28 posts categorized "June 2013"

"I much fear that the spirit which you have aided to infuse into the Army . . . will now turn upon you."

As I've mentioned here recently, I often listen to re-broadcasts of the Sunday morning political talk shows on C-SPAN (you get to skip all the commercials that way).

001rThis morning, while waiting for the Meet the Press to start, I heard a snippet of a speech by a military historian - he teaches, I think, at the Command and General Staff College, an institution at which my father studied when I was in 8th Grade, attending the General George S. Patton Jr. Junior High School - who told the story of the insubordination of one General John Hooker.

The historian's name is Ethan Rafuse, and he framed this story from the Civil War by transporting us to the interview at the White House where the head of the Army of the Potomac, a General Burnside, asked for President Lincoln's support of Burnside's decision to sack Hooker.

Lincoln demurred. Professor Rafuse let us know this by reading from the famous letter that the President sent Hooker, not simply to tell him that he hadn't been sacked, but instead that he had been promoted and given Burnside's job.

I think this letter is famous for what Lincoln says in it about risking dictatorship in exchange for victories on the battlefield, but that's not what interests me. Here's the part that I think speaks volumes of Lincoln's character:

"I have placed you at the head of the Army of the Potomac. Of course I have done this upon what appear to me to be sufficient reasons. And yet I think it best for you to know that there are some things in regard to which, I am not quite satisfied with you. . . . I think that during Gen. Burnside's command of the Army, you have taken counsel of your ambition, and thwarted him as much as you could, in which you did a great wrong to the country . . . . I much fear that the spirit which you have aided to infuse into the Army, of criticising their Commander, and withholding confidence from him, will now turn upon you. I shall assist you as far as I can, to put it down."

Doug Cornelius on the accredited investor definition post-DOMA

Important post this week from Doug Cornelius, weighing in on what happens to the accredited investor definition, following the Windsor case: "DOMA, the SEC, and the Accredited Investor."

Doug's core analysis is that the SEC need do nothing to extend the benefits of the marital accredited investor standard to persons in same sex-marriages:

"The US Supreme Court decided that Section 3 of the Defense of Marriage Act is unconstitutional. Therefore, the accredited investor definition’s use of the word 'spouse' is no longer restricted by DOMA to a person of the opposite sex who is a husband or a wife.

"In the states that allow same-sex marriage, an issuer should now be able to allow a same-sex married couple to combine their income to meet the standard. I don’t think the SEC needs to take any action for this to happen."

Doug also takes up the question of whether persons in civil unions in states that designate the participants as "spouses" will be spouses for purposes of the SEC rule. He references an Illinois statute that just so designates.

6a01156e3d83cb970c0192abcdde0d970d-800wiLastly, Doug wonders if the question of civil union partnerships might be dealt with in the SEC's overdue rulemaking (it's going to happen sometime, isn't it?) to lift the ban on general solicitation in Rule 506 deals limited to accredited investors.

Part of that rulemaking involves setting heightened standards for accredited investor "verification."

I had not thought about this before Doug's post, but is it possible that "verification" will require issuers to look into the scope of a given investor's domestic relationship? Crazy. More reason that the SEC should interpret "spouse" more broadly than the Supreme Court's Windsor holding requires!

Leave it to Doug to identify new dots by connecting them.

Image: Arthur T. Bens / Flickr.

Sexual orientation and angel investing

Here's where angel investing stands after the decision of the US Supreme Court yesterday in United States v. Windsor.

Sexual orientation is less relevant today for angel investing than it was on Tuesday.


This is because the Court struck down Section 3 of the federal Defense of Marriage Act (DOMA) as unconstitutional.

But, unfortunately, sexual orientation remains relevant to whether one can qualify to be an angel investor. This is because the Court's ruling appears to eliminate sexual orientation discrimination only with respect to angels who are legally married. It yet appears that individuals in same-sex relationships who are not allowed to marry, may need to meet a higher standard than do individuals who are legally married.

Doesn't the SEC, in light of the Court's decision, need to revisit Rule 501 of Regulation D before persons in same-sex marriages are treated the same way as persons in heterosexual marriages? I don't think so. I'm hearing and appreciate the media stories about how it may take some time for the executive branch of the federal government to fix various rules and policies in order to bring them into conformity with the Court's ruling, but, the Court's ruling on DOMA is self-executing with respect to the accredited investor definition for anyone who is married, regardless of gender.

"Spouse" under Rule 501 of Reg D now means any person with whom the potential accredited investor is married, full stop. The attenuated, mean-spirited and discriminatory gloss of DOMA previously overlayed on the definition of “spouse” is now gone.

Less clear, however, is whether couples in civil unions are "spouses" to one another. For someone who is part of a couple who wish to be married, but state law doesn't permit them to be, he or she may yet be shut out of the ability to combine income or net worth to meet what is effectively a lower accredited investor standard for married (now, regardless of gender) couples.

Photo: Ted Eytan / Flickr.

Liveblogging Supreme Court same-sex marriage cases: What today's rulings mean for angel investing and the startup financing ecosystem

Go to Scotusblog and elsewhere for discussion of the broader societal ramifications of the US Supreme Court's decisions this morning on same-sex marriage. The picture is from an @Scotusblog tweet.

BNryXjpCEAMbLs7On this blog, we want to focus on what the decision regarding DOMA likely means for the accredited investor definition under Rule 501 of Regulation D.

The decision is in. Amy Howe on the Scotusblog live blog reports, "DOMA is unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment."

Click here for the opinion.

More from Howe: "In determining whether a law is motivated by improper animus or purpose, discriminations of an unusual character especially require careful consideration. DOMA cannot survive under these principles." I think she is paraphrasing from page 20 of the opinion of the Court.

Here is the section of DOMA (the Defense of Marriage Act) that is being struck down:

“In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.” 1 U. S. C. §7.

 Here's how Justice Kennedy's opinion for the 5-4 majority describes the impact of the above quoted section of DOMA:

"The definitional provision does not by its terms forbid States from enacting laws permitting same-sex marriages or civil unions or providing state benefits to residents in that status. The enactment’s comprehensive definition of marriage for purposes of all federal statutes and other regulations or directives covered by its terms, however, does control over 1,000 federal laws in which marital or spousal status is addressed as a matter of federal law."

And here's more from Kennedy's opinion (pages 15-16) on the impact DOMA had:

"it enacts a directive applicable to over 1,000 federal statutes and the whole realm of federal regulations. And its operation is directed to a class of persons that the laws of New York, and of 11 other States, have sought to protect."

Scotusblog is reporting that references in dissenting opinions on DOMA indicate that the Court will dismiss the California Proposition 8 case on standing. To be clear, the opinion on the Prop 8 case has NOT been released yet, but that would appear to be coming next, after dissent(s) are read aloud from the bench, apparently, in the DOMA case.

It is now 7:23 AM Pacific. I guess the proper reference, since the Court is on the east coast, should be 10:23 AM Eastern.

Here's how Howe of Scotusblog summarizes, for non-lawyers, the upshot of the case: "What this means, in plain terms, is that same-sex couples who are legally married will be entitled to equal treatment under federal law-- with regard to, for example, income taxes and Social Security benefits."

My friend and former law firm colleague David Ziff has tweeted, "The federal govt will have to re-work all their regulations to make benefits available to same sex couples." I'm sure that must be the case but I don't think that is true with regard to Rule 501 of Regulation D.

Rule 501 reads in pertinent part,

"(a) Accredited investor. Accredited investor shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:

. . .

"(5) Any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1,000,000 [excluding the person's primary residence]. . . .

"(6) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year[.]"

Emphasis added.

So I think the implications of the Court's ruling on DOMA is self-executing with respect to who is and isn't allowed to participate in angel investing. "Spouse" now means any person with whom the potential accredited investor is married, regardless of gender. The attenuated, discriminatory meaning imposed by DOMA is now gone.

Not so clear, however, that couples in civil unions are "spouses" to one another. For someone who is part of a couple who wish to be married, but state law doesn't permit them to be, he or she may yet be shut out of the ability to combine income or net worth to meet what is effectively a lower accredited investor standard for married (now, regardless of gender) couples.

The link to Rule 501 above is to the offical language of the rules. This summary of the accredited investor definition on the SEC website is friendlier.

Turning back to Kennedy's opinion striking down DOMA, there as a lot of discussion and citation on pages 16-18 about how marriage is the province of state law, not federal law, and how DOMA abrogated that precept.

From pages 20-21 of the opinion:

"DOMA’s unusual deviation from the usual tradition of recognizing and accepting state definitions of marriage here operates to deprive same-sex couples of the benefits and responsibilities that come with the federal recognition of their marriages. This is strong evidence of a law having the purpose and effect of disapproval of that class. The avowed purpose and practical effect of the law here in question are to impose a disadvantage, a separate status, and so a stigma upon all who enter into same-sex marriages made lawful by the unquestioned authority of the States."

The argument here I think could be applied or adapted in reasoning that persons in civil unions, designated beneficiary arrangments, and other state law relationships designed to afford couples the economic benefits of marriage, should also be treated as "spouses" for purposes of the accredited investor standard. But no question Kennedy uses the word "marriage."

Here's another quote from Kennedy's opinion, one that helps put the implications of the prior DOMA-discrimination in an angel group context, I think:

"By creating two contradictory marriage regimes within the same State, DOMA forces same-sex couples to live as married for the purpose of state law but unmarried for the purpose of federal law, thus diminishing the stability and predictability of basic personal relations the State has found it proper to acknowledge and protect."

In other words, under DOMA, before it was struck down, an angel in a given state who was married might well think she or he would be able to meet the same standard to be qualified as an angel, as would any other married person in the angel group. But, because of DOMA, before it was struck down, she or he might in fact had to have met a higher standard than other members of the angel group who were in marriages that the federal government called out as not legitimate.

So DOMA is unconstitutional, the Court holds, "as a deprivation of the liberty of the person protected by the Fifth Amendment." 

Getting back to the limits of the ruling, the word marriage, the penultimate sentence of the Court's opinion probably settles it: "This opinion and its holding are confined to . . . lawful marriages."

That's probably enough for this morning. Signing off at 11:15 AM, Eastern!

Data trolls

What if the term "data troll" caught currency and captured public imagination?

The NSA would be a data troll, of course.

But, if and as it came to be believed that the government grossly under-exploits the wealth of data it collects, its trolling at the point of application might seem trivial compared to the uses to which players in the interactive advertising media complex (something Eisenhower did not foresee) put big data.

It's one thing to be surveilled; it's another to have your behavior tracked for the purpose of influencing your future behavior.

Big data in corporate hands could become the means to cycle through ever more effective ways to enforce compliance with ever more onerous commercial terms. Resistance is not futile; it's a breach of contract and grounds for denial of service. The Singularity achieved by sucking from each human all traces of personality.

Kellycol0906008Imagine if, back when the telephone was a more important means of communication than it is today, laws and norms had not trended toward a cultural expectation that phone calls might be private. Also suppose that software was applied to analyze the content of those calls (readers here are sophisticated enough to understand that "content" includes both what is said and where, when and how it is routed).

There would be "benefits" to such automated wiretapping, just as there are to mailtapping. You might be offered coupons for goods and services that are better tailored to your conversations. The price of goods sold to you via online stores might be optimized. Anything that might be done by analyzing the data inherent in your email, could be done with your phone calls equally well.

A person who grew up with different expectations for phone calls than for online communications, she or he might take to the term, "data troll."

I'm gonna make you a EULA you can't refuse

Getting near the end of the new Lanier book, Who Owns the Future.

Not sure I am going to have much more to post about the book than I've posted to date. The themes have been there throughout and there hasn't been an arc to the argument (my "thought collage" description remains apt).

But I have to share, by quoting, some text from Lanier about EULAs. This from page 314: 

"The online space feels a little creepier, a little less under individual control, every time a user is asked to acquiesce to a bunch of fine print no one reads. The reason no one reads the fine print is that even if you do take the time, there will soon be a new revision, and you'd have to make reading the stupid EULAs a full-time job. . . .

"The reason people click 'yes' is not that they understand what they're doing, but that it is the only viable option other than boycotting a company in general, which is getting harder to do. It's yet another example of the way digital modernity resembles soft blackmail."

Information asymmetry

Really cool to see this tweet today from Naval Ravikant of AngelList, encouraging startup employees and prospective employees who are offered stock options to ask questions.

To get at the information needed to assess the potential value of those options, Naval says, in a companion tweet to the one pictured: "Ask about Liquidation Preference, Exercise Price & Terms, Fully Diluted Shares & Company Repurchase Right[.]"

6a01156e3d83cb970c01901dc8b8fe970b-580wiTo that list, I would add, ask also about whether the company has a management incentive, or carveout, plan in place. These plans are often set up when the common stock of a company is under water.

And here's an earlier post I've written on the subject, Being Equitable with Employee Equity. It has an 8 point checklist that is similar to Naval's.

And here's a recent post from Joe Wallin wrote about what to do when getting ready to exercise a stock option.

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