Washington State to Regulate Fund Managers

The world is changing for venture funds and similar funds in Washington State, and not necessarily for the better.  It used to be the case that managers of venture or other private funds did not need to file anything with the SEC or state securities regulators (other than Forms D incident to their fundraisings).  Dodd-Frank changed all that – but provided that investment advisers solely to venture capital or other small private funds may be exempt (based on Congress’ belief that these funds posed no systemic risk to the nationwide financial system).

There are now SEC regulations that define the new exemptions for the managers of venture funds (discussed in more detail here) and for the managers of private funds with less than $150M management (discussed in more detail here).  Even if exempt, however, managers of venture funds and private funds with AUM of less than $150M now must publicly report certain high-level information, which becomes publicly available.  For example, here is the exempt reporting adviser Form ADV for Union Square Ventures.

These rules settled out a few years ago.  Right now, the bigger issue is with state regulators.  State regulatory regimes need to be updated in order to conform to Dodd-Frank.  The North American Securities Administrators Association (NASAA) created model rules for state regulators to follow, which adopted the same venture capital and private fund exemptions.  Many states, including California, have now adopted the NASAA model rules.

In Washington State, the Securities Division (Division) of the Washington State Department of Financial Institutions (DFI) is in the process of updating its rules to conform to Dodd-Frank.  Unfortunately for fund managers, DFI does not believe the SEC and NASAA Model Rules are enough regulation.  Their proposed rules provide that, if you don’t fall within the definition of a “venture capital fund” (as defined in the federal rule), you will generally have to register as an investment advisor in Washington State unless you are managing funds comprised only of super accredited investors (think $5M instead of $1M for individuals) – known as “qualified purchasers”.  This is going to create significant problems for funds that don’t fit the narrow confines of the “venture capital fund” definition (below).  We are actively trying to get these proposed rules changed before they are adopted, urging conformity with the federal rules, but so far the DFI has not agreed to make this change.

Here is more information on the Washington State proposed rules, from the DFI website:

RULEMAKING: INVESTMENT ADVISER RULES

The Securities Division is soliciting comments on proposed amendments to the investment adviser rules set forth in Chapter 460-24A WAC.

The proposed amendments would update various provisions of the investment adviser rules, including the rules regarding financial reporting requirements, custody, books and records, and unethical practices. The proposed amendments would add new rule sections addressing proxy voting, advisory contracts, and compliance procedures and practices, and would create exemptions from registration for certain private fund advisers and venture capital fund advisers. Many of these changes would make Washington’s rules consistent with current federal law and NASAA model rules.

Please find a copy of the proposed rule making notice and the text of the proposed rules below.

PUBLIC HEARING – MAY 21, 2013 – 1 PM

A hearing will be held on the proposed rulemaking on May 21, 2013 at 1:00 pm at the Department of Financial Institutions office in Tumwater, Washington. See:Directions to DFI.

 For more information on Kirkland Business Law, consider contacting a Kirkland Business Attorney.

Who Owns the “Dunk City” Trademark?

After hiring away Florida Gulf Coast head coach Andy Enfield Monday night with a hefty sum of cash, USC also pirated the Ft. Myers school’s now-famous “Dunk City” moniker.

“Please welcome Andy Enfield to the Trojan family as the new head coach of USC hoops,” went the Trojan tweet Monday. It was tagged #DunkCityUSC.

Talk about adding insult to injury. First they take FGCU’s coach. Then they take FGCU’s now famous slogan.

According to FGCU athletic director Ken Kavanagh, this is technical foul.

“There’s only one Dunk City USA.” Kavanagh said in a news conference Tuesday. “It’s here in Southwest Florida. I think it’s totally inappropriate for USC to do that. We would not copy somebody else’s well-earned scenario, and I will be sure to let USC know that.”

USC’s Athletic Director Pat Haden already responded, however, by saying, ”They have a right [to be upset],” Haden told ESPN on Wednesday afternoon. “That’s their moniker. They made it up. We’re going to create our own moniker. Somebody will figure it out with the way we play next year. I don’t think we should [use it]. We should respect their wishes.”

So who actually owns the trademark to “Dunk City”? No one at this point. However, Jennifer Psait from Fort Myers applied for an “intent to use” application (which we’ve discussed on this blog before) on March 25th under the trademark classification IC025 and listed “shirts and hats” as sub-classifications. I’ve heard rumors that this person is a music producer from Fort Myers but nothing is confirmed at this point.

Should FGCU be entitled to this mark? From a legal perspective, they were likely the first to “use in commerce” the phrase. However, it is more likely that no individual/school/entity should be entitled to trademark rights in this mark because it is a pretty generic term.

“I can’t imagine litigation over this,” said Michael McCann, who is the legal expert for Sports Illustrated. “To me this is a fairly generic expression. This is different from Johnny Manziel or Tim Tebow – an individual person. Here, it’s a style of play, success. I think the nexus between that expression and [Enfield] is weaker than Tebowing or Linsanity. This is something that should not be resolved in court.”

I agree with McCann and feel that there is no reason for the courts to be involved in this matter. Furthermore, it is more than likely that Jennifer Psait abandons the trademark application after FGCU applies some heat. Alternatively, once the mark is put in front of an examining attorney at the USPTO, it is likely that the application will be denied for being “generic”. As discussed previously on this blog, generic and descriptive marks (which haven’t received secondary meaning) do not receive trademark protection. This is the type of mark that likely would fall into the generic or descriptive category.

Who do you think should get rights to the phrase “Dunk City”? I would love to hear your thoughts.

For more information on Seattle Trademark law, consider contacting a Seattle Trademark Attorney.

LLC Capital Calls

Doug Batey of Stoel Rives writes a phenomenal blog regarding all things LLC. He wrote an article recently about a case coming out of Oregon in which LLC Members had a dispute over the legitimacy of requiring capital calls that allegedly benefit individual members. Below is a snippet of the article and the rest of it can be seen here.

The link between capital contributions to an LLC and the LLC’s purpose is usually clear. The contributions from the members support the LLC’s purpose and are in proportion to the members’ interests in the LLC. Similarly, the increase in value of the LLC’s assets is shared among the members in proportion to their interests. But in a recent case before the Oregon Court of Appeals, one member objected when the required capital contributions were used to directly benefit individual members, as well as benefiting the LLC. Awbrey Towers, LLC v. Western Radio Servs., Inc.,278 P.3d 44 (Or. Ct. App. 2012).

Background. Awbrey Towers, LLC was formed in 2000 to purchase a 19-acre antenna site located on Awbrey Butte in Bend, Oregon. The LLC’s operating agreement stated that its purpose was to “[a]cquire, own and operate an antenna site on Awbrey Butte in Bend, Oregon” and to “[e]ngage in such other activities as are related or incidental to the foregoing purpose and such additional purposes as may be determined from time to time by the Members.” Id. at 46 (brackets in original). Each of the seven LLC members owned a communication tower on the site and leased the land for its tower from the LLC. Each apparently held a one-seventh interest in the LLC.

For more information about Small Business Law in Bellevue, consider contacting a Bellevue Small Business Attorney.

Seattle Business Planning Tax Strategies

 

This is the first post of our series on Business Planning Strategies for corporations.

Internal Revenue Code Section 280A(g) provides an opportunity to reduce business income and also reduce individual income and payroll taxes. Under this provision of the Code, individual homeowners may rent out their personal residence for up to 14 days annually and pay no taxes on the rental income. And when the home is rented out for business, the strategy becomes even more effective.  For example,  hypothetical Company X  will receive a deduction for the rental payments paid to its employee/owner, even while the rental payments are non-taxable to that employee.

The Seattle residence can be rented to the business as long as the residence is used for a business purpose. A clear example would be to conduct a shareholder meeting at the owner’s residence. All corporations are required by state law to hold at least one shareholder’s meeting annually, at a minimum. Indeed, most businesses need to hold so-called “special meetings” of the board of directors (or shareholders) on a frequent and periodic basis. Thus, Company X can conduct monthly meetings to discuss ongoing operations of the Company.

In most circumstances, corporations rent space at a local hotel or conference center for a meeting of board memebrs or shareholders. They pay the hotel a reasonable amount of rent – a figure typically determined by local market conditions. The payment is deductible by the company as an ordinary and necessary business expense under section 162. However, instead of renting the meeting space at a local hotel or other facility, Seattle Business X could rent owner’s home for the meeting. Provided all the conditions of the Code are met, Section 280A(g) provides that the rent received by owner is not taxable.

Please note that a shareholder meeting is only a single example of a valid business purpose. Depending on the circumstances, other valid business purposes may include meetings with CPAs, attorneys, insurance agents, company picnics, holiday parties, or short-term storage of company equipment.

So for your next shareholders meeting, consider renting an employee’s home (preferably one with a nice view) and enjoy the tax deductions.

For more information about Small Business Law in Seattle, consider contacting a Seattle Business Attorney.

Seattle Small Business Exit Mistakes

The Wall Street Journal had a great article recently that discussed common mistakes made by owners of small businesses who are hoping to retire soon.  The article explained that too many owners aren’t prepared for the day when they’ll need to cash out, whether that is because they haven’t figured out what the business is worth or they have ignored the tax benefits of planning ahead. Below is a summary of the main issues cited by financial advisers and exit-planning specialists that  retiring small business owners will be faced with:

1. Creating a Business That’s Too Dependent on the Owner - Oftentimes the business owner has a difficult time delegating tasks and when it comes time to sell, purchasers perceive the business to be riskier since the owner is the company and may not run smoothly without him/her.
2. Ignoring the Tax Benefits of Planning Ahead - Failing to plan for gift taxes in particular can leave the recipient with a large tax bill.
3. Incorrectly Valuing the Business - Many business owners are overly optimistic about the value of their businesses and plan their retirement based on those figures.
4. Rushing to Accept a Rich Number - The highest dollar amount may not be the best offer. Other things to consider are due diligence requirements, how employees will be treated and how the purchaser will finance the deal.
5. Hiring Your Brother-In-Law to Do the Deal - It just makes things complicated, especially when they don’t know what they are doing.
6. Underestimating the Emotional Impact of Selling a Business - Owners are emotionally tied to their businesses and when it comes time to sell, they often react irrationally. The key fix for this problem is to map out an exit strategy long in advance.

A little planning can go a long way for your Seattle small business so make sure to take time to consult with an expert.

For more information about Small Business Law in Seattle, consider contacting a Seattle Small Business Attorney.

Punctuation in Trademarks

A client of mine recently asked about the affect punctuation has on trademark registration/rights (such as “Yahoo! or “Guess?”). In order to answer this question, it is important to understand what we call in trademark law as the “spectrum of distinctiveness.”  One of the factors used in determining the strength and distinctivenss of a mark is the meaning of the words, something that the punctuation is unlikely to affect.

This is also true for the way the mark sounds. For example, Shake ‘n Bake isn’t any stronger than Shake and Bake because the two sound nearly identical. A TTAB ruling said that “the addition of punctuation marks to a descriptive term would not ordinarily change the term into a non-descriptive one.” However, the TTAB has acknowledged that punctuation in an acronym “lends a visual distinction” which can be helpful to distinguish your mark from others.

Thus, it is unlikely that adding punctuation to a mark will assist the owner in obtaining trademark registration.

For more information on Seattle Trademark law, consider contacting a Seattle Trademark Attorney.

Seattle Sonics Trademarks: Who Owns Them?

The Sonics are almost back and I couldn’t be more excited. I grew up watching Shawn Kemp and Gary Payton play in the Key Arena and I was heartbroken when the team was stolen from us. With all the excitement around the team coming back, I’ve almost purchased several Sonics items to get ready for the season. However, the trademark lawyer in me got to thinking about who owns the Sonic trademarks at this point in time and who would be benefitting from my purchase.

The answer: Most likely Clay Bennett. Ugh.

When Clay Bennett and his group stole the Sonics from Seattle, they also took along 28 of our trademarks, 18 of which are still “live”, meaning they have not been abandoned. Now, the good news is that in an agreement with the city of Seattle, Clay Bennett’s group did agree that if Seattle did get an NBA team back in Seattle, they would transfer the trademarks back to the current team owner for free. The bad news, however, is that the sale of the team has not been finalized yet so at this point it is likely that any sale of Sonics gear is profiting Clay Bennett’s group. The reason that we are not 100% who is profiting from the sale of Sonics gear is that there could be a private agreement between Bennett and the league or the Hansen group.

Additionally, it is worth noting that NBA teams participate in a revenue sharing agreement in which teams share roughly 50% of their annual total revenue with the league, which is then allocated amont the teams thereafter (See here for a more lengthy discussion). Thus, that Sonics gear you have been buying is  fattening the pocket of the league and Bennett.

So the moral of the story is this: Until the sale of the Sonics is finalized, hold off on purchasing those shirts, hats and jerseys bearing the Sonics name and/or logo. Let’s keep the cash in Seattle.

For more information on Trademark law in Bellevue, Kirkland and Redmond, consider contacting a Bellevue, Kirkland and Redmond Trademark Attorney.