Why Independent Contractor vs. Employee Status Matters

By: Jon Avidor and Tyler Horowitz

Among the various questions that employers face is whether to classify certain personnel as independent contractors rather than as employees. Many new entrepreneurs will rely on the advice of colleagues and friends who will encourage categorizing new hires as independent contractors to avoid paying employment taxes and providing benefits, which isn’t always bad advice but isn’t that simple. Despite how an employer labels its personnel or even drafts its services agreement, the determination finally rests with the Internal Revenue Service and Department of Labor in light of how the relationship actually carried on.

Company’s Right to Control and Other Guideposts for Determining Status

Distinguishing an employee from an independent contractor is often difficult in the absence of bright-line rules, though the standard focuses on the employer’s “right to control,” which balances three considerations:

  1. Behavioral Control: Beyond requesting certain services and deliverables, does the employer have the right, or exercise an ability, to direct and control what, how, and when the individual’s work is performed, whether through instructions, training, or other means?
  2. Financial Control: Does the employer direct or control the financial and business aspects of the individual’s performance, such as paying service fees according to the company’s standard payroll schedule, exercising discretion over expense reimbursements, or providing the tools and supplies to perform the tasks at hand?
  3. Relationship of the Parties: If there’s a written contract between the parties, is it structured like an employment agreement or services agreement? Does it afford the individual employee-type benefits (such as insurance, a pension, etc.? Is the relationship open-ended in terms of length and type of service provided? Is the “independent contractor” given certain responsibilities and discretion typical of an employee?

Ultimately, does the company have the right to control not only what is to be done by the “independent contractor,” but also how it is to be done? If so, the worker is most likely an employee. On the other hand, if the company doesn’t control the means and methods of the work product, the worker is most likely an independent contractor. Employers should analyze the entire relationship and pay attention to the degree of control it has over the worker.

Administering the Relationship

Especially in the employment context, companies should set forth the terms of its personnel’s engagement in a written contract―for employees, an employment agreement, and for independent contractors, a services agreement. As discussed, state and federal authorities will look past a written agreement to how the relationship actually exists or existed, though an written agreement is an employers best tool to clarify expectations. For example, a standard services agreement should always state that the individual is performing his or her services as an independent contractor and is not entitled to employment rights or benefits, nor is he or she authorized to act on behalf of the company. The agreement will disclaim the company’s tax withholding and reporting obligations as well. The services agreement may also say that any work product is considered a “work made for hire” and belongs to the company. Each of these provisions make clear to the independent contractor that he or she is not an employee and shouldn’t assume otherwise.

Additionally, employers are required to deduct payroll taxes from its employees and issue them W-2s, while companies who engage independent contractors do not withhold payroll taxes and, if they have paid the independent contractor $600 or more during that tax year, issue them 1099s. Independent contractors are required to calculate their own payroll taxes and may have to make quarterly estimated tax payments to the IRS, in addition to remitting applicable state and local taxes. Companies should consult an accountant to ensure they withhold and remit the proper payroll taxes and issue the appropriate tax forms to their employees and independent contractors.

Risks of Misclassification

Employers are often tempted to label as many of their personnel as independent contractors as possible―they wouldn’t have to contribute to Social Security and Medicare or remit unemployment tax, provide workers’ compensation insurance, or provide employee benefits, including health insurance and paid sick leave and vacation time. However, a company that misclassifies employees as independent contractors could face serious consequences if they’re ever audited. This often arises when a former “independent contractor” applies for unemployment and lists among his or her previous employers a company that hadn’t reported the individual as an employee, triggering a state investigation. If caught, the company may owe back taxes and be subjected to fines at the state and federal levels for uncollected income tax, Social Security, Medicare, and unemployment tax. Worse yet, a misclassification could open a flood-gate of litigation from past or current “independent contractors.” Don’t fall into the trap of improperly classifying your workers as a cost-savings tool.

 *We would like to thank our intern Tyler Horowitz for his contribution to this article.

E.U. General Data Protection Regulation Looms for American Multinational Businesses

By: Jon Avidor and Cassidy Lopez

If you do business in Europe, a new landmark European Union data protection law may have a huge impact on how you may collect and store personal information from their E.U. clients and customers.

The General Data Protection Regulation (GDPR), which is set to go into effect on May 28, 2018, is perhaps the most significant change in personal data privacy rules to date. The new regulation gives European Union citizens more control over the private information they share online and applies to all companies worldwide that do business with E.U. citizens. It is a prime example of the difference in how American law and European law approach consumer privacy—opt-in vs. out-out—while forcing global companies, especially those in the tech, retail, healthcare, and financial industries, to find a compliant yet practical and workable balance.

The new law itself has extensive technical and costly requirements, including providing E.U. customers with copies of their personal data at their request and also deleting any such personal data at the customer’s behest. Companies must also report any data breaches within a 72-hour period. Non-compliant companies can face threatening fines of as much as 4% of its annual revenue or 20 million Euros, whichever is higher.

Implications for Data Collection and Retention


Personal Data: The GDPR regulates directly or indirectly identifiable information about a person, or “Data Subject,” which is more expansive than the traditional American concept of “personally identifiable information,” and can include the consumer’s name, photo, email address, financial and banking information, social media posts, medical information, and even IP address.

Information Concerning Minors: Data controllers must obtain parental consent before processing personal data of children under the age of 16, though E.U. member states may lower the minimum age to no less than 13. This sets a higher bar than American privacy law, which under the Children’s Online Privacy and Protection Act requires verifiable parental consent before collecting and storing personally identifiable information relating to children under the age of 13.

Consent to Collect Data: The hidden browse-wrap privacy policy is a no-go under the GDPR. Data collectors must have “unambiguous” consent to collect ordinary identifiable “personal data,” such as a person’s name, location data, or demographics, but “explicit” consent to collect sensitive personal data, including information relating to a person’s racial or ethnic origin, political opinions, religious beliefs, health, and more. An intelligible and easily accessible form stating the purpose of data collection is sufficient for unambiguous consent, but explicit consent requires affirmative acceptance or opt-in.

Data Retention and Consumer Requests: The GDRP’s greatest compliance cost will likely result from the strict data retention policies. Data collectors must routinely account for the data they hold and why and where, how, and for how long its stored. Within one month upon request by a data subject, these companies must provide E.U.-citizen customers with reports detailing all high-risk personally-identifiable information held by the company and disclose how they use that data and under what permissions. Companies will develop mechanisms for users to submit data requests to gain access to personal information.

This is not surprising in light of the 2014 ruling by the Court of Justice of the European Union that, under the EU’s 1995 Data Protection Directive, individuals have the “right to be forgotten,” more specifically, the right to request Internet search engine operators remove information from search results that is “inaccurate, inadequate, irrelevant, or excessive.” Listen to John Oliver’s take on Last Week Tonight.

Mandatory Security Breach Notifications: To ensure accountability, in the event of a “high risk” security breach, the data controller must notify its country’s supervisory authority and all affected individuals within 72 hours of discovering the breach.

Appointing Data Protection Officers: Organizations that engage in “large scale” systematic collection and processing of personal data must hire an expect in data protection law and practices as a Data Protection Officer.

Penalties for Non-Compliance: The enforcement mechanism under the GDPR is a fine, tiered up to the greater of 4% of total worldwide turnover (i.e., revenue) in the past financial year or 20 million Euros, based on, among other things, the scope and duration, negligence, and subsequent transparency of the data breach or non-compliance, as well as past infringements

Effect of “rexit: Since the United Kingdom will still be a member of the European Union when the GDPR goes into effect later this year, the GDPR will become part of U.K. law and remain so after leaving the E.U. The U.K. Department of Digital, Culture, Media and Sport introduced into Parliament the Data Protection Bill, which according to Shearman & Sterling, would largely implement and perhaps even enhance the GDPR framework and policies. As of January 18, 2018, the bill had proceeded from the House of Lords and is currently under consideration in the House of Commons. Check the status here.

U.S. Cooperation and the Privacy Shield

The E.U.-U.S. Privacy Shield framework is an agreement between the U.S. Department of Commerce and the European Commission designed to provide a regulatory framework for commercial personal data exchange between the European Union and United States in a way that satisfies both jurisdictions’ privacy and consumer data protection laws, namely the GDPR. It replaces the U.S.-E.U. Safe Harbor program. Once an eligible U.S. organization voluntarily and publicly commits to the Privacy Shield Principles, compliance with its commitment to data processing transparency, security, and accessibility is enforceable under U.S. law, primarily by the Federal Trade Commission or, if relating to an airline or ticket agent, the Department of Transportation. Participating American businesses must also provide a free mechanism for consumers to resolve privacy issues directly with the company and agree to final, “last resort” arbitration with an approved data protection authority. The E.U.-U.S. Privacy Shield will not apply to data transfer between U.S. and U.K. companies post-Brexit, according to a U.K. parliamentary committee report as reported by TechCrunch.

Looking Ahead, Companies Weigh Their Options

Compliance with GDPR is a top priority for many large U.S. based multinational companies, but achieving compliance won’t be cheap. PricewaterhouseCoopers reported that, to insure against the threat of fines and penalties resulting from non-compliance, 92% of U.S. multinational companies cite compliance with GDPR as a top priority and 68% of those companies are committing between $1 million to $10 million to GDPR compliance efforts. For others, the investment isn’t worth the return, and the threat of high fines and injunctions is instead leading some businesses to reconsider doing business in Europe. In another recent survey conducted by PwC, 32% of respondents plan to reduce their European presence, while 26% plan to exit the European market all together. While Google parent company Alphabet certainly won’t exit the European market, which contributes approximately $9.3 billion to Google’s annual revenue (approximately 33%), Deutsche Bank predicts Google’s bottom line could take a 2% hit as an estimated 30% of E.U. users will likely opt-out of data sharing under the GDPR, decreasing Google’s targeted ad efficiency by 20%. One report also claims that only 34% of sites in the EU are ready for GDPR. As European regulators continue to clarify how they will interpret the GDPR, more American companies are likely to re-evaluate the return-on-investment of their European initiatives.

* We would like to thank Cassidy Lopez for her contribution to this article.

The Chuck E. Cheese Test for Whether a Token is a Security

By: Steve Masur

Cryptocurrency markets are still nascent, and most people are still trying to work out how they will develop, and how blockchain can be applied to the wider variety of business cases. There is not much guidance from the government, and most people are confused regarding what is acceptable to do, or not. I recently got off the phone with an entrepreneur and his compliance officer, who are lauching a new token, and wanted to do an ICO. They were trying to decide the safest way to proceed, given the lack of guidance. In their confusion, they were mixing up and conflating IRS and SEC rules and trying to decide how to disclose the attributes of their token under SEC rules, or whether to withhold 30% of any proceeds, in case the proceeds would be considered revenue instead of capital gains. it just goes to show that there is a lot to know, and a lot of good and bad information floating around the crytosphere.

….But what everyone’s talking about is whether a token can be defined as a utility token, and not a security to avoid securities laws.

The truth is that both could happen. The token could be considered a utility token, with proceeds taxable as income, and it could also be considered a security, subject to SEC disclosure requirements.

So what should a company with these sorts of questions do?

As a means of forming an answer, I came up with the Chuck E. Cheese test. Is the primary use of the token to buy video game plays in an arcade, or is it to take the token out to the parking lot and trade it for marbles, bubble gum, drugs, Pokemon, or Cryptokitties? Are the sales in the parking lot one time only, like a New York Knick’s, Phish, or Burning Man ticket, or can you trade in and out of the token speculatively in markets of ever-changing value?

If it’s the former, without the latter, it might just be a utility token, made primarily to be used for a particular purpose. But now, especially after Munchee, Senate hearings and SEC public statements, if it looks, smells and tastes like it could be speculatively traded, then without regard to its utlity, it’s probably seen as a security by the SEC.

Personally, I like the Chuck E Cheese test because I like video games, and it just seemed so perfect that Chuck E. Cheese tokens were gold and looked just like the media’s representation of Bitcoin. Also, I just met Nolan Bushnell, my childhood hero, the founder of Atari AND Chuck E. Cheese’s. “Heh, heh. ….that was cool.” My punk rock band from the 1990s even played a song about him. Even Nolan thought THAT was cool.

Cryptocurrency, the Howey Test, and Munchee’s Guidance on How to Apply it

By: Steve Masur

Corporate and securities lawyers utilize the Howey test to determine whether a transaction is an “investment contract,” or more simply whether it involves offering a security, and therefore is subject to certain reporting and disclosure requirements. A transaction will be considered an offering of securities if:

  1. It is a contract or transaction for an investment of money,
  2. The investment of money is in “a common enterprise,”
  3. The investor has an expectation of profits from its investment, and
  4. Those profits would come from the efforts of others, such as a promoter.

SEC v. Howey, 328 U.S. 293 (1946)

The Supreme Court’s test in SEC v. Howey was deliberately written to accommodate undefined or “nontraditional” securities categories, such as those that might be more variable in nature and require further analysis to determine whether they are, in fact, securities offerings. This is evident by the broad definition of “investment contract” applied when courts evaluate the would-be security and would include a “contract, transaction, or scheme whereby an investor lays out money in a way intended to secure income or profit from its employment.” Golden v. Garafolo, 678 F.2d 1139, 1144 (2d. Cir. 1982).

Generally, state courts will apply the Howey test in conjunction with other analyses under their respective state securities law (often known as “Blue Sky laws”), such as the risk capital test or the Reves or family resemblance test to determine whether an investment contract is a security. The analysis that the states use to determine a securities offering is subject to statutory law and is at the discretion of state courts.

If a transaction constitutes a securities offering, both federal and state securities laws require that the issuer disclose material information about the company, its principals, and the investment opportunity, including the risks of the investment, such that a reasonable person could make an informed investment decision. Many types of securities and transactions are exempt from registration and heavy disclosure requirements, most commonly under Regulation D, Regulation Crowdfunding, Regulation A. These require limited filings to the Securities and Exchange Commission and supplements under state Blue Sky laws. Many of our clients opt for this route because it’s decidedly less burdensome than full-on registration and sufficiently risk averse than non-compliance.

The Howey Test as Applied to Cryptocurrency Offerings

While cyrptocurrency become more mainstream and accepted as rapidly as the valuations change, so too are the laws and regulation surrounding them. Rob Griffitts recently published his first in a series of posts on U.S. regulations that impact cryptocurrency businesses titled US Regulators & Your Cryptocurrency: It’s Complicated.

Many cryptocurrency promoters have recently attempted to design their digital token offerings to fail one or more of the Howey test prongs and thus avoid federal securities registration, and the high legal and accounting fees that come with it. For example, if the promoter can show that the digital token being offered has uses other than solely to be traded for economic gain, which would be referred to as a “utility token,” it is possible the token won’t be classified as a security―though many of these offerors knows buyers are likely to trade the token for other cryptocurrencies for the purpose of speculative gain. These tokens are usually offered through TGEs (token generation events) or TDEs (token distribution events) as opposed to ICOs to further distinguish them from securities.

The Supreme Court purposely designed the Howey test to be pliable and dynamic enough to be applied to unchartered types of offerings. The SEC is under a lot of pressure to set clear policies for how to deal with these new tradable asset classes. But ultimately, it will not shy way from applying the test broadly, wherever it sees the possibility of fraudulent activity or actual fraud, which can lead to suspension from trading securities, heavy fines, and imprisonment. Once you have made your offering out there in the public, it cannot be taken back. As a result, when applying the Howey test to your cryptocurrency offering, it is best to think of the prongs broadly from the perspective of a prosecutor trying to make them fit your offering, not from a perspective that hopes that by failing one prong, your token will not be considered a security. The SEC will not shy away from applying the test broadly, wherever it sees the possibility of fraudulent activity, or actual fraud, which can lead to suspension from trading securities and heavy fines and imprisonment. As a result, when applying the Howey test to your cryptocurrency offering, it is best to think of the prongs from the perspective of someone trying to make them fit, not from a perspective that hopes for the best. SEC Halts Munchee ICO

***

*We would like to thank Daniel O’Neill for his contribution to this article.

graphic for automated art

The Future of Creativity: Will Art Become Automated? A Panel Discussion at The National Arts Club

By: Steve Masur and Matt Field

Join us on Wednesday, January 17th at The National Arts Club (7-9PM) for the following panel discussion:

The Future of Creativity: Will Art Become Automated?

From an AI bot that recreates classical works of art, to an algorithm that created thousands of original folk songs by learning ABC notes of Celtic folk songs, many are wondering whether creativity too, will someday become automated. In this panel, we’ll discuss the role of the artist in the advent of technology. How will the artist continue to remain relevant in our advanced technological world? Will creativity still play a role in the creation of artistic works? This panel will include insight from researchers behind AI-art focused projects and contemporary artists working in this medium. The discussion will focus on how artists and researchers are utilizing technological innovations in their practice. Panelists include Douglas Eck, Senior Staff Research Scientist at Google, and Helene Alonso, Director of Digital Experiences at the American Museum of Natural History, Grace Cho, CEO of fine art platform Orangenius, Matthew Field, Attorney Scott Draves  Software Engineer/Artist at Two Sigma and Lev Polyakov an accomplished animator as moderator.

OPEN TO THE  PUBLIC – REGISTER TO ATTEND HERE

About the Speakers:

Douglas Eck is a Research Scientist at Google working in the areas of music and machine learning. Currently he is leading Magenta, a Google Brain project to generate music, video, images and text using deep learning and reinforcement learning. A main goal of Magenta is to better understanding how AI can enable artists and musicians to express themselves in innovative new ways. Before Magenta, Doug led the Google Play Music search and recommendation team. Before joining Google in 2010, Doug was an Associate Professor in Computer Science at University of Montreal (MILA lab) where he worked on expressive music performance and automatic tagging of music audio.

Helene Alonso is the Director of Digital Experiences at the American Museum of Natural History. She directs a multi-disciplinary team through the design and production of interactive experiences. She focuses on the integration of digital layers, the three-dimensional environment and connected spaces. Helene is now working on several innovative projects involving physical computing, projection mapping and Virtual Reality, playing with Vive, Hololens and Unity.

Grace Cho founded Orangenius on the premise that artists were lacking the necessary tools and resources they needed to thrive in the creative economy. With over 25 years of experience in the financial services, media and entertainment, and private equity industries, Grace has transformed global business units at GE Capital, NBCU, and Nielsen. Skilled at taking conceptual initiatives and turning them into $100 million businesses, Grace founded Orangenius to assist independent, working artists in building their own creative empires. Inspired by visionaries like Richard Branson, Walt Disney, and Ralph Lauren, Grace’s vision for the creative economy encapsulates her singular mission: to do away with the myth of the ‘starving artist’ and empower future generations of creators.

Matthew Field is an attorney at Masur Griffitts + LLP. For nearly a decade, Matthew has worked with emerging companies, entrepreneurs, and creative professionals on a broad base of transactional matters, including angel and VC financings, equity compensation, intellectual property identification and protection, commercial transactions, corporate governance, and mergers and acquisitions. Matthew’s clients operate in a variety of sectors, with many focusing on advertising technology, financial services technology, e-commerce, enterprise software, consumer products, and digital media. He is also a co-founder of Marauder, a boutique marketing and consulting firm focusing on the development of emerging talent from around the globe within North America.

Lev Polyakov graduated School of Visual Arts in 2009, receiving the SVA Rhodes Family Award for Outstanding Achievement in Animation. He has experience creating short films both personal and commissioned, that leave a lasting impression for their story, characters, and design. After designing and storyboarding his projects, Lev oversees the entire production of animated films ranging from 4 to 15 minutes, managing crews of up to 15 people composed of animators, colorists, and clean-up. His shorts have played on Reel13 and ShortsHD, as well as over 30 film festivals worldwide. Lev’s recent clients have included Giants Are Small / Universal for their “Peter and the Wolf in Hollywood” i-pad app, and Uber (illustration for its internal division)

Scott Draves is a pioneering software artist best known for creating the Electric Sheep, a collective intelligence consisting of 450,000 computers and people that uses mathematics and genetic algorithms to create an infinite abstract animation. His work has been shown at LACMA, MoMA.org, Prix Ars Electronica, ZKM, Art Futura, Emoção Art.ficial Bienial and is in collections world-wide including Carnegie Mellon School of Computer Science, the 21c Museum Hotel, MQS Capital, Google, the Simons Center for Geometry and Physics, and MEIAC. His clients range from Skrillex to the Adler Planetarium. Electric Sheep apps are available for iPad and Android. Draves Bomb was one of the first interactive software artworks (1994) and also the first Open Source artwork, and the first interactive reaction-diffusion. His Fuse algorithm (1991) was also extremly influential. In 1990 he received a BS in Mathematics from Brown University and in 1997 a PhD from the School of Computer Science at Carnegie Mellon University for a thesis on metaprogramming for media processing. He is currently employed by Two Sigma to develop the Beaker Notebook.

US Regulators & Your Cryptocurrency: It’s Complicated

By: Rob Griffitts

This is the first in a series of posts in which I’ll examine the US regulations that impact cryptocurrency businesses.

Many describe bitcoin and other cryptocurrencies as being unregulated. As a blanket statement, this is not true.

What is true is that regulators so far have provided only limited guidance on how existing regulations apply to cryptocurrencies.  But that doesn’t mean those regulations don’t apply. This is because regulations typically apply to some activity, not to a particular technology. So, for instance, if you’re committing fraud, it doesn’t matter whether you’re doing so using pen and paper, or whether you’re using email. Similarly, if you’re laundering money, it doesn’t matter whether you’re using the traditional banking system or using bitcoin.

The consequences of violating the regulations can be devastating. So, it’s important that operators of cryptocurrency businesses become familiar with the lay of the regulatory land (in addition to hiring knowledgeable advisers).

This is the first in a series of posts in which I’ll explain the regulations that come up most frequently in our work with cryptocurrency businesses. These regulations fall into three categories:

– Financial surveillance
– Investor protection
– Consumer protection

In this post, I’ll give a short overview of each.  In my next three posts, I’ll dive into each more deeply. I’ll tell you what we know, and what remains unclear. And to the extent regulators have provided unambiguous guidance, I’ll try to frame things in the context of the different actors that participate in the crypto-space, which I loosely categorize as software developers, miners, exchange operators and promoters.

Let’s dive in…

Financial Surveillance

The purpose of financial surveillance laws is to prevent money-laundering and terrorist financing, and to help law enforcement agencies prosecute crime. This is carried out primarily by the Bank Secrecy Act (BSA), which is a federal law that requires financial institutions to monitor the transactions of its customers, and to report large transactions and suspicious activity to the government. This is where the acronyms KYC (Know Your Customer), AML (Anti-Money Laundering) and CTF (Counter-Terrorism Financing) come from.

In the past, there wasn’t much ambiguity as to whether the BSA applied to a particular business. If you handled currency on behalf of your customers, like a bank or Western Union, you were subject to the regulations. However, it was far from clear whether the BSA’s regulations applied to cryptocurrencies, and for a period of time, cryptocurrency businesses had the luxury of operating in what many considered an unregulated field.

That changed on March 18, 2013, when FinCEN (which administers and enforces the BSA) announced that it would make no distinction between virtual currencies and regular (“fiat” or government) currencies. Overnight, software developers and other cryptocurrency innovators – businesses that looked nothing like a traditional financial institution – were subject to a very burdensome set of regulations, and consequently, were immediately in violation of those regulations.

Since 2013, FinCEN has issued additional guidance on the applicability of the BSA to virtual currency businesses, with mixed results in terms of clarity provided. Some actors, like miners, for instance, can take comfort that their activities are not subject to the BSA. Others, including companies conducting ICOs, still operate in muddied waters.

Investor Protection

Much of the conversation about cryptocurrency regulation these days revolves around this question:  are my tokens a “security”, and therefore subject to regulation by the federal securities laws? Much commentary has been offered on the topic, and while the SEC’s guidance has been limited, some consensus among practitioners about best practices has begun to emerge (of course, whether the SEC will ultimately agree with this consensus approach is anyone’s guess).

The consensus I’m referring to began to jell after the SEC released a report of its investigation into The DAO in July 2017. In that release, the SEC began to set the stage by reiterating some points that weren’t much of a surprise to securities lawyers, but which nonetheless provided some welcome clarity on its thinking. Most notably, the SEC said that cryptocurrencies can be, but aren’t necessarily, regulated securities, and that the determination of that question turns on application of the so-called “Howey Test” to the particular facts and circumstances of each case.

Based on the factors of the Howey Test (more on those later), securities lawyers began to draw a distinction between tokens issued before the network on which they will function has been built, and tokens issued after the network has been built. The former are likely securities; the latter may escape that fate – and therefore be unregulated as far as securities laws are concerned.  Out of this construct came the SAFT – a Simple Agreement for Future Tokens – a new, hopefully compliant way to conduct token offerings.

The SEC’s concerns extend beyond the initial sale of tokens in an ICO. It also regulates the trading of securities after their initial issuance (in the so-called secondary markets). So exchanges on which tokens are traded, and intermediaries that participate in that trading, have to carefully consider the securities laws, as well as the commodities laws.

Consumer Protection

Consumer protection is a broad term that means different things depending on the context. In the context of cryptocurrency businesses, consumer protection laws refer to the various money transmission laws enacted at the state level aimed at custodial businesses – namely, those businesses that maintain custody over the funds of another. The concern is that custodial businesses may be mismanaged, hacked, suffer from illiquidity or otherwise may lose those funds. Each state, except Montana, has such laws on its books.

The state money transmission laws are particularly frustrating for cryptocurrency innovators because complying with them is a cumbersome and costly affair —  each of the 49 states has a different set of laws, and each state’s laws reach anyone that services or even solicits a resident of that state. This means that a cryptocurrency business that intends to offer its services nationwide must satisfy each state’s licensing regimes. Exacerbating things is that these statutes are archaic, and with only few exceptions, state regulators haven’t offered guidance on whether, or how, their laws apply to cryptocurrency businesses.

In the next post, I’ll begin to examine these regulations in more depth.

Year-End Maintenance for a Healthy Business

The end of another year presents an opportunity for you to take stock of how your business has developed, and to think carefully about whether you have kept pace with your legal needs. Please consider the following so you maintain a healthy business as you enter the new year.

Corporate

  • Pay franchise taxes on company shares to your state of incorporation, often due at the end of the year, not on Tax Day.
  • File a Biennial Statement or annual report with your state of incorporation.
  • Comply with annual governance requirements, such as holding a shareholders meeting and updating your governance documents to reflect any major actions taken over the past year.

Intellectual Property

  • Confirm that each of your employees and independent contractors have assigned the rights in their work product to your company.
  • Ensure that your online terms of use and privacy policy still accurately reflect your business practices and are up-to-date with changes in the law―like the regulation for maintaining DMCA protection.
  • Consider how your brand has grown and developed, and whether you might have valuable trademarks that should be protected by registration with the U.S. Patent and Trademark Office.

Business Operations

  • Make sure you have the right agreements in place for all new hires.
  • Check that all essential business licenses are active and in good standing.
  • Determine whether there is a current and valid contract in place for each of your most important business relationships, and revisit the terms of any contract for any changes.
necklace made of bitcoin keyrings

Cryptocurrency, Blockchain and the Future of Finance in Art

By: Steve Masur

Join us on Monday, December 4 at the National Arts Club (7:30PM) to discuss Cryptocurrency, Blockchain and the Future of Finance in Art. 

About the Panel:

In recorded music, so much of the money is kept by middlemen that songwriters and musicians are looking to a new kind of money as a means of getting back some of what is derived from their craft.  It is called Bitcoin, a cryptocurrency powered by a technology called Blockchain, which records and encrypts transactions in a transparent public ledger. Pledge Music & Dot Blockchain founder Benji Rogers, Steven Masur, Ujo Music product owner Jack Spallone and painter/visual artist Lindsey Nobel will discuss the promise of Blockchain, and how it can change the artistic and creative world.

REGISTER TO ATTEND 

About the speakers:

Steven Masur has over two decades of experience advising emerging and established businesses on new opportunities and business challenges. He focuses his practice on corporate finance, M&A, intellectual property, entertainment, emerging businesses and strategic guidance. Steve brings a unique mix of legal, business, and strategic experience to bear on client matters. He has counseled enterprise level clients including Shazam, Virgin Mobile, Liberty Media, Yamaha, Nielsen Buzzmetrics, Bob Vila and Conde Nast Publications in corporate, digital media, and new business matters. He has also helped emerging businesses in a wide variety of sectors, and is especially knowledgeable in media, entertainment, advertising, consumer products, food and technology, including mobile, games, digital music, social media, augmented and virtual reality, software and hardware.

Benji Rogers is a British-born, New York-based entrepreneur, technologist, musician, and the founder of Pledge Music. An early pioneer of the direct artist-to-fan model of distributing music, Rogers founded Pledge Music based on the belief that artists should share the process of their artistic output, not just the finished product. Straddling the worlds of technology and music, Rogers uses his dual background to advise a range of tech and music companies on how to bridge the divide between their industries. To address the unique challenges facing artists releasing their work in the digital economy, Rogers also co-founded the Dot Blockchain Music Project, an attempt to create a decentralized global registry of music rights using blockchain technology that will overhaul the commercialization and movement of music online. In addition to these projects and his ongoing role with Pledge, Rogers is also an instructor at Berklee College of Music on digital trends and strategies in the industry. A dedicated patron of arts and creativity in all its forms, Rogers’ work is rooted in a belief in the democratizing power of the internet; he will always be “loving your work.”

Lindsey Nobel is a mixed-media artist living and working in Los Angeles. Her art employs various media to explore ideas of technology, science and human connection. Lindsey’s artistic process stems from investigating memory, dislocation and environment.  Attachment and reflection. In 1992 she began developing a drawing language that, for better or worse, connects us to computers. Lindsey’s work exposes the invisible world to which we are utterly attached via the Infosphere.

Jack Spallone comes from the US with a diversified background working in music and tech. Starting as a music and events blogger while still an undergrad, Jack soon expended his experience into talent buying and inevitably managing artists. After launching the careers of two Billboard artists, Jack’s attention turned to exploring alternative methods for maintaining a career as a musician, leading him to thinking about how blockchain and decentralized technology could usher in new financing, licensing, and interactive opportunities for artists. Today, Jack drives the product vision for Ujo Music, focused on solving the many problems of music’s digital supply chain while also growing the revenue pie for rights holders.

*In addition to this event, we also have another Cryptocurrency and Blockchain event coming up November 16. See more info and register to attend here.

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Exploring the Impact of the Blockchain on Music and the Arts

By: Steve Masur

Tracking Creative Digital Rights:
A Panel and Reception Exploring the Impact of the Blockchain on Music and the Arts

Join us on November 16 (7PM ET) at the Abrons Arts Center (466 Grand St. at Pitt St., Lower East Side, Manhattan) to learn about new paths for managing digital creative property with the emergence of the blockchain, a tamper-proof distributed record keeping system. This panel of experts will explore issues of artist, management, label, dealer, collector, customer control over licensing, royalties, attribution, sampling, provenance, copyright and transparency at this kickoff event to the Open Source Music Festival.

Panelists include: Ken Umezaki, Co-Founder and Chief Business Officer, Dot Blockchain Music; Daniel Doubrovkine, Chief Technology Officer, Artsy; Jennie Rose Halperin, Communications Manager at Creative Commons; and Steven Masur, Senior Partner MG+. Isabel Walcott Draves, President of Creative Tech Week, is moderator.

REGISTER TO ATTEND

About the Panelists:

Steven Masur has over two decades of experience advising emerging and established businesses on new opportunities and business challenges. He focuses his practice on corporate finance, M&A, intellectual property, entertainment, emerging businesses and strategic guidance. Steve brings a unique mix of legal, business, and strategic experience to bear on client matters. He has counseled enterprise level clients including Shazam, Virgin Mobile, Liberty Media, Yamaha, Nielsen Buzzmetrics, Bob Vila and Conde Nast Publications in corporate, digital media, and new business matters. He has also helped emerging businesses in a wide variety of sectors, and is especially knowledgeable in media, entertainment, advertising, consumer products, food and technology, including mobile, games, digital music, social media, augmented and virtual reality, software and hardware.

Ken Umezaki is an independent investor and business advisor for music startups and artists, through his company Digital Daruma, with a specific focus on artist facing music and media service companies. Digital Daruma has made select direct investments in music artists and songs, and has also co-founded Dot Blockchain Media, a public benefit corporation that has introduced a new music file technology architecture to modernize copyright management and the music supply chain fit for the digital music age. Ken currently is the Chief Business Officer of dotBC. His past experience includes 25 years in financial services trading, asset management and senior management positions. He is also an experienced musician, and currently plays bass in the band Fifth of Bourbon. Lastly, he is involved in a number of music foundations and academic organizations, including serving on the boards of Little Kids Rock, and Future of Music Coalition, as well as advisory board position for programs at New York University and Berklee College of Music.

Daniel Doubrovkine (aka dB.) is a seasoned entrepreneur, technologist, CTO at Artsy.net in New York, the largest online fine art marketplace and publication. Daniel graduated from University of Geneva in late 90s with a degree in Computer Science, and founded and sold Vestris Inc., an early stage technology start-up right after college. He joined Microsoft as Development Lead, was Director at Visible Path, then Architect and Development Manager at Application Security. Daniel is the creator and maintainer of many popular open-source projects and a lifetime artist.

Jennie Rose Halperin is the Communications Manager at Creative Commons. She makes the CC communications and brand sparkle and works with communities to tell their stories through a variety of media. As a freelance writer and editor, Jennie is currently working with MIT’s CoLab, where she is assisting in the creation of a book and multimedia series on social justice for SAGE Publishing and the SEIU.  Before joining Creative Commons, Jennie worked for Safari Books Online/O’Reilly Media as the Product Engagement Manager where she managed community marketing and test-driven product growth with a mighty team of technologists dedicated to innovation in online learning. She was previously at Mozilla on the Community Building Team and earned her masters degree in Library Science.

Isabel Walcott Draves (moderator) is the founder of Leaders in Software and Art (LISA) and President of Creative Tech Week. She is an Internet entrepreneur with over two decades of experience organizing technology communities, conducting research and managing large projects.  In 2015, she started Creative Tech Week to create a network of creative and business professionals originating new technology-driven content in media, entertainment, advertising, music and the arts.  Since 2009, Draves has convened Leaders in Software and Art, bringing together cutting-edge software and electronic artists, curators, collectors, and coders to share their work in conferences, shows and salons. Draves founded the first website for teen girls, SmartGirl.com, from 1995-2001; managed content publishing systems at Bertelsmann and directed an elite think tank for cybersecurity executives at Gartner in the 00’s; and has provided expert consulting to dozens of startups and Fortune 100 companies nationwide.

Enjoy wine, beer and appetizers with speakers and guests after the panel discussion at an upstairs reception.

Programming provided by Leaders in Software and Art and Creative Tech Week.

Equity Dilution: Is the Juice Is Worth the Squeeze?

By: Steve Masur and Cassidy Lopez

If you’ve ever made orange juice from concentrate, you probably already have a good feel for how equity dilution works. When you put the orange juice concentrate in a pitcher, you have a small amount of, well, really strong concentrated juice. As you add water, the water dilutes the original concentrate, which then represents only a small portion of your beverage. The same holds true for equity.

What is Equity Dilution?

Equity dilution refers to the reduction in the percentage ownership interest—shares of stock or membership units—of current stockholders of a corporation or members of a limited liability company when the company issues new shares or units, whether that be through a private placement of securities or an initial or follow-on public offering (IPO/FPO). The number of shares or units held by existing shareholders or members remains the same, though when the company increases the total number of shares or units issued and outstanding, each preexisting stakeholder will subsequently own a smaller ownership percentage of the enlarged pie. This sounds scary to stockholders and LLC members, but keep in mind that a company’s value increases whenever money is infused. In other words, existing stockholders or LLC members will own a smaller portion of the company, but the reality—or the hope anyway—is that what they do own is worth more.

Calculating Equity Dilution

To calculate equity dilution, you as a stockholder or LLC member need to know three things: (1) how many shares/units you own, (2) how many shares/units were outstanding prior to the investment, and (3) how many new shares/units were issued in the financing.

  1. Determine Your Original Ownership Percentage: Divide the number of shares/units you currently own by the total number of the company’s issued and outstanding shares/units prior to the investment. For example, if you own 20,000 shares of a corporation and the corporation has issued 100,000 total shares of stock, you own 20% of the company.
  2. Find the Number of Shares/Units Outstanding After the Financing: Add the newly issued shares/units to the total number of shares/units issued and outstanding by the company prior to the investment. In this example, if the corporation issues an additional 25,000 shares to a new investor, add 25,000 to the 100,000 then-outstanding shares to find the company now has 125,000 total shares of stock outstanding.
  3. Calculate Your New Ownership Percentage: Divide the number of shares/units you currently own by the total number of shares/units issued and outstanding by the company after the investment. Continuing with this example, if you own 20,000 shares of the corporation, and now the corporation has 125,000 shares outstanding, divide 20,000 by 125,000 to find you now own only 16% of the company.
  4. Determine Your Equity Dilution: Subtract your new equity percentage from your old equity percentage to find the amount by which you have been diluted by the investment. In this example, subtract 16% from 20% to find you own 4% less of the company than you did before.

Staying on this example, let’s now assign a valuation to the company. Prior to the investment, the corporation had a pre-money valuation of $1,500,000. The corporation issued 25,000 shares to a new investor in exchange for $500,000, making the company now worth $2,000,000. Prior to the financing, you owned 20% of the company, which at its prior valuation, meant your ownership interest was worth $300,000, or $15 per share. After the financing, your ownership interest was diluted to 16%, but the company’s new post-money valuation makes your ownership interest worth $320,000, or $16 per share. You own a smaller percentage of the company, but that percentage is now worth more.

Check out this tool from OwnYourVenture as a great resource to visualize equity dilution.

Preventing Dilution

Practically speaking, the only way to actually prevent dilution is to be the sole owner of your corporation or LLC. Though for founders who intend to take any outside investment, the key is to only grant equity in exchange for something (or someone) that will generate more value than what is given up. In other words, that 4% equity dilution should throw off a greater than a 4% increase in value to the company. Mechanisms to prevent dilution do exist, more often in later stage equity financings, though how they are structured and their implications to the various stakeholders vary and will be discussed in a later LawTalk blog post.