10 posts categorized "January 2010"

The Attack on Reg D: an FAQ

What is the attack on Reg D? The attack on Reg D is contained in a bill proposed by Sen. Christopher Dodd that would do two things: (a) Senator Dodd's bill would allow states to again regulate offerings that meet Reg D requirements, and (b) Senator Dodd's bill would require the SEC to narrow the universe of individual investors who would be allowed to invest in startup companies. If Senator Dodd's bill is passed and becomes law, then all 50 states would be free to impose their own requirements on seed financings for start ups, and none of those rules would have to be consistent with a national standard. Also, while Senator Dodd's bill does not set precise, new thresholds for being eligible to be an investor, it does mandate a process that could, potentially, knock out all but the super-rich from investing in startup companies.

Senator Dodd is retiring. Doesn’t that mean that his attack on Reg D is dead? I wish that were so. Unfortunately, both Senator Dodd, and his counterpart on financial regulatory reform in the House, Representative Barney Frank, have said that their work on financial regulatory reform, presumably including efforts to pass Senator Dodd's bill, will continue.

Who would want to kill Reg D? Best I can tell, the move to gut Reg D is championed by state securities regulators. Published articles indicate that state securities regulators are concerned about abusive and predatory offerings where unsophisticated investors are preyed upon by unscrupulous broker dealers or placement agents. Recently, I have been told that state securities regulators are also worried about offerings by issuers, but I have yet to learn more about those accounts.

Would there be another way to address abuses? Yes, I think so. Rather than gut Reg D, which does so much to facilitate the formation of startup capital for tech and other entrepreneurs in this country, the SEC and state regulators could be further empowered to regulate offerings that may pay lip service to Reg D, but don't actually meet existing Reg D requirements. For example, if Reg D were clarified to underscore that an issuer must have a pre-existing business relationship with its investors, the current, successful and prevalent practice of the tech startup community would be preserved, and offerings synidcated by placement agents might have to follow other, more stringent rules.

Why does the National Venture Capital Association remain silent on this? This organization refuses to take a public position on the issue, but in backchannels has indicated that the proposed changes to Reg D are primarily "angel" issues and not a priority for the professional venture capital funds and managers that it represents. For reasons put succinctly and best by Fred Wilson, it is a huge mistake to think that angel financing is not important to entrepreneurs and the whole eco-system by which tech ventures are founded and financed.

What are the next steps? For me, to try to find out more about what state securities regulators perceive to be the problems. For folks looking at this issue for the first time, you may want to consider writing your elected representatives.

Automatic Contracts (and the Cause of Bringing the Legal Profession Forward a Century or Two)

Last week, Ben Hatten of Legal River e-mailed to let me know his company had just released a "terms of service generator" and a "privacy policy generator." Having seen my earlier review of the Wilson Sonsini and Orrick term sheet generators, he knew I'd be interested.

As I am. I’m hopeful that, over the next 2 to 3 years, we’ll accelerate the speed at which we put distance between our era and the 19th Century inefficiencies around access to legal learning. This cause has many fronts.

The front being addressed by the online "generators" of legal documents, such as the Wilson and Orrick applications, as well as forms now being supplied by Legal River and others, is the most important. It has to do with breaking down the wall of secrecy between what legal practitioners learn, iterate, improve and update over years of investment in their trade, on the one hand, and the need of entrepreneurs to access, understand, utilize and question that living knowledge, on the other hand.

The form terms of service (“TOS”) and the form privacy policy now available at the Legal River site are worthwhile, and startuppers (from bootstrappers to the funded), emerging company employees, and lawyers, alike, will find them useful. It would be too generous, however, to call the Legal River documents "generators" or applications. Your online engagement with these forms is limited to your supplying them with your company's name and some contact information. Though that's alright. Getting a template with your name in it is worth the minute of effort, as it may have the useful psychological effect of making you read all the boilerplate T’s and C’s from a fresh (first-person) point of view.

In the process of constructing TOS that you can use for your own business, you’ll still need to noodle a list of comparable companies and sites, check out their TOS, ask questions of and compare notes with fellow travelers (including lawyers), and make your own calls where your business model and your values suggest you ought to build select TOS rules from scratch.

Here's an example: in the TOS supplied by Legal River, on the subject of user generated content, it says: 

"By posting your Content using the Services, you are granting an unrestricted, irrevocable, non-exclusive, royalty-free, perpetual, worldwide, and fully transferable, assignable, and sublicensable right and license to use, copy, reproduce, modify, adapt, publish, translate, create collective or derivative works from, distribute, perform and display your Content in whole or in part and to incorporate it in other works in any form, media, or technology now known or later developed. You further warrant that all so-called moral rights in the content have been waived."

Let's suppose your site is all about user generated content. In this simple hypothetical, it is easy to imagine that you and members of your community might actually want to embrace moral rights of attribution, and that, however user content might be re-syndicated or re-purposed (and the license language in the Legal River form is pretty good for such broad purposes), you might want to promise to always keep the author’s name, and maybe even a web link designated by the author, associated with that author's content. If that's the case, you don't want your TOS to have a blanket waiver of any and all moral rights.

But kudos to Legal River for making a start by supplying thoughtful, comprehensive forms that represent a significant investment. It is certainly conceivable that, over time, a robust set of alternative provisions could be threaded into the drafts, and a wizard created to lead one through the (appropriately complex) maze to the appropriate choices. (Such nuance and sophistication are provided by the Wilson and Orrick term sheet generators.)

Other fronts in the cause include those internal to the legal trade. At his talk in Bellevue a week or two ago, Dean Huttenlocher of Cornell decried what he called the “20th Century search tools” used to manage the conduct of litigation (and I think for the Dean, calling something “20th Century” may be more pejorative than how I use “19th Century” as an adjective!). What Google Scholar does now for certain case law shows us a better way. What a boon it will be to someday have all contracts, that I or anyone else has ever written, accessible and available for reference, reflection or reworking!

Effective Contract Drafting: A Subversive Manifesto

It's always best to say what you mean as clearly and as simply as you can, right?


If you’re writing the "risk factors" for an offering document, yes, you should seek to be clear. (This statement is aspirational. Most securities lawyers do strive to flag pertinent risks, but actual practice finds them burying meaningful disclosure within HYSTERICAL ALL CAPS BOILERPLATE DESIGNED TO EXHAUST YOU AND GET YOU TO SKIP RIGHT OVER IT.)

Ambiguity, however, is indispensable to the drafter of commercial contracts.

The case for precision and clarity is always forceful: avoid disputes later by spelling things out today; write as if the parties doing the deal won't later be around, or will have forgotten themselves, or will have joined the dark side. Trust is fostered, commerce enhanced, by plain dealing. Everyone loves a shrewd negotiator, but he who speaks un-plainly gets the reputation of a sharp dealer.

What about, however, material points on which the parties will not agree? Either because they do not have the time, or do not wish to risk what they regard as the more essential deal? 

Here are opportunities for skilled draftspersons to practice at being elusive. Words are chosen -- sometimes artfully chosen -- to preserve for each party a different argument on the same point. An issue may be flagged expressly for the sake of not resolving it.

If I'm making it sound like there is a secret, select cadre of lawyers who participate in such willful obfuscation, I shouldn't. All good business lawyers participate. The more adept a lawyer is at employing such techniques, and judging when they are needed, the more effective that lawyer is as a deal maker.

Boon for Bloggers: the Free Dragon Dictation iPhone App

At a breakfast meeting this morning, I gave Matt Heaton and Chuck DelGrande an impromptu demonstration of the Dragon dictation iPhone app, available for free at the iTunes store. Below, cut and pasted into this post, is that demo, exactly as I spoke it and mailed it to Chuck and Matt over the breakfast table. I'm also including Matt's reply, which encouraged me to write this post.

I do take pride in my drafting, and, at my core, perceive myself to be a writer. So I'd be the last person to suggest that transcribing extemporaneous speech will always be a sufficient means to write something that will end up being worth reading.

But a good transcript is a hell of a good place to start. With it, you can sit down at the keyboard and edit your way to a second draft.

As I work with the app, too, I'm finding that I'm speaking more deliberately, and suspect my spoken first drafts may even sometimes be better than my typed ones. Certainly, I think the spoken first drafts are better than the ones I might otherwise scribble on a napkin.

This post was dictated to Dragon. In fact, I think I'll make a point of posting this before going to the desktop. As always, however, I may not be able to resist going to the post later, after it's published, to tweak it further.

Sent from my iPhone

Begin forwarded message:

From: Matt Heaton <matt@timu.com>
Date: January 20, 2010 11:25:08 AM PST
To: William Carleton <WCarleton@mcnaul.com>
Subject: Re:

Really cool, I'm going to have to check it out. You should do a post about it :)

On Wed, Jan 20, 2010 at 8:26 AM, William Carleton <WCarleton@mcnaul.com> wrote:
I'm having breakfast with Chuck and Matt, and we just ordered. We're talking about how the Dragon dictation app really increases productivity!

Sent from my iPhone

Criteria for Selecting Web Startup Lawyers

Matt Heaton has pointed me to Giff Constable's effort to amass a list of good web startup lawyers.

I don't know, and cannot personally vouch for, any of the other lawyers listed so far for other markets. (There aren't many listed; presumably, this effort is just underway.) However, Giff supplies a five point criteria for selecting a lawyer that I think is excellent. 

 Here it is: 

  • has a practice with several Web startups, and understands startup issues 
  • keeps billable hours reasonable, respecting cash of clients 
  • is both an excellent lawyer and communicator 
  • does not lose sight of business needs when thinking through legal issues 
  • truly cares about representing your business (without conflicts of interests with VCs or other) 

Bullets three and four are givens, and ought to be weighed when selecting any kind of lawyer. Bullets two and five are where Giff's criteria really add value. 

I am self-interested, of course, but here's my perspective: 

Large firms sometimes do not have the flexibility to discount fees or take substantial risks of nonpayment. This is not always true. In fact, other times, large firms are in a better position than a boutique to undertake a client with the fore-knowledge that the firm may someday have to write off a large receivable. Whether there is flexibility is a case-by-case assessment. 

Which brings me to the parenthetical in Giff's fifth point: if the law firm is amazingly flexible as to its fees, that could mean either (a) you are a recognized world-beater, or (b) there may be other loyalties or agendas in the mix that you should unscramble. 

For me, the sweet spot often seems to be a mix composed of reasonable rates; some upfront, modest, good-faith retainer; and some ability and willingness on the part of the lawyer to take some risk.

Crowdsourcing the World's Landmarks

Chris Dixon has a really interesting post today. In it, he talks about having the foresight to structure information in order to get better and better performance from what he calls "collective knowledge systems." Toward this end, Chris thinks that academic computer scientists could play an important role. "Unfortunately," Chris writes, "academic computer scientists still seem to model their field after the 'hard sciences' instead of what they should model it after -- social sciences like economics or sociology."

Well, as life would have it, I read Chris's piece while in the midst of collecting links for my own post about research being done at Cornell University, concerning the organization of millions of geo-tagged photos on Flickr and how best to mine and map that "collective knowledge."

Here's a link to a paper describing that research, "Mapping the World's Photos," written by David CrandallLars BackstromDan Huttenlocher (who is dean of Cornell's Faculty of Computing and Information Science) and Jon Kleinberg. They point out that photo-sharing sites have connective structure, provided by the millions of people that take and post the photos. This is significant because:

". . . it means that we can discover, through collective behavior, what people consider to be the most significant landmarks both in the world and within specific cities; which cities are the most photographed; which cities have the highest and lowest proportions of attention-drawings landmarks; which views of those landmarks and most characteristic; and how people move through cities and regions as they visit different locations within them."

Check out these maps generated by the Cornell researchers -- or, I should say, maps that are generated from the programs they built to "automatically [mine] the information latent in large sets of images."

And here is a detail from one of those maps, the one for Paris:


I offer this detail because I can relay a story Dean Huttenlocher shared with Cornell alumni at an event last week in Bellevue: the photo of the Eiffel Tower taken at the bottom, just to the left of the Musée d'Orsay, represents the canonical view of the landmark for American tourists; whereas the image labelled "Tour Eiffel," just below the image of the tower shot from Trocadéro, represents the canonical view as determined by residents of France. Apparently, French people take as given that one must always cross the river to get a proper picture of the tower. (My daughter and I are debating this evening what this might mean, culturally.)

How do the Cornelleans determine which image is the most representative?

"[W]e pose canonical image selection as a graph problem. We construct a graph in which each node represents a photo and between each pair of nodes is an edge with the weight indicating the degree of visual similarity between the two photos. Our goal is then to find a tightly-connected cluster of photos that are highly similar. To do this we use a spectral clustering technique that partitions the nodes of the graph using the second eigenvector of the graph's Laplacian matrix. Finally, we choose as the canonical image for each cluster the one corresponding to the node with the largest weighted degree."

Okay, so I don't know what that means. But I gotta give Daniel Carleton, Bruce Roberts and certain of my other readers something more to chew on from time to time! (And besides, the words have dimension and weight, like silver coins in your palm.)

Coming back full circle: I can't dispute Chris's point about university computer science departments, in general. At Dean Huttenlocher's talk last week, he also suggested that change comes slowly to academic disciplines. But at Cornell, the Computer Science Department "co-sponsor[s] a major in Information Science, Systems, and Technology in Engineering and a major in Information Science in Arts & Sciences and Agriculture & Life Sciences." You can get a degree in anything at that school, practically.

Curious Phrasing: President's Proposed Bank Tax to Apply to "Covered Liabilities"

I don't completely understand how the Financial Crisis Responsibility Fee proposed by President Obama would work, if implemented. But I wonder if a phrase used to describe how it will be implemented -- the phrase, "covered liabilities" -- might radiate with an unwitting acknowledgment.

Here's an image downloaded from the US Treasury website, provided as an example of how the new tax might work:

News Why would one call the net amount to be subject to the tax the "covered liabilities?" Is it because, in the policy-making back rooms of the Treasury, there emerged an intellectual rationale for a fee that would in effect be a kind of insurance premium, to cover the risk of the government's exposure to bank liabilities that are not already insured by the FDIC? Note that the tax is not to be imposed on amounts already assessed by the FDIC for insured deposits (this is indicated in example at the line, "minus $500 billion in Assessed Deposits"). 

I get that the public-facing, political rationale for the tax is to "get our money back," and perhaps speed up the previously-set TARP repayment schedule. To the immediate industry reaction that this tax will burden bank customers and shareholders, the President was quoted as telling the banks,"I'd urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or fellow citizens with the bill, but by rolling back bonuses for top earners and executives."

But I wonder if the phrase "covered liabilities" signifies something besides the exposure of these amounts to tax. Might the proposal be rooted in an acknowledgment, within the policy-making bowels of government, that some institutions are still yet "too big to fail," that the government is still exposed to the risk of additional bailouts?

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