida court to better suit the interests of the beneficiaries. In so doing, the court is empowered to exercise its discretion to modify the trust in a way that, to the extent possible, conforms to the settlor’s intent, and yet takes into account the current circumstances and best interests of the beneficiaries.

There are many different ways a trust may be modified to conform to the interests of beneficiaries. Among other things, beneficiaries and trustees may seek to impose different distribution schemes, earlier distributions, or changes in how the trust is managed or administered. For example, if it can be shown that the beneficiary needs the income for health care or business needs, the trust may be restructured to allow for earlier principal distributions.

To achieve tax objectives. Florida law allows for an interested person to petition the court to modify a will or a trust to achieve tax objectives that are not contrary to a settlor’s intent.

To correct mistakes. It has been the law of Florida for some time that a trust that contained a mistake could be reformed or “fixed” to accurately reflect the settlor’s intent. In order to do so, the mistake must be shown by clear and convincing evidence. In a significant departure from prior law, in 2011 the Florida Legislature enacted law that now permits interested persons to petition a Florida court to fix a mistake in a will to conform the document to the testator’s true intent.

Unanimous agreement after the settlor’s death. Certain trusts, depending on their language, may be modified or terminated after a settlor’s death upon the unanimous agreement of the trustee and all the beneficiaries.

When circumstances or needs change, it is important to know that otherwise “irrevocable” plans may be adjusted if certain criteria exist.

Coauthor: Jane W. Brown

Millions of small business owners avoid paying payroll taxes on their income by taking distributions from their S corporations, which are not subject to payroll taxes, in addition to salaries, which are subject to payroll taxes. When using this tax strategy, it can be difficult to determine an appropriate salary and small business owners and their tax advisors must consider the unique facts and circumstances of the taxpayer’s situation.

However, a spike in IRS audits focusing on this issue indicates a growing interest in curbing abuse of this popular strategy. In these audits, the IRS attempts to reclassify nonwage distributions as salary, thus forcing the S corporation to pay additional employment taxes, interest and penalties.

In at least one recent case, the IRS was successful in arguing that the tax law requires S corporations to pay employment taxes on the amount of distributions that represent “reasonable compensation” for their employees’ services.

The U.S. Court of Appeals provided the criteria as to just what constitutes “reasonable compensation.” The court found that the intent of the corporation in making the payments is irrelevant and instead focused on whether the payments were made in compensation for service.

To determine what is reasonable compensation, the court looked to factors such as:

• experience level of the employee;
• amount of time the employee devoted to the business;
• compensation of others similarly situated

The methodology utilized by the IRS and the courts, as revealed in the ruling, provides a framework for tax advisors and their clients in setting acceptable salaries. Small business owners who have elected S corporation status should be careful that the salaries they pay to their employees are reasonable in light of the recent ruling.

Coauthor: James B. Davis

On April 17, the U.S. Court of Appeals for the District of Columbia issued an emergency temporary injunction against the implementation of the National Labor Relations Board’s notice-posting rule.

The National Association of Manufacturers and other business interest groups sought the injunction after these recent rulings on the matter:

• March 2: U.S. District Court Judge Amy Berman Jackson in D.C. left the poster requirement portion of the National Labor Relations Act (NLRA) alone, but said the NLRB couldn’t punish any failure to comply with the rule. (Nat’l Ass’n of Mfrs. V. NLRB, D.D.C., No. 11-cv-1629, March 2, 2012.)

• April 13: U.S. District Court Judge David Norton in South Carolina found the poster requirement was not necessary to carry out any NLRA provision, and that the rule is invalid and unenforceable. Chamber of Commerce v. NLRB, D.S.C. No.11-cv-2516, April 13, 2012.)

The groups seeking the injunction claimed the union poster rule would impact more than 6 million employers not otherwise subject to NLRB regulation.

Associated Builders and Contractors Inc. made the following statement after the April 17 injunction was issued:

“For the last several months, ABC has vigorously fought NLRB’s politically motivated policies that threaten to paralyze the construction industry in order to benefit the special interests of politically powerful unions,” said Geoff Burr, ABC Vice President of Federal Affairs. “The NLRB’s notice posting rule is a perfect example of how the pro-union board has abandoned its role as a neutral enforcer and arbiter of labor law.”

The NLRB has said it intends to appeal both the March 2 and April 13 decisions, but will not implement the rule pending resolution of the issues before the court.

The injunction will remain in effect until the appeal is decided.

Related news:

• Appeals court blocks NLRB union poster requirement (Gunster blog);
• Court blocks NLRB’s union poster rule with emergency injunction (The Hill);
• NLRB union poster rule delayed while challenge proceeds (Bloomberg Businessweek).

There is a yearly statutory cap of 65,000 H-1B approved petitions for the general category, of which 6,800 are reserved for Chile and Singapore Free Trade H-1B visas, resulting in only 58,200 for all other nationalities. There is an additional quota of 20,000 for foreign professionals with advanced degrees (master’s degrees or higher) from U.S. institutions. Exemptions from the annual quota cap may apply in certain instances.

April 2, 2012, marked the first day the U.S. Citizenship and Immigration Services (“USCIS”) began accepting H-1B visa petitions for fiscal year 2013, which begins October 1, 2012.

As of May 18, the USCIS received approximately 42,000  toward the annual 65,000 annual quota cap, and approximately 16,000 toward the 20,000 annual cap.

Employers who wish to hire nonimmigrant workers in specialty occupations should carefully analyze the options available to them as soon as possible.

Read recent bulletins issued on the topic:

• Monitoring H-1B visa petitions: USCIS continues to accept fiscal year 2013 H-1B petitions (April 16, 2012).
• H-1B visa petitions for nonimmigrant workers accepted April 1 until quota met (February 22, 2012).

For more information see USCIS’s link on the H-1B visa program.

This resulted in some very disgruntled folks who, in turn, vented their frustration and disappointment about Taco Bell to the press, on blogs and via social media outlets.

Here are some measures to consider when launching an online sweepstakes to avoid problems similar to those Taco Bell faced:

1. Include language in sweepstakes rules to deter hackers, including language reminding hackers of potential civil and criminal liability
2. Include provisions in sweepstakes rules that anticipate technical issues, including hacking, such as, “Company…at its sole discretion….may modify, cancel, terminate or suspend this sweepstakes…”
3. Consult with a technology specialist to confirm that necessary anti-hacking measures are in place
4. Consult legal counsel because sweepstakes law is complicated and varies from state to state

As a result of the recent sweepstakes breach, Taco Bell launched a second-chance drawing, giving the misinformed ”winners” a second chance to win a game console. 

Read related news:

• Gunster blog post by Joe Chase: Taco Bell hacking incident reminds companies to carefully draft sweepstakes rules
• Taco Bell blames Vita contest debacle on ‘technical issues,’ enrages misled winners (Kotaku.com)

By all indicators, Groupon, the popular Internet group-discount clearinghouse, was an extremely successful private technology company. But since it went public in November of last year, the company has been plagued with accounting problems, compounded by communication and image issues.

Groupon’s stock price is currently well below its IPO price, and further deterioration in the company’s market value will likely occur if their problems are not acknowledged and corrected. In addition, the company will need to work to rebuild credibility in the investment community.

The focus of Groupon’s recent problems is the substantial restatement of its operating results for the fourth quarter of 2011 – the first quarter involving its operation as a public entity. This revision reduced the company’s fourth quarter revenues by $14.3 million and increased its net loss by $22.6 million. These revisions also affected the company’s 2011 annual financial statements.

One of the early red flags of accounting trouble was when, during the IPO process, Groupon was forced to abandon a strange accounting metric that attempted to exclude certain significant marketing expenses. Use of this metric substantially increased the company’s revenues. When the company’s calculations were revised to incorporate these marketing expenses, its total revenues were reduced by about 50 percent.

To top it off, Groupon management and spokespeople were seen as being flippant and dismissive when they appeared to convey that as a young, fast-growing company, problems like this were bound to happen.

Read the entire article: Groupon has accounting problems (again)

Miami-based Lennar Corporation, one of the nation’s largest homebuilders, released Q1 earnings of $15 million – the strongest first-quarter sales since the 2008 collapse of the economy. According to Lennar’s CEO, Stuart Miller, last year’s first-quarter earnings of $27.4 million were distorted by $37.5 million in revenue from a litigation settlement.

Lennar’s announcement included total revenue of$ 724.9 million, up 30 percent from the same time last year, as well as a 33 percent increase in new orders and a 39 percent increase in the backlog of homes for delivery.

More hope for the beleaguered industry is seen in the revenue and sales increases reported by KB Homes and Hovnanian, also leading homebuilders in the nation.

Add to that a positive forecast for 2012: Building activity is expected to increase, and consumer confidence to be boosted by low mortgage interest rates and a more favorable job climate for Americans, according to Freddie Mac’s U.S. Economic and Housing Market Outlook for the year.

National homebuilders’ noticeable improvement in sales is encouraging and points to a stabilizing housing market.

Read the related South Florida Business Journal article: How Lennar’s earnings signal better times in housing.