Crowdfunding limits and lawsuits waiting to happen concerning video content are just a few items to consider in a changing legal landscape.

Crowdfunding limits and lawsuits waiting to happen concerning video content are just a few items to consider in a changing legal landscape.

Business law is a moving target. It changes as courts and regulatory agencies issue new rulings, or as lawmakers enact changes. Central Ohio lawyers answer five key questions to help keep business owners current.

Question #1

Did they take the crowd out of crowdfunding?

Crowdfunding became an exciting option for startups seeking early capital. Now, new Securities and Exchange Commission rules seek to protect small investors from unscrupulous operators, but they limit fundraising and advertising while adding new disclosure burdens.

“When you do crowdfunding, you do it primarily on the Internet, so its safety depends on disclosure and the quality of the people you’re dealing with,” says Andrew Federico, of counsel with Carlile Patchen & Murphy. To protect Internet investors, SEC-required disclosures must include names of directors, officers and 20-percent shareholders. Financial statements must be reviewed by a CPA when raising $100,000 to $500,000, and audited when raising more than $500,000. It’s hard to avoid at least 20 hours of costly legal and accounting fees, Federico says.

The SEC rules limit crowdfunding proceeds to $1 million, and the maximum individual investment is $2,000 for individuals with net worth under $100,000, or 5 percent of their annual income or net worth, whichever is lower. For individuals with incomes and net worth over $100,000, a 10 percent, $100,000 limit applies. The smaller the investment, the more shareholders and mailings you have, Federico says. Meanwhile, crowdfunding portals like Kickstarter, GoFundMe and Indiegogo are still adjusting their prices for the new environment, Federico says.

Chris Hawker, CEO of Trident Design, has worked with crowdfunded products and companies, and he agrees the new SEC rules were “pretty conservative, especially with the million-dollar limit.” Part of the appeal of crowdfunding was the potential for a business to go viral and “win the lottery” with multi-million-dollar proceeds, but that’s no longer the case, he says.

“But the other thing about crowdfunding that needs to be understood is that it’s not just about the money. It’s more about exposure, momentum and market validation,” Hawker says. “If you’re using crowdfunding and trying to get a lot of buzz and your crowdfunded equity quickly sells, you’ve got a strong argument for further venture capital funding or Series A (preferred stock) funding.”

Question #2

Is cyber insurance an asset or liability in M&A?

Ice Miller partner Thomas Pampush has seen the need for cyber-insurance—coverage against cyber fraud, data security breaches and attacks on personal information held by a company—emerge in dramatic ways while discussing a merger or acquisition.

“I have sat in a client room with two business owners, and they have a CFO and another manager,” he recalls. “One company had just received a phishing attack that realistically simulated an email from the president to the CFO to pay an invoice.”

The managers ask back and forth why this invoice came, and the president doesn’t remember sending the email, although it looks very realistic. In this case, they discussed it and avoided paying it. “If the CFO had wired the money, assuming you have coverage at all, you may or may not have coverage, depending on what the insurance says,” Pampush says, since it may not have fulfilled the requirement for two-step authentication before a significant transaction.

That’s why assessing cyber insurance coverage and documenting good policies are essential in mergers, Pampush says. “If you’re the buyer, you need to look at the target company and ask, ‘Are these things in place?’ If you are the seller, and you have these policies in place, the buyers are less likely to question the value of the business.”

That includes any company with confidential data, including patient data in a healthcare setting, credit card numbers or social security numbers.

“Even in the context of M&A work, cyber insurance is a very new product,” Pampush says. “I think many insurance companies are still figuring out how to price it. I’m discussing it actively with clients and the insurers to make sure the coverage is understood and how it applies to your specific business.”

Question #3

Can tabletop drills uncover data security gaps?

The conference room is small, but the key players are there—CEO, CFO, CIO and outside counsel. They learn a hacker has breached a firewall and wrested control of the company’s computers and shut them down. Unless the company pays $20,000 in bitcoins as ransom to the perpetrator, it could be days or weeks before computers function again.

This is a tabletop exercise like several recently conducted with the help of Heather Enlow-Novitsky of Vorys, Sater, Seymour & Pease, often involved in data security issues and managing data intrusion crises.

Attempted cyber attacks are a fact of daily life for most organizations with consumer data. The tabletop drills help companies learn more about how to respond, often uncovering gaps in their crisis planning, Enlow-Novitsky says.

“For example, recently a client didn’t have a representative from shareholder relations present,” she says. “But as we talked through the situation, we realized the client might have a disclosure obligation to the SEC, so we integrated that manager into the crisis plan.”

Other issues can include a company’s limited call center capacity, and negotiating backup call center services in advance is less costly than during an actual emergency, Enlow-Novitsky says. Or, a company might not be aware of required notifications to state and federal authorities in the event of a data breach.

That’s why the Payment Card Industry Data Security Standard requires member companies to plan and test their emergency plans once a year. Evidence of regular drills can help companies limit liability down the line, Enlow-Novitsky says.

“It’s not a question of if—it’s rather when a company is breached. You need to have prepared in a way that will protect you down the road…so you can react rationally and quickly,” Enlow-Novitsky says.

Question #4

How have web accessibility lawsuits changed audio-video content?

Litigation regarding the Americans with Disabilities Act has moved from parking spaces and bathrooms to the Internet marketplace, where Web Content Accessibility Guidelines are the rule.

Audio, video and picture files make today’s online retail and e-commerce sites come alive, but the WCAG rules call for including detailed written descriptions of pictures, written transcripts of audio files and close-captioned video for visually impaired and hearing-impaired shoppers.

“Drive-by” lawsuits on the height of hold bars in bathrooms at a restaurant were once the rule. “But now the online accessibility concern is audio, video and pictorial content that is invisible or silent for individuals who are blind or deaf,” and more than 60 such lawsuits have been filed recently, says Samuel Lillard, of counsel at the Columbus office of Fisher & Phillips.

No government agency really enforces ADA rules, but plaintiffs can sue if they feel barriers exist. Federal rules have long existed for buildings, parking spaces, ramps, pool lifts and Braille signage, but website rules—originally promised by the US Department of Justice in 2010—have yet to be adopted.

Instead, DOJ supported a lawsuit against Harvard and MIT on behalf of disabled people unable to absorb free audio and video content on their websites, including courses and lectures. Then, in March, a California Superior Court ruled that BMI/BND Travelware did not provide access to video and pictorial material for visually impaired luggage shoppers.

The visually impaired typically obtain written material through software that converts written words either into Braille or audible speech like Job Access With Speech, Apple VoiceOver for Mac and NVDA, a free Windows application. For pictures, web designers provide alternative verbal descriptions for the sight-impaired.

“The remedy is not that complicated, and most businesses want to serve this community,” Lillard says. “But the plaintiffs’ bar will be looking for people not paying attention to this.”

Question #5

How are business assets impacted by divorce rulings?

Dividing business assets in a divorce can be costly, especially in light of recent court rulings, advises Ron Petroff, managing partner of Petroff Law Offices.

A 2011 ruling by the 10th District Court of Appeals in Franklin County in Heller v. Heller had made it fairly simple. A spouse was entitled to half of the value of a family business in the division of property or a share of the business’s ongoing revenues in spousal support, but not both. That would be double dipping, the court ruled.

Then Samuel Gallo, an ocular plastic surgeon making about $700,000 a year, used the Heller ruling to seek reduced spousal support last year. The trial court had divided the value of Gallo’s practice, which was based on a “capitalization of earnings” approach, and then included all of Gallo’s income, including distributions from that company, his surgical center, in its calculations for spousal and child support. Gallo lost his double dipping claim and another 10th District case before it, Bohme v. Bohme, counts toward overturning the double-dipping concept, too.

“You can make this easier,” Petroff says. “The first thing is to agree on an expert, stipulate there will be no battle over the value of the business, agree on an evaluation method and then agree that no double-dipping is to occur and that the asset will be redistributed in the property settlement, not the support piece.”

But in high-income divorce cases, each party may hire its own expert and dispute the business evaluation method, says Petroff. Pre-nuptial agreements should exclude business assets and income, as well as future growth, from marital assets. But if your marriage is on shaky ground and you’re thinking of starting a business, just don’t do it, he says.

Mike Mahoney is a freelance writer.