Facecoin

FaceCoin: Facebook to Launch a Private Stablecoin for Whatsapp Users

By: Jon Avidor and Rachel Behar

Facebook is reportedly working on making a digital coin called FaceCoin for users of Whatsapp, a messaging application owned by Facebook. Its value would be derived from that of several different fiat currencies, not only the U.S. dollar.

FaceCoin would allow Whatsapp users to send and receive money, otherwise known as remittances. To put things into perspective, over $69 billion was sent to India in 2017 in remittances according to the World Bank. With over 200 million Whatsapp users, Facebook has access to a groundbreaking number of potential market participants.

FaceCoin would be a stablecoin–  a safe, risk averse cryptocurrency designed to maintain a stable value against an asset of fiat currency. The current problem faced by stablecoins for payment is that since most businesses don’t accept them, stablecoins have to be converted to a fiat currency to be used as a form of payment. Additionally, Basis recently shut down its stablecoin because the company could not prove that its stablecoin was not a security. SEC regulation of stablecoins could make it less attractive to potential buyers.

This is not Facebook’s first venture with virtual currencies. As far back as 2007, Facebook was pursuing patents related to digital currency when it applied for a patent which is likely what led to the creation of Facebook Credits and Facebook Gifts. Facebook began developing its own virtual currency in 2011 with Facebook Credits, then moved onto Facebook Gifts in 2012. Each application was shut down within two years because Facebook reportedly encountered issues with distance and localization problems to allow these payments to be made across borders. In 2015, Facebook Messenger Payments was launched in the U.S. and ultimately expanded to France and the UK in 2017.

Last year, Facebook created a new policy banning ads for ICOs and cryptocurrency. Facebook’s rationale was that they wanted to prevent misleading or deceptive ads. Nearly six months later, Facebook reversed its ban on ads related to cryptocurrency, now requiring advertisers to apply and be pre-approved to advertise cryptocurrencies. In these application, advertisers must disclose certain business information to Facebook, including the company’s name, whether the company has any regulatory certification, or if the company is publicly traded.

 If WhatsApp users have to convert their coins to a fiat currency to make payments, FaceCoin will have a much smaller market of users. Think about the users in third world countries – this would be more of a hassle than a utility. If this issue is still present, Facebook could offer goods and services for purchase. In that case, FaceCoin would be functionally similar to Facebook Credits and would have less utility than if it could be used for remittances.

Potential regulation of FaceCoin as a security is a potential hurdle, but likely not one that Facebook can’t handle. Facebook will have to keep in mind SEC regulations when developing FaceCoin. Facebook has more resources to deal with regulatory obstacles in comparison to smaller companies that have recently failed in releasing stablecoins due to this issue.

Given that Facebook has been under fire for privacy issues for some time now, users may be less keen on using FaceCoin if they don’t trust that their privacy will be protected.

Facebook still has banned ICO ads. It’s understandable to want to block any scam ads, but there are surely compliant ICOs that are blocked from advertising on Facebook. This begs the question – is Facebook trying to cut out ICO competition in light of their own upcoming token offering? If so, is that could potentially mean trouble with the FTC.

If Facebook can overcome regulatory and technological hurdles, FaceCoin could very well open up the cryptocurrency market to millions of people that were not already market participants.

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We would like to thank Rachel Behar for her contribution to this article.

 

security token summit

Steve Masur at Security Token Summit in Bermuda – March 18-19

By: Steve Masur

The first Blockchain Token Association (BTA) Security Token Summit was held in 2018 and started with an open invitation for those involved in the Security Token Industry to come together and make a commitment to work towards building a common framework on the issuance and trading of security tokens. Now, the BTA is grateful to the Government of Bermuda, the Bermuda Business Development Agency (BDA) and Fintech Bermuda for their partnership in the second Security Token Summit taking place March 18-19, 2019. Learn more and register here.

March 18
4:00 pm – 7:30 pm Registration
5:30 pm – 7:30 pm Welcome & Cocktail Reception

March 19
7:30 am Registration Opens
8:00 am Continental Breakfast
8:45 am Summit Welcome / The New Capital Markets Ecosystem Taxonomy
Jeff Pulver, Blockchain Token Association (USA)
Damian Williams, Blockchain Token Association (USA)
9:00 am – 9:30 am Community/”Lighting Round” Introductions 
9:30 am – 9:45 am Bermuda Regulatory Update
Moad Fahmi, Senior Advisor – FinTech, The Bermuda Monetary Authority
9:45 am – 10:30 am International Security Token Regulatory Discussion
Moderated by Joshua Klayman, Founder and Managing Member of Klayman LLC
Keller Fisher, DLT Law Group (USA)
Robin Sosnow, Digital Securities Law Group (USA)
Steve Masur, Masur Griffitts & LLP (USA)
Alan Konevsky, tZERO (USA)
10:30 am – 10:45 am Break
10:45 am – 11:15 am Bermuda Security Token Regulatory Discussion
Moderated by Stan Stalnaker, Chief Strategy Officer, Hub Culture | Ven | Ultra
Chris Garrod, Conyers, Dill & Pearman
Simone Smith-Bean, SBC Corporate Services Limited
Natalie Neto, Walkers
11:15 am – 11:30 am The Industry Need for Interoperability/VTF Overview
Paul Salisbury, BlockchainLabs (New Zealand)
11:30 am – 11:45 pm Fireside Chat with Gabriel Abed, Founder, Bitt (Barbados) with Jeff
Pulver
11:45 AM – 12:05 pm Caribbean Blockchain Alliance: Update
12:05 pm – 12:25 pm tZERO Update TBA, (USA)
12: 30 pm – 1:30 pm Networking/Lunch
1:30 pm – 1:45 pm FinTech Bermuda Update
Major (Ret’d) Allan Wayne B. Smith, ED, MBA, pmsc (Bermuda)
1:45 pm – 3:00 pm Global STO Business Issues (mega session) with contributions from delegates representing: Bermuda, Canada, Mexico, New Zealand, Singapore, United Kingdom, USA
3:00 pm – 3:10 pm Break
3:10 pm – 3:30 pm Spotlight on Bermuda STOs
Matt Gallant, tribeOS (USA)
James Wallace (Canada)

Andres Banuelos, teknei (Mexico)
Joseba Lekube, teknei (Mexico)
3:30 pm – 4:00 pm Fireside Chat Premier of Bermuda, the Hon. E David Burt, JP, MP & Jeff Pulver
4:00 pm – 4:30 pm Presentation of Security Token Protocol Frameworks
Hyperlink Technology (UAE)
Kodebox (South Korea)
4:30 pm – 5:00 pm Show & Tell (Live Demonstrations of Working Solutions in the STO Ecosystem)
Securitize (USA)
Simple ICO (Guatemala)
5:00 pm – 5:30 pm Next Steps in Growing the Industry – Group Discussion
5:30 pm – 6:00 pm Networking/Summit Concludes

March 20 Security Token Unconference

8:00 am – 12:00 pm Security Token Unconference
Topics and Issues will be determined the week of March 18th by the attending community.
8:00 am – 8:30 am Welcome & Claim Your Session
8:30 am – 11:30 am Sessions 
11:30 am – 12:00 pm Wrap Up

This is an International Gathering with Delegates Representing at least 12+ countries including: Bahamas, Barbados, Bermuda, Canada, Costa Rica, Guatemala, Hong Kong, Mexico, New Zealand, Singapore, South Korea, UAE, UK, USA

photo of Roland Rhythm Composer TR-808

Can Roland Claim Trade Dress Protection for its TB-303 and TR-808 Designs?

By: Lauren Mack and Sasha Safavi

Roland, an electronic musical instrument manufacturer, recently registered with the German Patent and Trademark Office the design used in two of their signature products – the TB-303 synthesizer and TR-808 drum machine. Commonly referred to as an “808”, the Roland TR-808 Rhythm Composer was one of the first drum machines to allow rhythms to be programmed into it (rather than only allowing for pre-set beats), leading to its now-iconic status in electronic and hip-hop music. Roland claims trade dress protection in the layout of the keyboard and knobs used on the 303 and the sequence of colored keys present on the 808 as distinctive elements in its German registration, which was granted in January 2019. Music technology website Create Digital Media notes that that the timing of Roland’s applications suggest that Roland may be gearing up to squash lookalike gear in response to the announcement of an 808 clone created by Roland rival Behringer.

Roland recently filed applications for the same designs in the United States, perhaps confirming suspicions of a crackdown on those who copy the distinguishing characteristics of Roland’s products. But how successful will Roland be in seeking trade dress protection in the United States?

What is Trade Dress?

Trade dress is a type of trademark protection that protects products with a distinctive design or packaging from being copied by competitors. The primary purpose of trade dress protection, as with trademark protection of words, logos, sounds, and other signifiers, is to protect consumers from being confused as to the source of a product, as well as to protect business from unfair competition. Protectable trade dress must be distinctive and applies to design elements such as color, shape, and other branding motifs. Trade dress protection may sometimes extend beyond product design and packaging, as was determined in a landmark United States Supreme Court decision where the interior color scheme of a restaurant was found to be inherently distinctive of its brand and worthy of trade dress protection.

In addition to being distinctive, the claimed trade dress must not be a functional element of the underlying product. If an element of the product design or packaging is essential to its purpose or affects the cost or quality of the product, then that element is deemed functional. This is because granting exclusive rights to functional elements would award monopolies to product designers and prohibit competition in the marketplace.

What Does Trade Dress Look Like?

A well-known example of distinctive trade dress is the shape of the classic Coca-Cola bottle – ribbed edges, wide base, narrow top, and a logo slightly higher-than-center, sitting cozy by the hand’s grip. Some of these elements are not unique to a Coke bottle – wide bases and narrow openings in bottles have practical spill prevention functionality. But other elements, namely the distinctive ribbing and logo placement give way to its art deco inspired, cocoa bean-inspired design that proved to become recognizable of the Coca-Cola brand.

The fashion world tested the distinctiveness requirement with red-bottomed stilettos in 2008, when Christian Louboutin, S.A. registered for trade dress protection in the bright-red lacquered outsole of its high-heel shoes with the United States Patent and Trademark Office. When Yves Saint Laurent released heels in a similar, monochrome red color (including the outsole), Louboutin filed a lawsuit against Yves Saint Laurent claiming trade dress infringement. The dispute made its way to the the Second Circuit, where the court ruled that Louboutin had failed to show distinctive trade dress rights in a shoe that was entirely the bright-red color it claimed in its trademark registration. However, the court went on to say that Louboutin had proven that its shoes were widely recognizable by the public when the bright-red lacquered outsole contrasted with the color of the rest of the shoe. As a result of the court’s ruling, Louboutin’s registration was amended to narrowly phrase the protected element as a “red outsole [that] contrasts with the color of the adjoining upper portion of the shoe”.

Will Roland Have Trade Dress Protection in the United States?

Roland may face some challenges in claiming trade dress protection for the design of its 303 and 808 drum machines in the United States. Certain elements of the 303 and 808 machines serve a purpose that is functional to the underlying product, such as the layout of piano keys and the close proximity of knobs and dials to those keys. For this reason, the design of the 303 claimed by Roland may not receive trade dress protection in the United States unless Roland can show that there are numerous other ways that a synthesizer may be designed and that its design in particular is associated by the public as Roland’s. Roland may be able to successfully claim trade dress rights in the color pattern design of the 808’s buttons, provided that it is determined that the pattern of red, orange, yellow, and white key colors are generally known by the public to be those of Roland’s drum machines (much in the way that bright-red contrasting outsoles are associated with Louboutin). Of course, there is an argument to be made that allowing trade dress protection in either of these instances would unreasonably stifle the production of competing synthesizers and drum machines.

Time will tell whether Roland’s trademark applications for the 303 and 808 designs will be registered by the United States Patent and Trademark Office and why Roland is now seeking trade dress protection more than thirty years after they were first introduced.

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We would like to thank Sasha Safavi for his contribution to this article.

 

 

legal hackers

Smart Contracts 101 Workshop on Wednesday, Feb 20 Presented by Legal Hackers

On Wednesday, Feb 20 at 7pm ET, NY Legal Hackers are partnering with OpenLaw for an informational workshop on how to build legal agreements using blockchain technology. This workshop is free to attend but RSVP is required. Instructors will demonstrate how to create an agreement on the OpenLaw platform and answer your questions, including:

– What does a smart contract look like?
– What basic concepts and terminology should I know before I build a smart contract?
– What types of legal agreements and other related projects can be built using blockchain technology?

Workshop Leaders:
Michael Chan, Legal Engineer, OpenLaw
Anne Griffin, Lead Project Manager, OpenLaw
Ross Campbell, Legal Lead at OMGPool

NOTE: Laptops are OPTIONAL for this event.

Legal Hackers is Co-Founded by MG+ Attorney Lauren Mack. Legal Hackers works to foster the global  movement of lawyers, policymakers, technologists, and academics who explore and  develop creative solutions at the intersection of law and technology. Legal Hackers is also the largest grassroots legal innovation community in the world, with more than 75 chapters on 6 continents and more than 10,000 members.

CES MG+

CES 2019: Trends in Technology Cause Regulatory Action For Data and Privacy

By: Steve Masur

CES 2019, recently concluded in Las Vegas and Masur Griffitts Avidor LLP was asked to moderate several panels pertaining to intellectual property and virtual reality at the Digital Hollywood event. Serving as the global stage for innovation, CES introduced many new tech products across a variety of industries. Some exciting new devices like the Samsung GEMS-H demonstrated the possibility of futuristic human abilities—creating a complete lower body exoskeleton. Cars were a focal point at the show as well;he Mercedes-Benz CLA 2020 exhibited heart rate monitoring to control temperatures, music and lighting.

Another major trend at CES was products that utilize location and voice-activated services.Voice assistants, with tracking and location services, are able to power features like traffic predictions and restaurant recommendations. Amazon’s Alexa continues to be built into more products, and CES 2019 displayed many newly-Alexa-enabled products such as Jabra’s Elite 85H Headphones and Lenovo’s Smart Tablet.

Although the convenience of location enabled technology allows for more fluid day-to-day functions and potentially faster exchange of information, they introduce a host of privacy concerns and legal ramifications.

In the first week of 2019, Los Angeles prosecutors sued, Weather: The Weather Channel. The nexus of the claim is that the app tracked the whereabouts of its users and sold it to third-party websites for targeted ads. After high-profile conglomerates like Facebook faced major scrutiny for sharing consumer data, this is the newest lawsuit that relates to online consumer privacy. Mike Feuer, the Los Angeles City prosecutor on the case questions, “This case against the operators of the Weather Channel app goes to the core of today’s most fundamental issues: How do we maintain privacy in the digital age?”

One proposed solution comes in the form of a “Do Not Track Option”. In the face of continued privacy breaches, Senator Ron Wyden of Oregon, one of privacy’s most vocal advocates, doesn’t have faith in big tech companies to regulate themselves, and he has proposed the Consumer Data Protection Act. The proposed regulation is an amendment to the Federal Trade Commission Act. Senator Wyden writes in his discussion draft that he hopes to “establish requirements and responsibilities for entities that use, store, or share personal information, to protect personal information, and for other purposes.”

The proposed bill calls for big tech companies to submit to the government annual data protection reports, which should outline the measures the companies took to ensure the security of all collected personal information. The “Do Not Track Option” section will allow people to opt-out entirely of having their data sold or shared to third-parties and companies that personalize advertisements. This concept is essentially the same as the Do Not Call Registry that was established by the FTC in 2003, where people were given a choice to opt-out of receiving phone calls from telemarketers. The “Do Not Track Option” seems to match up as the digital age’s edition of that. Senator Wyden also proposes to hire 175 more government staff to regulate the market for private data that may have potentially been sold or transacted between companies who possess the data banks. Finally, to ensure cooperation with his proposed legislation, Senator Wyden has included language that outlines prison sentences of up to 20 years for executives who do not abide by the proposed terms. (You can read Senator Wyden’s one-pager underlying the proposed framework here.)

Although this is a valiant effort to maintain consumer privacy in the digital age, it will be a battle for Senator Wyden to have this bill signed into law. The tech lobby has a powerful influence on federal and state policy. Lobbyists pour massive funds into opposing bills that are not in their favor. Amazon, Microsoft, Uber, Facebook, Google, AT&T, and Verizon previously teamed up to work against the proposed California Consumer Privacy Act. The legislation requires companies to share the data they collect from users and also give users similar opt-out option of having their information sold to the highest bidder. Although this was signed into law several months ago, the tech companies put up a fight, and will likely oppose Senator Wyden’s Consumer Data Protection Act as well.

The future of online data privacy is uncertain, but with continued legislative attempts and investigations, it seems as if big conglomerates are also taking steps to make changes to their privacy practices. Just last week, face with a federal investigation, AT&T said they will stop selling location data and pledged to suspend current deals and terminate all remaining deals pertaining to location data. Given the push for legislation reform, tech companies could potentially see massive fines and other consequences. Ultimately, the revenue generated from selling consumer location data may have to become more transparent. For the present moment, consumers intrigued by the new location service enabled tech products at CES can rest a little more comfortably knowing that there are measures being taken to ensure that they retain privacy and control of their data.

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We would like to thank Sasha Safavi for his contribution to this article.

sundance fim festival

3LD at Sundance Film Festival 2019

By: Steve Masur

3LD Art & Technology Center artists Victor Morales, Matt Romein and Peter Burr have been selected to showcase their work at Sundance Film Festival as part of the New Frontiers initiative. This curated collection of cutting-edge independent and experimental media works are by creators who are pushing artistic innovation across new mediums that include virtual and augmented reality (VR & AR). Partner, Steve Masur joined our clients at the events in Park City, Utah this year. You can view the full schedule of events at Sundance Film Festival here.

Congratulations to 3LD, Victor Morales, Matt Romein and Peter Burr!

CBD

CBD Between the Lines

By: Steve Masur and Kristen Kennedy

Cannabidiol, or CBD, has been making headlines the past few years for its potential to deliver many health benefits. Proponents claim that CBD can, among other things, relieve pain, ease anxiety and depression, and even benefit pets. This summer, the FDA approved the first CBD-based drug, and sales of CBD in forms like edibles and oils are expected to pass 1 billion dollars in 2020. Understandably, many people are interested in doing business in the CBD space, but one question stands in the way: is CBD legal? It depends on two things: the state(s) it’s being bought and/or marketed in, and the source of the CBD.

CBD, State-by-State

Every state has its own rules regarding CBD, found naturally in the cannabis plant, and THC, CBD’s psychoactive cousin found in marijuana. At the more permissive end of the continuum, states like California and Nevada have given the green light to adult use of cannabis for either medical or recreational use. In the middle of the spectrum are many states that have medical cannabis laws, which may also include the use of CBD. The least-permissive states provide no protection whatsoever for CBD sellers or purchasers. However, CBD continues to be widely sold and purchased in many states which do not permit it, and enforcement on the whole is sporadic. Therefore, the crucial first step in establishing a CBD business is to become well acquainted with the law in your state and any state you plan to do business in.

Know the Source

A big part of operating within the law is determining the source of the CBD being offered for sale. Ensuring the CBD is either sourced from industrial hemp or portions of the cannabis plant exempt from the definition of “marijuana” in the Controlled Substances Act (CSA) is crucial to staying within the law. Sellers of industrial hemp, defined as any cannabis plant containing less than 0.3 percent THC, must confirm that the cultivator is operating within a state that has an agricultural pilot program, complying with Section 7606 of the 2014 Farm Bill. (Industrial hemp is widely expected to be removed from the CSA and thus become fully legal with the passage of the 2018 Farm Bill, so this pilot program requirement will no longer exist in the future.) Sellers of CBD derived from exempt plant material must verify that the CBD was derived from mature stalks or seeds incapable of germination, as exempted from the CSA. These distinctions should be laid out in a carefully-worded purchase and sales agreement between you and your supplier, with representations and warranties to this effect to protect your business.

Find a Reliable Supplier

The importance of using a reputable supplier can’t be overstated. In a study carried out last year, researchers found that less than one-third of CBD products purchased online contained the amount of CBD they claimed to have. It may be in your best interest to source CBD from a state where marijuana is regulated, as CBD companies in states like Washington are required to test their products and accurately label them. Some things to look for in a wholesaler include a certificate of analysis that provides information on the levels of CBD, THC, and other compounds in a CBD product, what sorts of claims they make on their web site, and what type of extraction method they use.

Don’t Overstate the Claims

Once you set up your CBD business, be sure not to make unfounded claims about what it can do. The FDA has warned companies that have made dubious claims, such as that CBD could combat and prevent the spread of cancer and inhibit cancer cell growth. References to legitimate medical studies, however, are a safe way to highlight CBD’s potential benefits, as are third-party testimonials that don’t stray into the realm of unfounded medical claims. And be sure to include an FDA disclaimer on your web site, which is required by law.

Draft Clear Legal Policies

As you build your CBD business, be sure to stay within the bounds of the law in other ways. Draft legal policies that let your users know how you collect and use their data, and create clear, user-friendly terms and conditions that are easy to find on your web site. It’s also not a bad idea to include a basic and up-to-date statement of CBD laws, which may put customers who are uncertain of the legality of CBD at ease.

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We would like to thank our intern Kristen Kennedy for her contribution to this article.

STOs MG+

Are STOs the New ICOs?

By: Jon Avidor, Jaclyn Wishnia and Kristen Kennedy

As the SEC continues to crack down on noncompliant ICOs and token exchanges, many investors and crypto developers are expected to embrace the trend of adopting security token offerings, or STOs, due to the surer regulatory framework in which they operate. Though it’s possible to issue ICOs that conform to SEC guidelines, the use of STOs provides issuers with several advantages over ICOs. Indeed, experts forecast that ICOs will ultimately play a minor part in the blockchain ecosystem, while STOs will become the primary investment vehicle. Which begs the question: what exactly are STOs?

All STOs are ICOs, but the same isn’t true the other way around.” Unlike ICOs’ user participants, STOs are token offerings made to accredited investors “who pay and receive a security,” such as equity, stock shares, derivatives, etc. Initially, issuers of ICOs had to decide whether to classify a token as a security or a utility, which could have major regulatory implications and potentially expose them to liability. However, because the tokens issued in an STO are already labeled as securities, the offering automatically falls under SEC regulations. Thus, STOs must comply with securities law, including AML/KYC rules, and therefore, provide “liquidity, traceability, and accessibility,” at least within the U.S.

The fact that STOs are definitively regulated makes them less susceptible to scams and vests them with greater credibility than ICOs. For instance, because “STOs are subject to federal security regulations, one of the regulations they need to follow is Regulation D.” Within Regulation D, there are particular rules pertaining to offer limit amounts, the ability to use general solicitation, and investor requirements (i.e., Rule 506(b), Rule 506(c), and Rule 504). These rules require that investors must be accredited, information used to solicit cannot be “false or misleading,” and issuers must continuously verify that tokens are not resold to non-accredited investors. If those regulations had initially applied to ICOs, problems like “pump and dump” schemes and “front running” might have been avoided.

Although one of the primary benefits of STOs is that they provide clearer legal standards and protections, “STOs are regulated according to the jurisdiction in which they are based.” This presents issues of comity, potential trade agreement problems, unfair competition law, lack of uniform standards (or in some countries, no relevant laws at all), foreign tax reporting requirements, and assessing other various security laws associated with the jurisdiction where the STO will be offered. What began as a contained problem—labeling STOs under U.S. law—could become an international dilemma, by having to thoroughly ensure STOs adhere to other countries’ securities laws and practices.

Also, in relation to jurisdictional issues, being subject to another country’s laws and rules means its governing authority will have centralized control over all filed paperwork and information associated with a company’s STO, including its participants. These procedures run contra to the spirit of decentralization, one of the tenets that blockchain and cryptocurrencies were founded upon, and could pose potential privacy or data problems. Additionally, since these technologies remove the component of an intermediary, the duties attached to financial regulations, e.g., “underwriting, preparation of marketing materials in accordance with rules, and high levels of security,” will shift the burden directly to the buyer or seller of the STO, who will then have to remain compliant, as opposed to allowing traditional financial institutions to assume the responsibilities. This could drive up costs for companies, rather than aid them in saving resources.

Regardless of these issues, the STO space is currently seeing high levels of activity and innovation. For example, LXDX, a high-speed cryptocurrency exchange, will become one of the first companies to issue stock through an STO this December. Investors will be permitted to purchase LXDX’s cryptocurrency tokens, which represent direct ownership in the exchange, complete with dividend rights. Investors will be permitted to purchase LXDX’s cryptocurrency tokens, which represent direct ownership in the exchange, complete with dividend rights. This represents an exciting development in this space. On one hand, the regulatory framework which applies to STOs ensures compliance and legitimacy and reduces security risks and legal liability. On the other hand, stricter regulations impede innovation, reestablish the challenges that start-ups face to raise capital, and return the finance marketplace to the status quo, which begs the question: why alter traditional methods in the first place? LXDX’s launch of its new STO exchange may provide a model as to how other STOs might operate in the future, and will hopefully help to move the industry forward in a way that brings STOs closer to worldwide acceptance.

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We would like to thank our interns Jaclyn Wishnia and Kristen Kennedy for their contribution to this article.

Stock Options

Choosing Between NQSO and ISO Stock Options for Your Business

By: Jon Avidor

Companies planning to offer options of its stock as a form of compensation generally have two choices: an incentive stock option (ISO) plan, or a nonqualified stock option (NQSO) plan. The most notable differences between ISOs and NQSOs are in their tax treatment and the advantages they provide to employers and its recipients.

ISOs can only be offered to employees. ISOs are offered an incentive for personnel to remain with a company over a long period of time and to work to increase the company’s value. With an equity option in the company, the better the company does, the more the employee’s equity will be worth. Generally, ISOs are more beneficial for employees than NQSOs for tax reasons: employees can defer recognition of income until either the grant or exercise of the shares, and the income gained via disposition of the shares is taxed more favorably as long-term capital gain.

ISOs provide a slight benefit to employers in that they are exempt from 409A valuation, with some considerations. However, ISOs offer less benefits for employers than NQSOs. Employers are generally not entitled to tax reductions for ISOs, and ISOs come with complex administrative rules; companies must also comply with a long list of requirements to be eligible to offer an ISO plan. Nevertheless, ISOs may be an attractive option for start-ups whose stock may increase significantly later down the road as their business develops.

NQSOs are typically more favorable for the employer. NQSOs can be granted to both non-employees, including non-employee directors, consultants and advisors, and employees. Employers can claim a tax deduction for NQSOs and are more straightforward to administer. There are fewer tax minefields, as it is more straightforward to determine the taxes owed on NQSOs than ISOs. One caveat is that income from an ISO is not treated as wages for employment tax purposes, while income from an NQSO plan is, requiring both employer and employee to pay employment taxes on NQSO plan payments. However, the NQSO tax deduction typically offsets this cost for the employer.

Employers should consider their unique business needs and weigh the benefits of both types of plans before utilizing options as a form of compensation.

Sexual Harassment Law

New Sexual Harassment Prevention Laws Are in Effect in New York

By: Jon Avidor and Kristen Kennedy

On April 12, 2018, Andrew Cuomo, the governor of New York, signed into law the most comprehensive anti-sexual harassment legislation in the country. Following a public comment period, on October 1, the New York State Department of Labor issued a final model sexual harassment policy, trainings, and guidance for employers to comply with the new legislation, which went into effect on October 9. All employers in New York will now be required to comply with a list of requirements which includes the following:

  • Adopt the state’s model sexual harassment policy and trainings, or establish a sexual harassment prevention policy that meets or exceeds the standard set by Section 201-G of the New York State Labor Law
  • Provide employees with a complaint form for reporting sexual harassment
  • Make the sexual harassment policy available to all employees in writing or electronically, in a language they understand, and make it publicly available
  • Hold annual sexual harassment prevention training, which must be interactive and meet the standards established by Section 201-G, for all employees by October 9, 2019; new employees should ideally be trained “as soon as possible”
  • State contractors will be required to affirm that they have an anti-sexual harassment policy in place and that all employees have been trained in sexual harassment prevention

Additionally, Section 296-d of the New York State Human Rights Law now protects non-employees such as contractors, subcontractors, vendors, consultants or others providing services from sexual harassment in the workplace. Employers who know or should have known that sexual harassment was taking place and failed to take immediate action to prevent it may be found liable for such harassment.

The New York State Civil Practice Law & Rules contain two major updates to anti-sexual harassment measures. First, under Section 5003-B, employers are no longer authorized to include nondisclosure clauses in settlement agreements or other resolutions of sexual harassment claims that would prevent the disclosure of the underlying facts and circumstances to the claim or action, unless confidentiality is preferred by the plaintiff. Second, under Section 7515, employers with four or more employees are barred from requiring mandatory binding arbitration to resolve sexual harassment claims, and mandates that such provisions will be rendered null and void. Both of these provisions became effective as of July 11, 2018.

New York City employers are required to go beyond what the new state legislation requires, as Mayor Bill de Blasio signed the Stop Sexual Harassment in NYC Act into effect on May 9. Both the city and state regulations require annual anti-sexual harassment training. However, this act expands sexual harassment protections under the city’s Human Rights Law, requiring city agencies to assess workplace risk factors for sexual harassment and report on sexual harassment incidents, and mandating that contractors and subcontractors applying for city contracts must disclose their anti-sexual harassment policies.

Policies combating workplace sexual harassment have long been a best practice implemented by major employers, in the interest of worker protection and insulation from lawsuits. New York joins several other states including Delaware, California, Connecticut, and Maine in mandating that all employers must now take proactive measures to prevent sexual harassment, and companies should take all necessary steps to ensure their full compliance with these new laws.

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We would like to thank our intern, Kristen Kennedy for her contribution to this article.