New SEC Rule Helps Entrepreneurs Raise Capital

GT Law

Start-ups, small businesses, venture capi- talists and hedge funds can for the first time in 80 years begin openly advertising to raise money in private offerings. The change by the Securities and Exchange Commission is part of the JOBS Act requirement to amend Rule 506 of Regulation D to permit general solicitation. While opening the gates for general solicitation, the SEC has simultaneously tightened rules to protect investors.

Prior to the new rules that be- came effective Sept. 23, companies seeking to sell securities to raise capital had to either register the offerings or qualify for exemptions from registration. The costs and complexities of public offerings often were beyond the reach of many small businesses. The new public solicitation rules make it possible for startups, small businesses, venture capitalists and hedge funds to search for investors via the internet, newspaper and other ads, social media and other general solicitation methodologies — previously forbidden territory. At the same time, they avoid the challenges and costs that come with the full registration process.

The new rules are complex, and ensuring compliance will invariably require advice from securities lawyers and investment bankers who can help companies raise capital safely. This includes ensuring they qualify for the traditional exemption or are in the “safe harbor” of the new rule. While this involves cost and time commitments, the new avenues for fund raising are still less complex and ex- pensive than traditional registered offerings. For example, offerings under the original Rule 506 exemption (now retained as a Rule 506(b) offering) allowed companies to raise an un- limited amount of capital from an unlimited number of accredited investors, but not from more than 35 nonaccredited investors. The new alternative, Rule 506(c), allows companies to generally solicit potential investors, gaining access to wider au- diences through solicitation and advertising methods previously unavailable – good news for startups and small companies.

Other changes require issuers to provide ad- ditional information about the 506(c) offerings and require companies using the new rule to take “reasonable steps” to ensure every inves- tor is qualified. The definition of a “reasonable step” is not clear under the new rule. It will take time to fully understand what the SEC views as a “reasonable step.” Practitioners will want issu- ers to document in their files that the companies did more than just take the investors’ word that the investors are accredited. It is generally understood that tax returns, certifications from tax accountants, review of bank account statements or other independent confirming information about potential investors will suffice to meet the “reasonable steps” standard.

Another change imposed by the new rules: a “bad actor” disqualification. This means issuers and other market participants will be disquali- fied from relying on Rule 506 when felons or other bad actors participate in Rule 506 offerings. As part of the adoption of these new rules, the SEC also voted to issue new companion rules containing stronger investor protections. Theseinclude requiring entrepreneurs who take advantage of the new general solicitation rules to (i) provide additional information about their capital raising offerings, (ii) provide more information about the in- vestors who are participating in the offerings, and (iii) require companies to file Form D with the SEC at least 15 calendar days before engaging in general solicitation and within 30 days of completing the offerings to update the informa- tion contained in the Form D and indicate that the offerings have ended.

Although it remains to be seen whether these rules will make it easier for entrepreneurs to raise money, the new rule changes will certainly allow companies to reach more potential inves- tors in a more cost-effective manner. If handled properly, entrepreneurs should have a powerful new vehicle at their disposal to support the de- velopment and growth of their companies.

This article was previously publsihed in Daily Business Review.

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Will a New California Ballot Initiative Usher in the Next National Shift in Privacy Law?

Poyner Spruill

Just 10 years ago, California enacted the first breach notification law and unwittingly transformed the landscape of American privacy and data security law. To date, 45 other states, multiple federal agencies, and even local governments have followed suit. California residents may soon find themselves voting on a ballot initiative that could have an equally dramatic effect on this area of law.

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The ballot initiative, known as the California Personal Privacy Initiative, is designed to remove barriers to privacy and data security lawsuits and also would promote stronger data security and an “opt-in” standard for the disclosure of personal information. Specifically, the initiative would amend the California Constitution to:

  1. Create a presumption that “personally identifying information” collected for a commercial or governmental purpose is confidential

  2. Require the person collecting such information to use all reasonably available means to protect it from unauthorized disclosure

  3. Create a presumption of harm to a person whenever her confidential personally identifying information has been disclosed without her authorization.

Notwithstanding the presumption of harm, the amendment would permit the disclosure of confidential personally identifying information without authorization “if there is a countervailing compelling interest to do so (such as public safety or protected non-commercial free speech) and there is no reasonable alternative for accomplishing such compelling interest.”

Turning first to the impact on litigation, plaintiffs have largely been unsuccessful in privacy and data security litigation because they have failed to show harm resulting from an alleged unlawful privacy practice or security breach. The obligation to show harm arises at two stages when a case is litigated in federal court: first, the plaintiff must establish that he has suffered an “injury in fact” in order to meet the requirements for Article III standing, and second, the plaintiff must satisfy the harm requirement that applies to the relevant cause of action (e.g., negligence). If the case is litigated in state court, the standing requirement does not apply, but most, if not all, privacy and data security breach class actions have been litigated in federal court.

The ballot initiative would create a presumption of harm that could allow more lawsuits to satisfy the injury-in-fact standard (step one, above) and the harm requirement for the underlying cause of action (step two, above). Without that barrier, business would be stripped of the most effective means of prevailing on a motion to dismiss for certain causes of action. And in some scenarios, business would be forced to rely on untested or tenuous defenses, making companies more likely to settle, rather than fight, previously unsustainable causes of action.

Other components of the initiative would exacerbate the uptick in litigation, including the presumption that personally identifying information collected for a commercial purpose is confidential and the requirement that organizations use reasonable measures to prevent unauthorized disclosure of that information. Plaintiffs’ claims are sometimes based on an allegation that promises made in the defendant’s privacy notice regarding security measures are deceptive. Currently, companies can protect themselves against these claims by making only conservative representations about privacy and security. But the ballot initiative could create a general duty to adopt reasonable privacy and security measures, raising the prospect that plaintiffs could more successfully pursue negligence-style claims, which companies cannot deter solely by adopting conservative privacy notices.

The initiative also employs a very broad definition of personally identifying information: “any information which can be used to distinguish or trace a natural person’s identity, including but not limited to financial and/or health information, which is linked or linkable to a specific natural person.” (The definition does not cover publicly available information lawfully made available to the public from government records.) This expansive definition would force organizations to apply stricter security to types of information that might not otherwise receive those protections. Furthermore, the definition is particularly problematic when considered in conjunction with the presumption of harm discussed above because identifiable data such as names, email addresses, and device identifiers are routinely shared by businesses without consent. If this initiative succeeds, the increased threat of litigation will incentivize businesses to default to an opt-in standard for disclosures of information.

There is, however, at least one reason to believe that the initiative may not be as detrimental to business interests as some are predicting. Showing a nominal harm for the underlying cause of action does not necessarily equate to an award of damages so, even if the ballot initiative is successful, there would in some cases remain a practical limitation on the plaintiff’s ability to recoup money damages. Where statutory damages are available, or where a plaintiff can show some actual monetary harm, money awards would be possible. But in cases where statutory damages are not available and a plaintiff must show actual monetary harm to procure a monetary award, the ballot initiative may not save such claims. For example, the damages award flowing from a negligence claim is generally based on the actual damages incurred by a plaintiff. Therefore, even if the plaintiff could state a cause of action for the purpose of defeating a motion to dismiss, the plaintiff may not be entitled to anything more than a nominal damages award if the plaintiff cannot demonstrate monetary damage such as the cost of credit monitoring, identity theft insurance, or perhaps even therapy bills. On the other hand, courts could interpret the amendment as requiring recognition of a new type of harm, similar to emotional distress, that is compensable through money damages—even without a showing of some concrete financial harm to the plaintiff.

The ballot initiative’s proponents must obtain 807,615 signatures before Californians would have the opportunity to vote on it. If the signatures are collected, then the initiative will appear on the ballot without further opportunity to seek amendments to address business concerns. If the initiative appears on the ballot, it would require only a simple majority vote to pass. Interested organizations should work to ensure that public debate over the initiative includes a discussion of the heavy burden on business that could result from the initiative.

 
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The European Court of Justice Overturns, Unfreezes EU Iran Sanctions

Sheppard Mullin 2012

In a series of recent rulings, the European Court of Justice overturned economic sanctions issued by the Council of the European Union (EU) on several Iranian banks and shipping lines.  On September 6 and 16, 2013, the Court halted sanctions on Persia International Bank plc, Bank Refah Kargaran, Export Development Bank of Iran, Post Bank Iran, Iranian Offshore Engineering & Construction Co., Iran Insurance Company, Islamic Republic of Iran Shipping Lines (IRISL), Khazar Shipping Lines, and Good Luck Shipping.  The EU had sanctioned these entities for their support of nuclear proliferation activities in Iran, but the Court determined that the EU lacked sufficient evidence to introduce such sanctions.  The cases are notable for their effect on global sanctions against Iran, although it seems unlikely that U.S. sanctions against Iran would be lifted on similar grounds.

While a full review of the developments in each case would be beyond the scope of this blog article, a few representative matters bear closer scrutiny.  In the case against IRISL, the Court noted that the imposition of sanctions was only permitted where a party had allegedly supported nuclear proliferation.  The Court indicated that sanctions could not be imposed simply based on a risk that  IRISL might provide support for nuclear proliferation in the future.  In particular, the Court determined that, while the EU established that IRISL had been involved in exports of arms from Iran, that activity was not alone sufficient to support the imposition of nuclear sanctions.  As a result, the Court struck down the sanctions against IRISL.

Similarly, in considering sanctions against Iran Insurance Company, the Court noted that the EU had sanctioned the company for insuring the purchase of helicopter spare parts, electronics, and computers with applications in aircraft and missile navigation, which the EU alleged could be used in violation of nuclear proliferation sanctions.  The Court ruled that the EU had relied on “mere unsubstantiated allegations” regarding the provision of insurance services, and annulled the sanctions.

We think these two matters are noteworthy for the types of evidence used to link the activities of the entities to nuclear proliferation.  When viewed in the light of a formal court proceeding, it seems somewhat remarkable that the EU sought to tie the insuring of items including helicopter spare parts to nuclear proliferation at all.  But, as we have discussed previously in this blog, [see May 2013 sanctions article]  economic sanctions against Iran have been broadly construed and applied by the United States and the EU to target industries integral to the functioning of the Iranian economy.  Insofar as a functioning Iranian economy also supports the nuclear development efforts of its government, it may make political sense for the EU and the United States to impose leverage through sanctions.  As a legal matter, however, the European Court of Justice rulings suggest that Court will be loathe to tie restrictions on general economic activity to a statute focused on the specific activity of nuclear proliferation.

In other words, the European Court of Justice seems unlikely to defer to the EU, even where European security is at stake.  This stands in relatively stark contrast to U.S. courts, which have generally shown deference to government activity on issues of national security.[1]

For the time being, U.S. sanctions on Iran and key entities within the Iranian banking and shipping sectors remain in place, with far reaching consequences that will continue to deter Western business from even considering business in Iran.  And ultimately, any warming in diplomatic relations between the United States and Iran will likely be more momentous than judicially vacated sanctions.  But at a minimum, the European Court of Justice has signaled that EU sanctions are subject to standards of proof that cannot be broadly construed to incorporate all types of economic activity.


[1] At least one U.S. court has overturned criminal sanctions charges on individuals by reading regulatory provisions in the accused’s favor due to issues of vagueness in the sanctions regulations. [see Clarity Required: US V. Banki]

The False Claims Act During Times of War: Is There Any Time Limit For Bringing Suit

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A federal appellate court recently ruled that, at least for the moment, claims under the False Claims Act (“FCA”) are not subject to any statute of limitations. The United States Circuit Court for the Fourth Circuit, in U.S. ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013), relied on an obscure federal statute, the Wartime Suspension of Limitations Act (“WSLA”), to hold that the FCA’s general six-year statute of limitations, 31 U.S.C. §3287, was tolled due to the ongoing conflict in Iraq. The Fourth Circuit’s decision is ground-breaking, as it is the first federal appellate court to weigh in on this issue and takes a broad view of the tolling question, effectively removing any limitations bar to FCA violations committed during times of war.

The WSLA, originally enacted in 1942 and amended as recently as 2008, generally suspends statutes of limitations in actions related to fraud against the United States until 5 years after the termination of a war. 18 U.S.C. §3287. In Carter, the qui tam whistleblower alleged that his employer, well-known government contractor Kellogg Brown Root Services, Inc. (“KBR”), was defrauding the government by inflating its employees’ work hours on a water purification contract as well as misrepresenting to the United States that it was actually purifying water for servicemen and servicewomen deployed in Iraq. The trial court dismissed Carter’s complaint on the grounds that, among other things, Carter’s case was not tolled by the WSLA because the government did not intervene in the action. Carter, 710 F.3d at 176. The Fourth Circuit reversed, holding that the armed conflict in Iraq suspended the statute of limitations in Carter’s case, regardless of whether the case was being prosecuted by Carter, as the FCA relator, or by the United States. According to the court, “whether the suit is brought by the United States or a relator is irrelevant . . . because the suspension of limitations in the WSLA depends on whether the country is at war and not who brings the case.” Id. at 180.

In addition to explicitly extending the scope of the WSLA to non-intervened cases, the Fourth Circuit made two other important WSLA-related holdings. First, the court ruled that the phrase “at war” in the WSLA is not limited to formally declared wars but, instead, applies to modern military engagements such as the United States’ involvement in Vietnam, Korea, Afghanistan and Iraq. Id. at 179. Although none of these conflicts were formally declared wars, they occupied much of the government’s attention and resources such that the purpose of the WSLA-allowing the government more time to act during the fog of war-would not be served if an unnecessarily formalistic approach were required.

Second, the Fourth Circuit-consistent with several district courts before it-ruled that the WSLA applies to both criminal and civil cases. Id. at 179-180. The question of WSLA’s application to civil matters arose out of the use of the word “offense” in the statute. The original version of the WSLA applied to “offenses involving the defrauding or attempts to defraud the United States . . . and now indictable under any existing statutes.” In 1944, however, the Act was amended, deleting the “now indictable” language. With that change, the court concluded, the “WSLA was then applicable to all actions involving fraud against the United States,” including civil actions. Id.

In light of the Fourth Circuit’s decision in Carter, the limitations period for FCA actions may be indefinitely extended. Indeed, in Carter, the court indicated that it is not clear that the war in Iraq is over for purposes of the WSLA. Tolling under the WSLA ends 5 years after the termination of hostilities “as proclaimed by a Presidential proclamation, with notice to Congress, or by a concurrent resolution of Congress.” Wartime Enforcement of Fraud Act, Pub. L. No. 110-417 §855, codified at 18 U.S.C. §3287. According to the Fourth Circuit, because “it is not clear” that President Obama has proclaimed the war in Iraq as over and provided notice of the same to Congress, as required by the WSLA, the limitations period may still be tolled.

Some commentators have argued that the FCA statute of repose, which sets the outside deadline for bringing claims at either “3 years after the date when facts material to the right of action are known or reasonably should have been known” by the government, “but in no event more than 10 years after the date on which the violation is committed, whichever occurs last.” This mandates that the statute of limitations for FCA cases cannot be tolled for more than 10 years. Although Carter did not reach that specific issue, it seems unlikely-based on the Fourth Circuit’s language and analysis-that it would endorse such a position. Indeed, the Fourth Circuit noted, in a footnote, that “tolling will indeed extend indefinitely” absent a formal Presidential proclamation with notice to Congress. Carter, 710 F.3d at n.5.

If the Fourth Circuit’s analysis is adopted by its sister circuits, there will be profound benefits for whistleblowers seeking to expose fraud against the Government. For instance, defendants may be discouraged from proffering hyper-technical, confused or convoluted statute of limitations defenses in order to avoid responsibility for their fraud. It would also open up the possibility of bringing qui tam claims under the FCA for conduct dating farther back in the past.

Politics and Consequences: An Update on U.S. Sanctions Against Iran

Sheppard Mullin 2012

Since Hassan Rouhani’s election to the Iranian presidency, some U.S. leaders have expressed interest in diplomatic talks with Iran.  It is currently unclear whether any such talks will ever occur, or on what terms.  In the face of ongoing uncertainty, the U.S. sanctions program against Iran has continued to develop in a piecemeal sometimes inconsistent fashion.

More Restrictive Sanctions: Executive Order 13645

On June 3, 2013, President Obama’s Executive Order 13645 authorized sanctions against foreign financial institutions that conduct or facilitate significant transactions in the Iranian Rial or that provide support to Iranian persons on the Specially Designated Nationals (SDN) list.  Under the Executive Order, the Secretary of Treasury may prohibit those financial institutions from opening or maintaining a correspondent or payable through account and may block the institutions’ property in the United States.

Less Restrictive Provisions

Notwithstanding the restrictions in EO 13645, there remains some room for engaging in business with Iran in some sectors.

The Executive Order itself is restricted to certain types of transactions.  A foreign financial institution engaged in transactions involving petroleum products from Iran may be subject to restrictions on its accounts in the United States only if the President of the United States determines there is a sufficient supply of such products from countries other than Iran.  The same sanctions apply to a natural gas transaction only if the transaction is solely for trade between Iran and the country with primary jurisdiction over the foreign financial institution, and any funds owed to Iran as a result of the trade are credited to an account located in the latter country.

The prohibition against significant foreign financial transactions for SDNs does not apply to transactions for the provision of agricultural commodities, food, medicine, or medical devices to Iran, or to transactions involving a natural gas project described in section 603(a) of the Iran Threat Reduction and Syria Human Rights Act of 2012.

On July 25, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) followed in the wake of the Executive Order, issuing a General License for the exportation or reexportation of medicine and basic medical supplies to Iran.  OFAC delineated the scope and limitations of the authorization via a list of frequently asked questions and new guidance, and updated section 560.530(a)(3)(i) of the Iranian Transactions and Sanctions Regulations to reflect the change.

Under the new regulations, the sale of food, medicine, and medical devices by U.S. persons or from the United States to Iran, and the sale of food, agricultural commodities, medicine, and medical devices to Iran by non-U.S. persons are not subject to U.S. sanctions.  The financing or facilitation of such sales by non-U.S. persons do not trigger sanctions either, so long as the transaction does not involve certain specifically proscribed conduct or designated persons (such as Iran’s Islamic Revolutionary Guard Corps or a designated Iranian bank).  Iranian oil revenues held in Central Bank of Iran or non-designated Iranian bank accounts at foreign banks, for example, may be used to finance exports of food, agricultural commodities, medicine, or medical devices to Iran from the country in which the account is held or from any other foreign country.

Separately, On September 10, OFAC issued two new general licenses. General License E authorizes nongovernmental organizations to export or reexport services to or related to Iran in support of specific not-for-profit activities designed to directly benefit the Iranian people.  The enumerated activities include those aimed at basic human needs, post-disaster reconstruction, environmental and wildlife conservation, human rights, and democracy.

General License F permits the importation into the United States, exportation from the United States, or other dealing in Iranian-origin services related to professional and amateur sporting activities and exchanges involving the United States and Iran.  The authorized activities include those related to matches and events, sponsorship of players, coaching, refereeing, and training.

Conclusion

The recent Executive Order and General Licenses highlight a fundamental fact about U.S. sanctions programs: because they are subject to unilateral executive control, changes can be sweeping and abrupt.  It remains to be seen whether the United States will engage in increased diplomacy with Iran.  But what is clear is that shifting geopolitical realities are sure to alter the future course of the Iran sanctions program and to carry real consequences for U.S. and foreign businesses.

Department of Justice (DOJ) Intervenes in Qui Tam Action Against Lance Armstrong

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The Department of Justice announced in February that it would intervene in a False Claims Act suit filed against former Tour de France winner Lance Armstrong and others by former teammate Floyd Landis. Reports indicate that in 2010, Landis filed a lawsuit, captioned United States ex rel. Landis v. Tailwind Sports Corporation, et al., in the U.S. District Court for the District of Columbia. The lawsuit alleges that Armstrong and his teammates violated the terms of a $30 million sponsorship contract he and his cycling team had with the U.S. Postal Service (USPS) by taking drugs to enhance their performances.

USPS sponsored Armstrong’s Tailwind cycling team from 1996 through 2004. During that time, Armstrong and his team took more than $30 million in sponsorship fees. The USPS claims Armstrong violated a contractual promise by regularly employing banned substances and methods to enhance their performance, in violation of the USPS sponsorship agreements. Those sponsorship agreements gave USPS the right to place its logo prominently on the cycling team’s uniform, among other promotional opportunities. However, the agreement also required the cycling team to comply with all rules of cycling’s governing bodies. Those rules prohibited the use of performance enhancing substances and methods.

For years Armstrong and others denied that the team used performance enhancing drugs, but in October, 2012, the U.S. Anti-Doping Agency (USADA) issued a report concluding that Armstrong used banned performance enhancing substances, starting in at least 1998 and continuing throughout his career. The time Armstrong and teammates were alleged to have been “doping” overlaps significantly with the term of Armstrong’s USPS sponsorship.

After the USADA report, Armstrong admitted in an interview with Oprah Winfrey that he used banned substances and methods throughout his career, starting in the mid-1990s. He admitted having used banned substances during each of his seven Tour de France victories, including the six he won while sponsored by USPS.

The U.S. Government’s intervention complaint alleges that riders on the USPS-sponsored team “knowingly caused violations of the sponsorship agreements by regularly and systematically employing substances and methods to enhance their performance” and, as a result, “submitted to the United States false or fraudulent invoices for payment.” In addition, the complaint alleges that the Defendants “made false statements, both publicly and to the USPS, that were intended to hide the team’s misconduct so that those invoices would be paid.” All in all, according to the government, “[b]ecause the Defendants’ misconduct undermined the value of the sponsorship to the USPS, the United States suffered damage in that it did not receive the value of the services for which it bargained.” In support of its allegations, the government details the prohibited substances used by the Armstrong team, including erythropoietin, human growth hormone, anabolic steroids, and corticosteroids. It also details delivery methods used, including blood re-injections and “the oil,” a mixture of testosterone and olive oil. In addition, the government complaint contains a litany of Armstrong’s denials of banned substances use over a ten-year period.

While the Government notified the court that it was joining the lawsuit’s allegations as to Armstrong, the Tailwind cycling team, and the team’s manager, it advised the court that it was not intervening in the case as to several other defendants named in Landis’s complaint.

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Securities and Exchange Commission (SEC) Adopts Rule Amendments to Implement JOBS Act Provisions for the Elimination of Prohibitions Against General Solicitation in Private Offerings

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On July 10, 2013, the SEC adopted final amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act in order to implement Section 201(a) of the Jumpstart Our Business Startups Act (JOBS Act). Section 201(a)(1) of the JOBS Act directed the SEC to eliminate the prohibition against general solicitation in private security offerings made under Rule 506 provided that all purchasers of the securities are accredited investors. New Rule 506(c) permits issuers to use general solicitation and general advertising in private security offerings made under Rule 506 provided that: (1) the issuer takes reasonable steps to verify that investors are accredited investors; (2) each investor qualifies, or the issuer reasonably believes that each investor qualifies, as an accredited investor at the time of the sale of securities; and (3) all terms and conditions of Rules 501, 502(a) and 502(d) are satisfied.

The SEC noted that whether the steps taken by an issuer to verify accredited investor status are “reasonable” is an objective determination based on the particular facts and circumstances of each investor and transaction. Factors to be considered in this analysis are:

(1) the nature of the purchaser and type of accredited investor that the purchaser claims to be;

(2) the amount and type of information that the issuer has about the purchaser; and

(3) the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as the minimum investment amount.

In response to commenters’ requests, Rule 506(c) also provides a non-exclusive list of specific methods that investors may use to verify an investor’s accredited investor status. This list includes:

(1) with respect to verifying income, review copies of any IRS form that reports income (e.g., W-2, Form 1099 or a copy of a filed Form 1040), along with a written representation that the investor will likely continue to earn the necessary income in the current year;

(2) with respect to verifying net worth, review copies of bank statements, brokerage or other statements of securities holdings, or CDs for evidence of sufficient net worth, along with a credit report for evidence of total liabilities; or

(3) obtain a written confirmation from a broker-dealer, an investment adviser, a licensed attorney or a certified public accountant that such entity or person has taken reasonable steps to verify the investor’s accredited investor status.

Section 201(a)(1) of the JOBS Act also directed the SEC to revise Rule 144A(d)(1) to provide that securities resold pursuant to Rule 144A may be offered, including by means of general solicitation, to persons other than  qualified institutional buyers (QIBs) as long as the securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe is a QIB. The SEC adopted amendments to Rule 144A as directed under the JOBS Act.

The rule amendments became effective on September 23, 2013.

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Cloning Decision Could Lead to Copycat Litigation in the World of Racing

Sheppard Mullin 2012

Owners of elite American Quarter Horses may soon be ponying up to create clones of their champions.

On July 31, 2013 a North Texas District Court jury decided that the American Quarter Horse Association’s (“AQHA”) rule prohibiting the registration of cloned American Quarter Horses violates federal and Texas antitrust laws. The AQHA, located in Amarillo, Texas, is the world’s largest equine breed registry and membership organization, with more than 5 million American Quarter Horses registered to nearly 350,000 members.

The American Quarter Horse excels at sprinting short distances and racing of these animals is the third most popular form of horse racing, generating more than $300 million in bets at U.S. racetracks in 2012. American Quarter Horses are bred to run in races of under a quarter-mile and have been clocked at speeds up to 55 mph.

Plaintiffs Jason Abraham and Gregg Veneklasen sued the AQHA for $6 million in damages, arguing that Rule 227(a) of the AQHA, which prohibits the registration of clones, violated both the Sherman Antitrust Act and the Texas Free Enterprise Act, which reflects federal antitrust law.

Plaintiffs alleged that the association’s prohibition of clones violates Section 1 of the Sherman Antitrust Act because the AQHA acted as a conspiracy that unreasonably restrained interstate or foreign trade. In response, the AQHA argued that the association is a single body and that the Board of Directors acted with a single interest, and therefore cannot be a conspiracy. Plaintiffs further alleged that the rule violated Section 2 of the Sherman Antitrust Act because the AQHA acted to maintain its monopoly power in the industry by enacting the rule. In response, the AQHA argued that the rule did not maintain monopoly power, but instead narrowed the association’s reach by reducing the potential universe of its registered horses.

On July 31, the jury found that the AQHA’s Rule 227(a) violated Section 1 and Section 2 of the Sherman Antitrust Act, as well as the equivalent Texas laws. In their decision, the jury awarded no damages, but could lead to the reversal of Rule 227(a) following an order the District Court Judge.

Johne Dobbs, the President of the AQHA’s Executive Committee, is reported as saying that the AQHA will appeal the North Texas District Court decision to the 5th Circuit, though it may be a year before a decision is made on the appeal.

A decision in favor of the AQHA by the 5th Circuit could have a reversing effect on a number of changes to AQHA rules since 2000, while a decision against could further cement the trend toward the AQHA being more inclusive. In 2000, a breeder sued the AQHA regarding the association’s rule that limited one registeredhorse per breeding pair per year, which thereby prohibited the use of embryo transplants to create multiple foals per breeding pair. The court held in an interlocutory order that the rule was an anticompetitive restraint of trade, adopted for the purposes of limiting the supply of registered quarter horses. Before a final order was written, the two parties settled and the AQHA changed its rules to allow for the registration of all embryo transfer foals. Since then, the AQHA has changed its rules to also register horses considered perlinos and cremellos to register, as well as horses deemed to be excessively white. The AQHA may be interested in pursuing a reversal to these changes if the 5th Circuit rules in their favor.

A decision against the AQHA could also lead to other breeder associations, including the American Kennel Club and American Paint Horse Association, to change their rules prohibiting the registration of clones.

An industry able to support quarter horse clones is likely ready to go if the courts side with the plaintiffs. Texas company ViaGen owns the patent that created the infamous cloned sheep, Dolly. The company has already cloned a number of horses, including Royal Blue Boon, the all-time leading dam of cutting horses with personal lifetime earnings of $381,764 and produce earnings of over $2.6 million. Hundreds of American Quarter Horse owners have already gene banked their horses in anticipation of the AQHA changing Rule 227(a).

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Michigan Right to Work – What’s the Effect: A Data Point

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How Michigan’s Right to Work law would ultimately impact union dues payer rolls has been a topic of some debate. Now we have a data point, but it may not tell the whole story.

Michigan’s Right to Work law became effective March 28, 2013. The law gives employees the right to choose to join and/or financially support a union. In other words, it allows employees to retain the representational benefits of their union representation without paying dues. If an employee elects not to pay dues, the employee’s union still must represent the employee with respect to grievances and arbitration. Unions refer to this as “freeloading.”

There has been much speculation about what impact the passage of Michigan’s law would have on the number of dues paying members. Today, an article in the Detroit News reported that, according to the Michigan Education Association, Michigan’s 150,000 member teachers union, only 1 percent of its members have elected to exercise their rights under the Right to Work law and stop paying dues.

Michigan

This, however, likely only tells part of the story because the law does not impact union security provisions in contracts that have not yet expired and some contracts were “rush-renewed” to ensure that they would not be impacted by Right to Work for several more years.

In addition, the Right to Work law did not impact union “check off” provisions which are often tied to a card that is signed by a union member and authorizes the employer to deduct dues from the member’s paycheck and send them to the union. Such cards can serve as an impediment to a member desiring to stop paying dues because they can be irrevocable for a period of time, even if the employee revokes his or her union membership. These agreements, which can be irrevocable for up to a year under federal law, are a hurdle that trip up many employees trying to end dues payments immediately. However, while certain restrictions on dues check off authorizations have been approved under federal law, it is unclear whether the Michigan Employment Relations Commission (MERC) will find such restrictions lawful or violative of Michigan’s Right to Work law.

The point is, MEA’s 1 percent report is only one data point; it will take a lot longer to tell the impact on the number of dues paying members in the MEA and other unions.

See all our previous Right to Work coverage here.

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Immigration Reform Resurfaces Amid Congressional Breakdown Over Funding and Debt Ceiling

GT Law

As the country waits for Congress to resolve the government funding and debt ceiling stalemate, immigration reform simmers in the background. This week, a group of Democrats introduced a Comprehensive Immigration Reform bill, H.R. 15, entitled the “Border Security, Economic Opportunity, and Immigration Modernization Act.” This is not the much awaited work product of the secret bi-partisan Gang of 8 (which has now been disbanded), but rather an almost verbatim reproduction of the Senate passed CIR legislation, S. 744. The new House bill does include provisions from the McCaul-Thompson “Border Security Results Act” (H.R. 1417) reported out of the House Homeland Security Committee and passed this summer with bipartisan support. It also removes the Corker-Hoeven border security amendment, which seeks to add approximately 20,000 border patrol agents, more than 700 additional miles of border fencing, a mandatory E-Verify program nationwide, and an entry/exit tracking system for temporary visitors to the United States.

House Republicans on the Judiciary Committee are working through the normal order and are drafting separate bills to address the future of undocumented immigrants in the U.S., as well as new temporary worker provisions for lesser skilled workers. We expect the Judiciary Committee to take up measures on immigration in the next few weeks. We also expect the “Strengthen and Fortify Enforcement (SAFE) Act” (H.R. 2278) and other border security measures to be brought to the House floor this year.

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