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I am currently consulting at a small startup technology company. Last
year I swapped a month's earnings for shares in the company. I want
to repeat the same deal again this year. However, we now have a new
CFO, and he is concerned that such a swap could harm the company's
prospects for an IPO down the road, especially since I am not an
"accredited investor" by SEC rules. My questions are:
1) Did the company make a mistake in making the swap back last
summer? I have the share certificate, so it's a done deal (but see
question 5 below), but will the company have problems down the road as
a result?
2) Since they did this once already, is there really any harm in them
doing it again -- assuming, which may not be the case, that there was
any problem in the first case?
3) I checked the SEC site for info on "accredited investors". I
thought it might involve a test of some kind, but all it really seems
to say is that you have to be rich enough, and you are accredited.
I'm not rich. Is there any other way I can be accredited?
4) When we did the deal last summer, they would not let me actually
pay chash for shares, they insisted that I had to bill for my hours
directly in terms of payment in shares. Was that their clever way of
circumventing the "accredited investor" issue? If so, I can let the
new CFO know that that is the trick involved.
5) The company is currently having it's annual audit, and the new CFO
mentioned that the sale of shares to me is one of the transactions
they would review. If they find any kind of problem with it, is there
any legal way they could compel me to return the shares?
Needless-to-say, I don't want to give the shares back, even if they
pay me the full dollar amount for which they were purchased.
Basically, I just want to know what I'm dealing with here, and if the
new CFO's concerns are at all warranted. Any other comments or links
to relevant data would be appreciated. One additional item of info:
The sums we are taking about here are fairly small, a few thousand
dollars for a few thousands shares.
Thanks in advance for all replies.
CJ
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I am currently consulting at a small startup technology company. Last
year I swapped a month's earnings for shares in the company. I want
to repeat the same deal again this year. However, we now have a new
CFO, and he is concerned that such a swap could harm the company's
prospects for an IPO down the road, especially since I am not an
"accredited investor" by SEC rules. My questions are:
1) Did the company make a mistake in making the swap back last
summer? I have the share certificate, so it's a done deal (but see
question 5 below), but will the company have problems down the road as
a result?
In order to legally issue you stock, the company must either register the
offering (that's very expensive) or find an exemption from registration
(federal) and qualification (state). There are lots of exemptions.
"Accredited Investor" is a concept that applies to more than one exemption.
But the exemption which applies to dealing with someone the company has a
business relationship with, and the one which applies to tiny deals,
probably apply here, and "Accredited Investor" is irelevant. I suspect that
what the CFO is saying is: "We don't want to give you any more stock."
Other than finding an exemption, there is no problem with the company giving
you stock in exchange for forgiveness of debt, IF the company is properly
organized and went through the proper steps. Naturally, you gave us no
facts on those issues, because you wouldn't be in a position to know.
2) Since they did this once already, is there really any harm in them
doing it again -- assuming, which may not be the case, that there was
any problem in the first case?
If they issued stock improperly, then yes, there would be harm in doing it
again.
3) I checked the SEC site for info on "accredited investors". I
thought it might involve a test of some kind, but all it really seems
to say is that you have to be rich enough, and you are accredited.
I'm not rich. Is there any other way I can be accredited?
Getting rich is only part of the criteria. But regardless, there is no
other way than meeting the criteria.
4) When we did the deal last summer, they would not let me actually
pay chash for shares, they insisted that I had to bill for my hours
directly in terms of payment in shares. Was that their clever way of
circumventing the "accredited investor" issue?
Yes. That procedure established a debt, and established that the company
has business dealings with you apart from the stock transaction. They were
using that exemption.
If so, I can let the
new CFO know that that is the trick involved.
There is nothing wrong with telling the company about the exemptions, but
I'm sure they already know, and simply don't want to give you any more
stock.
5) The company is currently having it's annual audit, and the new CFO
mentioned that the sale of shares to me is one of the transactions
they would review. If they find any kind of problem with it, is there
any legal way they could compel me to return the shares?
It's possible. But more likely they would use the audit to bluff and bully
you into surrendering the stock. The true reason probably will be that they
want to undo the deal even though it was legal. In the unlikely event they
have good grounds to call the transaction illegal, you can safely force them
to actually take the unplesant steps, because you are not facing any
liability even if the company violated the law with an improper sale. It's
their problem, not yours.
McGyver
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"McGyver" <Greyprof@msn.com> wrote in message news:<c1gasn$1gjkbm$1@ID-75195.news.uni-berlin.de>...
In order to legally issue you stock, the company must either register the
offering (that's very expensive) or find an exemption from registration
(federal) and qualification (state). There are lots of exemptions.
"Accredited Investor" is a concept that applies to more than one exemption.
But the exemption which applies to dealing with someone the company has a
business relationship with, and the one which applies to tiny deals,
probably apply here, and "Accredited Investor" is irelevant. I suspect that
what the CFO is saying is: "We don't want to give you any more stock."
Possibly -- except he specifically stated in his e-mail that he was
willing to revisit the issue in a few months. What happened was, I
had just broached the subject of repeating the deal -- that is, just
broached it with the old CFO -- when, a week later, that CFO leaves
the company, and a new guy comes in. So, our company is a startup,
the new CFO has a lot of stuff on his plate, the company is
experiencing other transitions, etc. Possibly the new CFO is blowing
me off, tactfully; but equally possible, he's just a new guy on the
job, and wants to get his bearings, and help the company make certain
other transitions, before turning his attention to what is, from his
perspective, a relatively minor issue. In other words, maybe he
really is sincere, and will consider the deal come summer time.
Other than finding an exemption, there is no problem with the company giving
you stock in exchange for forgiveness of debt, IF the company is properly
organized and went through the proper steps. Naturally, you gave us no
facts on those issues, because you wouldn't be in a position to know.
Well, technically, no, I'm not in a position to "know", because I
haven't actually looked at their paperwork. But this is not a "three
guys in a garage" start-up. I want to be deliberately vague, because
I do not want to identify the company. But we've got major staffing,
serious investments in rented office space and lots of expensive
equipment floating around, a full suite of executives, several
significant patents, with others pending. I'd be real surprised if
the company was not properly organized.
4) When we did the deal last summer, they would not let me actually
pay chash for shares, they insisted that I had to bill for my hours
directly in terms of payment in shares. Was that their clever way of
circumventing the "accredited investor" issue?
Yes. That procedure established a debt, and established that the company
has business dealings with you apart from the stock transaction. They were
using that exemption.
There is nothing wrong with telling the company about the exemptions, but
I'm sure they already know, and simply don't want to give you any more
stock.
Well, again, you may be correct, but I'm hoping the new CFO was being
straight with me, and that this is simply new territory for him. So,
hopefully, once he is settled in, we can still pull this off down the
road.
5) The company is currently having it's annual audit, and the new CFO
mentioned that the sale of shares to me is one of the transactions
they would review. If they find any kind of problem with it, is there
any legal way they could compel me to return the shares?
It's possible. But more likely they would use the audit to bluff and bully
you into surrendering the stock. The true reason probably will be that they
want to undo the deal even though it was legal. In the unlikely event they
have good grounds to call the transaction illegal, you can safely force them
to actually take the unplesant steps, because you are not facing any
liability even if the company violated the law with an improper sale. It's
their problem, not yours.
Again, hopefully, it won't come to that. I'll have to formally
confirm with a paid attorney, but if what you see is right, my
ownership of the shares is legit, and they won't even try to take them
back.
Regards,
CJ
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