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Massachusetts Appeals Court Rules on Intentional Interference with Contractual Relations

Posted on Feb 29th, 2024

A recent Massachusetts appeals court ruling provides guidance on the required elements of a claim for intentional interference with contractual relations (IICR).   IICR claims are very common in commercial litigation cases and often arise in the context of a contract dispute.  Unlike a contract claim, IICR claims provide a potential for more extensive damage claims and offer a plaintiff a different legal argument outside the terms of a particular contract that may be in dispute.  However, the law is that IICR claims have to be based on more than just a breach of contract.  There has to be more nefarious conduct that would justify this level of liability.  This case addresses the requirements for that standard.  The key finding here is that negligence or even gross negligence is not sufficient – the conduct has to be intentional.

In the case of Cutting Edge Homes, Inc. v. Alan J. Mayer, the Appeals Court affirmed a summary judgment dismissing Cutting Edge’s claim for intentional interference with contractual or advantageous business relations against Alan J. Mayer. Cutting Edge, a general contractor, had contracted with homeowners Rory and Sharon Shapiro for a renovation project. The Shapiros hired Mayer to perform architectural services and review Cutting Edge’s work and invoices. Mayer regularly criticized Cutting Edge’s invoices, alleging overbilling by hundreds of thousands of dollars. Eventually, the Shapiros terminated their contract with Cutting Edge based on Mayer’s advice and engaged a different contractor.

The central question was whether Mayer’s conduct was “improper in motive or means.”  The improper means or motive required to support a claim for intentional interference is “actual malice” or “a spiteful, malignant purpose, unrelated to the legitimate corporate interest” The motivation of personal gain, including financial gain, however, generally is not enough” to constitute improper motive

The court ruled that Cutting Edge failed to provide sufficient evidence to support this claim. While Mayer may have been critical of Cutting Edge’s billing practices, the evidence did not show deceit or intentional misrepresentation. Mayer’s actions were seen as fulfilling his professional obligations as requested by the Shapiros. Therefore, the court found that negligent or even grossly negligent conduct was insufficient to meet the standard of “improper means.”

The key legal points in this case include:

  1. Elements of Tortious Interference: To establish a claim of intentional interference with contractual relations, Cutting Edge needed to demonstrate four elements: (a) the existence of a contract between Cutting Edge and the Shapiros, (b) Mayer’s knowledge of this contract, (c) Mayer’s intentional inducement of the Shapiros to breach the contract, and (d) Mayer’s interference being improper in motive or means.
  2. “Improper” Conduct Requirement: A crucial aspect of the case is determining whether Mayer’s conduct was “improper” as required by law. This involves assessing whether Mayer acted with deceit, dishonesty, or other wrongful motives or means beyond mere negligence.
  3. Standard for “Improper Means”: The court discussed the legal standard for “improper means,” emphasizing that negligence or even gross negligence is insufficient to establish improper conduct. Instead, the plaintiff must show conduct amounting to deceit or dishonesty.
  4. Good Faith Requirement: The court examined whether Mayer acted in good faith in providing his advice to the Shapiros regarding Cutting Edge’s invoices. Good faith is crucial in determining whether Mayer’s actions were improper.
  5. Burden of Proof: Cutting Edge had the burden of proving that Mayer’s actions met the legal standard for intentional interference with contractual relations. This requires presenting sufficient evidence to establish each element of the claim.

Corporate Transparency Act goes into effect January 1, 2024

Posted on Dec 22nd, 2023

Effective as of January 1, 2024, the Corporate Transparency Act, commonly known as the “Rule,” dictates that entities established through state filing procedures, including limited liability companies, corporations, statutory trusts, and similar entities collectively referred to as “Reporting Companies,” must directly submit beneficial ownership information to the Financial Crimes Enforcement Network (“FinCEN”) of the Department of the Treasury. Failure to adhere to the Rule’s reporting requirements could result in civil and criminal penalties.

On November 30, 2023, FinCEN adjusted the Rule’s filing deadline for Reporting Companies created or registered between January 1, 2024, and January 1, 2025, extending the timeframe from 30 to 90 calendar days.

Reporting Companies in existence before January 1, 2024, have until January 1, 2025, to fulfill the reporting obligations, while those established on or after January 1, 2025, must file within 30 days of their formation.

Reports submitted to FinCEN – Beneficial Ownership Information Reports “BOI Reports” -  must identify the Reporting Company and disclose specific personal information about the Beneficial Owners and Applicants.

Two categories of Beneficial Owners are distinguished: those owning or controlling at least 25 percent of ownership interests and those exercising “substantial control” over the Reporting Company. Notably, applicants encompass the individual filing the formation document and the individual primarily responsible for directing or controlling such filing.

The Rule does provide a large number exemptions to the Reporting Company definition. However, these exemptions do not apply to most types of businesses – in general, they are limited to financial institutions, broker dealers and large public companies.  They are generally exempted because these types of businesses are already subject to extensive regulations and requirements with respect to filing of similar types of information.

Entities falling within an exempted category are exempt from filing a BOI Report with FinCEN. Furthermore, the Rule introduces the concept of “FinCEN Identifiers.” Individuals frequently appearing in BOI Reports can request a unique number from FinCEN, providing an alternative to repeatedly transmitting personal information with each BOI Report filing. Entities also have the option to obtain FinCEN Identifiers.


When is a liquidated damages clause enforceable?

Posted on Sep 25th, 2023

In the case of Cummings Properties, LLC vs. Darryl C. Hines, the Massachusetts Supreme Judicial Court considered the enforceability of a liquidated damages clause in a commercial lease agreement. The court upheld the clause and ruled in favor of Cummings Properties, LLC.  https://www.mass.gov/files/documents/2023/09/25/p13406.pdf

 

Here are the key points from the summary:

  1. Background: The case involved a commercial lease between Cummings Properties and Massachusetts Constable’s Office, Inc. (MCO), with Darryl C. Hines as the personal guarantor. The lease had a provision for liquidated damages in case of rent default.
  2. Liquidated Damages Clause: The liquidated damages clause allowed Cummings Properties to terminate the lease and collect the entire balance of rent due as liquidated damages if MCO failed to pay rent after a ten-day grace period.
  3. Default and Lawsuit: MCO failed to pay rent shortly after the lease took effect, leading Cummings Properties to initiate legal action. MCO vacated the premises, and Cummings Properties subsequently leased the space to a new tenant.
  4. Enforceability of Liquidated Damages Clause: The central issue was whether the liquidated damages clause was enforceable. The court applied the “single look” approach, which focuses on the circumstances at the time of contract formation.
  5. Two-Prong Test: To enforce a liquidated damages clause, two conditions had to be met: (a) actual damages at the time of contract formation were difficult to ascertain, and (b) the sum agreed upon as liquidated damages represented a reasonable forecast of damages in case of a breach.
  6. Burden of Proof: Hines, as the party seeking to invalidate the clause, had the burden of proving that either actual damages were easily ascertainable at the time of contract formation or that the damages specified in the clause were disproportionate.
  7. Court’s Findings: The court found that Hines failed to provide evidence to support his claims that actual damages were easily ascertainable or that the damages specified in the clause were disproportionate.
  8. Mitigation Not Required: The court emphasized that under the single look approach, mitigation of damages, such as rent collected from a new tenant, was not a consideration in determining the enforceability of the liquidated damages clause.
  9. Sophistication: Hines argued that he was not a sophisticated party and should not be bound by the clause. The court found that Hines demonstrated some business acumen and sophistication, making him accountable for the contract terms.
  10. Judgment: The court affirmed the judgment of the Superior Court, upholding the enforceability of the liquidated damages clause and ruling in favor of Cummings Properties.

In summary, the court upheld the liquidated damages clause in the commercial lease, emphasizing that it was enforceable because it represented a reasonable forecast of damages at the time of contract formation. The court also considered Hines to be sufficiently sophisticated to be held accountable for the contract terms.


Massachusetts Supreme Judicial Court Rules on Cat’s Paw Theory

Posted on Jun 24th, 2023


A recent SJC decision in MARK A. ADAMS vs. SCHNEIDER ELECTRIC USA rules on the “cat’s paw” theory of liability.  Companies considering a reduction in force should be familiar with this decision and should discuss their plans with qualified employment counsel.

What is the Cat’s Paw theory:

The “cat’s paw” theory of liability refers to a legal concept where an employer can be held responsible for discriminatory actions taken by its employees, even if those employees were not the ultimate decision-makers. In this theory, the employer is considered to be the “cat” and the employee who carries out the discriminatory action is the “paw.” The idea is that the employer may use or rely on the biased actions or recommendations of its employees to accomplish its discriminatory purposes. Under the “cat’s paw” theory, the employer can be held liable for discrimination, even if the decision-maker was not directly motivated by discriminatory intent.

The theory is based on a fable  in which a monkey convinces a cat to retrieve chestnuts from a fire, and then makes off with the finished product, leaving the cat with a burned paw and no chestnuts.

https://en.wikipedia.org/wiki/Cat%27s_paw_theory

More about the case:

Mark Adams sued his former employer, Schneider Electric USA, for age discrimination after being laid off in a 2017 reduction in force. Schneider Electric was initially granted summary judgment, but the Appeals Court reversed the decision. The Supreme Judicial Court granted further appellate review to clarify the summary judgment standards in employment discrimination cases. The court concluded that the grant of summary judgment was improper, as there was evidence to support the claim of a discriminatory corporate policy and the “cat’s paw” theory of liability.

Mark Adams produced several pieces of evidence to support his claim of age discrimination. First, he provided evidence that officials at Schneider Electric expressed a desire to increase “age diversity” in the company and specifically in the research and development (R&D) group where he worked. They wanted to hire recent college graduates and reduce the number of older employees.

Adams also presented evidence that his R&D group in Andover was targeted for layoffs while a younger R&D group in India was not. Human resources executives at Schneider Electric emphasized the need for age diversity and discussed making budget reductions to make room for younger employees.

Furthermore, Adams’s name appeared on a list that exemplified the policy of increasing age diversity, indicating that he was selected for the layoff based on his age. Additionally, statistical evidence showed that the layoffs had a disparate impact on employees over fifty years of age.

Overall, Adams provided evidence of discriminatory remarks by corporate executives, the targeting of his division for layoffs, and statistical evidence of age-based impact, all of which supported his claim of age discrimination

 


Massachusetts Appellate Court Rules On General Release Provisions As They Relate To Severance Agreements And Promises Of Equity

Posted on Jan 17th, 2018

Ryan S. Carroll

The Massachusetts Appeals Court recently affirmed the practice that a general release, including one provided in the context of an employment separation, extinguishes the signing party’s rights to all claims predating that release.  However, that general statement does not come without some caveats.

Alan MacDonald (MacDonald), had two separate terms of employment with Jenzabar, first as a CFO and later as a “Mergers and Acquisitions Researcher”.  During his first term of employment, MacDonald executed an employment agreement which provided for: (i) the issuance of a number of shares of preferred stock and (ii) an option to acquire 1,516,000 shares of common stock.  MacDonald and Jenzabar would enter into two additional agreements relating to his equity.  MacDonald then left Jenzabar and had not received his preferred shares nor exercised any of his vested interests.  At a later date, MacDonald joined Jenzabar for the second time and left shortly thereafter.  After his second departure, MacDonald and Jenzabar executed a severance agreement which provided for Jenzabar to continue to pay MacDonald’s salary and other benefits for six months in exchange for a general release of all claims, an affirmation and extension of a confidentiality obligation and an agreement that the severance agreement terminated and supersedes all other oral and written agreements or arrangements between MacDonald and Jenzabar.  After he signed the severance agreement, MacDonald attempted to exercise his option and Jenzabar denied the request, citing the release.  Litigation then ensued as to MacDonald’s rights to the equity and the enforceability of the severance agreement.

In MacDonald vs. Jenzabar, the court ruled that the general release provision and a merger and integration clause in the severance agreement extinguished MacDonald’s rights to the equity.

The general release language (“from any and all claims, liabilities, obligations, promises, agreements, damages, causes of action, suits, demands, losses, debts, and expenses . . . of any nature whatsoever, known or unknown, suspected or unsuspected, arising on or before the date of this Agreement.“) was held to be both clear and broad and that MacDonald released all rights to the preferred stock and option.  Further, the court cited that, “a general release disposes all claims and demands arising out of any transactions between the parties” and that “any intended exception should have been expressly stated.

Lastly, the court ruled the merger and integration clause contained in the severance agreement clearly extinguished all rights to the promised preferred shares and the option.

This case is an overall win for employers with respect to their separation arrangements. The case also illustrates the significance of any single word or phrase (or lack thereof) in a tightly-worded document, such as a release, when under the microscope of a court’s review.  Any ambiguity in this context creates risk for each party, and conversely creates negotiating leverage in terms of pre-litigation negotiations, leading to unnecessary cost and other negative impact for both parties.


Recent Federal Court Decision Clarifies Fiduciary Duty Interpretation for Delaware Corporations Doing Business In Massachusetts

Posted on Oct 5th, 2016

By: Richard Gauthier

A recent decision by the Massachusetts federal district court held that Massachusetts corporate law relating to fiduciary duty does not apply to Delaware corporations doing business in Massachusetts.  As most privately held tech-based companies started in Massachusetts are typically formed in Delaware and qualified here as a foreign corporation, this decision, while not surprising, provided comfort and clarity on this important issue.

Paul Nahass, a shareholder and former director and officer of FlexLite Corporation, sued a group of FlexLite shareholders, for terminating him as an officer and director of FlexLite.  Nahass alleged the termination violated their fiduciary duty to Nahass as a minority shareholder in a close corporation and FlexLite’s corporate bylaws.  Nahass argued that because FlexLite was a close corporation, under the famous Massachusetts Donohue v. Rodd decision, the other shareholders owed him a fiduciary duty that he claimed was breached.

The Court rejected this argument.  Pursuant to the Massachusetts “internal affairs” doctrine, the law of the state of incorporation applies to disputes over the internal workings of a corporation, including allegations that majority shareholders breached a fiduciary duty to shareholders. Because FlexLite is a Delaware corporation, The Court held that Massachusetts law does not apply.

The Court then went on to clarify that, unlike Massachusetts, under Delaware law shareholders in a close corporation do not have a fiduciary duty to each other.  Instead, Delaware courts have expressly rejected the Massachusetts Supreme Judicial Court’s reasoning.  The Court noted that some Delaware courts have held that “majority stockholders have fiduciary duties to minority stockholders as stockholders …” in certain circumstances, which were not alleged in this case.[1]

The Court also upheld Nahass’ removal from the FlexLite board that was effected by a written consent of stockholders.  While he claimed the corporate bylaws entitled him to a stockholder vote, the Court rejected this argument based on the provisions in the DGCL and the corporate bylaws that permitted action by written consent.


[1] The Court noted that under Delaware law, a shareholder may owe a fiduciary duty where it owns a majority interest in or exercises control over the business affairs of the corporation. In appropriate circumstances, multiple stockholders together can constitute a control group, with each of its members being subject to the fiduciary duties of a controller.

 


Federal Court Holds Uber’s “Sign-In-Wrap” Online Agreement Enforceable under Massachusetts Law

Posted on Sep 12th, 2016

By: Richard Gauthier

In a recent consumer class action case brought against Uber Technologies, the Massachusetts U.S. District Court held that the binding arbitration clause in Uber’s Terms and Conditions (“Terms”) was enforceable and prevented the consumers from seeking a class action in a court of law.  This decision is noteworthy because along with the ruling on arbitration clauses, it provides a thorough summary of the Massachusetts case law on the enforceability of online agreements.  It also highlights that Massachusetts law is favorable for the enforcement of such online agreements, perhaps more so than New York.

The plaintiffs in this case alleged that Uber overcharged them by imposing fictitious fees hidden in charges for legitimate local tolls. They sought class action relief for unfair and deceptive practices pursuant to Chapter 93A and common law claims for unjust enrichment. Uber moved to enforce the arbitration clause in the Terms pursuant to the FAA, and the Court agreed.

The Terms contained the following provision related to arbitration:

“[You] agree that any dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof or the use of the Service or Application (collectively, “Disputes”) will be settled by binding arbitration, except that each party retains the right to bring an individual action in small claims court. . . . You acknowledge and agree that you and Company are each waiving the right to a trial by jury or to participate as a plaintiff or class User in any purported class action or representative proceeding. Further, unless both you and Company otherwise agree in writing, the arbitrator may not consolidate more than one person’s claims, and may not otherwise preside over any form of any class or representative proceeding.”

The Court began by analyzing whether the Terms were valid under general Massachusetts contract law principles.  A significant portion of this discussion relies on Ajemian v. Yahoo!, Inc.,  a 2013 Massachusetts court decision that we previously discussed here.  In this analysis, the Court provided a very helpful summary of Massachusetts law on the various types of online agreements:

  • Adhesion Contracts:  Massachusetts law applies the same general analysis as other jurisdictions with respect to the enforceability of online adhesion contracts.  Such agreements will be enforced provided they have been “reasonably communicated and accepted” and “it is reasonable to enforce the provision at issue.”

The Court then compared the different types of online agreements, which evolved from shrinkwrap software licenses that have come into use since the computer era:

  • A “Browsewrap” agreement is where the user “does not see the contract at all but in which the license terms provide that using a Web site constitutes agreement to a contract whether the user knows it or not”, or “[w]here the link to a website’s terms of use is buried at the bottom of the page or tucked away in obscure corners of the website where users are unlikely to see it.”
  • A “Clickwrap” agreement is an online contract “in which website users are required to click on an “I agree” box after being presented with a list of terms and conditions of use.
    • The Court commented that Clickwraps are more enforceable than Browsewraps because they “permit courts to infer that the user was at least on inquiry notice of the terms of the agreement, and has outwardly manifested consent by clicking a box.”
  • A “Sign-In-Wrap” Agreement (a term coined in a 2015 decision by Judge Weinstein of the EDNY) is somewhat of a hybrid between the Browsewrap and Clickwrap.  A “Sign-In-Wrap” Agreement does not have an “I accept” button and the user is not required to view the terms and conditions to use the related web service.  These agreements typically make terms and conditions available by link and provide that by registering for an account, or signing into an account, the user agrees to those terms and conditions.

In this case, the Court adopted the “Sign-In-Wrap” terminology and held that such agreements may be enforceable under Massachusetts law.  Here, the Court found that Uber’s Terms were a Sign-In-Wrap agreement.  The Court then summarized Massachusetts law on the enforceability of online agreements in general, as follows:

  • Online consumer agreements “will be enforced provided they have been reasonably communicated and accepted and if, considering all the circumstances, it is reasonable to enforce the provision at issue.”
  • The party seeking to enforce the contract has “the burden of establishing, on undisputed facts, that the provisions of the online agreement were reasonably communicated and accepted, which requires “[r]easonably conspicuous notice of the existence of contract terms and unambiguous manifestation of assent to those terms by consumers.” 

Reasonably Conspicuous Notice

  • The Court held that Massachusetts law does not require proof of actual notice of the terms of the Agreement.  All that is required is that the users have reasonable notice.  Uber’s language on the final screen of the account registration process (“By creating an Uber account, you agree to the Terms of Service & Privacy Policy”) was found sufficient. 
  • While the dispute resolution/arbitration clause did not appear until the user scrolled down to the 8th/9th page, the Court was satisfied that the user had reasonable notice because the heading for the clause was in bold and much larger than other non-heading text.
  • Notably, the Court refused to adopt the four-step process used by the EDNY Court that first coined the Sign-In-Wrap phrase, which would have required a factual analysis of the actual notice to the user.  The Court held that such an analysis would be impractical and make online agreements much more difficult to enforce, which this Court was unwilling to do.

Manifestation of Assent

  • The Court adopted a similar reasonable test for determining whether the user’s assent can be found.  Specifically, the Court held that the “Done” button on Uber’s website (as opposed to “I accept” or other similar buttons) was sufficient for finding that the user understood that by clicking this button it has consummated account registration and was bound by the Terms.

Having found that the Terms were enforceable, the Court quickly made its way to conclude that the binding arbitration clause and the waiver of class action remedies too were enforceable.  The Court noted that this standard favors arbitration and that the only exception would be where the arbitration itself would be an “illusory remedy.” Here, as Uber offered to pick up the arbitration costs for any claims up to $75,000, arbitration would not be illusory and that the clause should be binding.

 

 


Recent Massachusetts Cases Rule on Contract Enforceability

Posted on Mar 13th, 2016

By: Ryan Carroll

The main purpose of a contract is to establish an agreement between parties to express their rights and obligations.  However, just because you may agree to something, in writing or verbally, does not mean that it will be enforceable if a legal dispute is to arise.  Two recent Massachusetts Appeals Court cases are examples of how this can work in practice.

In Goddard v. Goucher, a Massachusetts Appeals Court recently held that parties may not stipulate to legal conclusions (as opposed to factual) and that courts are not bound by these stipulations.  In this case, the parties sought to enforce a purchase and sale agreement to sell a parcel of land; never having been a final signed version of the purchase and sale agreement, they entered into pretrial stipulations that this purchase and sale agreement was a valid and enforceable contract.  At trial, the trial judge rejected the stipulation that a valid and enforceable contract was created, and the appellate court agreed.  Because the issue of whether the contract was valid is a question of law, as opposed to whether it was actually signed by parties or there was a meeting of the minds, which are factual issues that a party can stipulate to, the Court concluded that the trial judge was within his authority to reject the stipulation.

In Downey v. Chutehall Construction Co., Ltd., a Massachusetts Appeals Court recently concluded that a waiver of statutory requirements by an individual homeowner did not preclude a contractor, who violated the statute, from being liable.  In this case, the contractor alleged that the homeowner did not allow the contract to comply with state’s building code requirements relating to roofing – specifically, the contractor argued that the homeowner did not wish for the contractor to strip the existing roof materials, which was required by the code.  The contract claimed that this was a waiver by the homeowner and it was a defense to claims under Chapter 93A.  The Court concluded that the waiver did not preclude the contractor from being held liable of violations of the building code and resulting 93A violations, especially because the violation carried potential public safety concerns.  While the court did acknowledge that a statutory right or remedy may be waived if it would not frustrate the public policies of the statute, it did state that such right may not be disclaimed if the waiver could do violence to the public policy underlying the legislative enactment.

These recent cases are just examples.  There is a plethora of past cases that illustrate instances in which, despite the parties’ intents and agreements, a court could deem an entire agreement or terms contained therein, unenforceable.  That is why it is always a good idea to have legal counsel review your contracts, especially if big stakes are involved.

 


Regulation Crowdfunding – SEC assists smaller, non-public U.S. companies with raising capital

Posted on Nov 12th, 2015

Ryan S. Carroll

On October 30, 2015, the SEC voted to adopt Regulation Crowdfunding, the final rules allowing private companies to raise capital through crowdfunding and providing additional protection to investors in crowdfunding investments.  This post provides some background on crowdfunding, a summary of Regulation Crowdfunding’s rules and forms and how we can assist in helping you in your next crowdfunding financing.  While we are lawyers, this blog is not intended to be legal advice and should not be relied on as such.  If you would like legal advice on any of the information contained in this post, please contact us.

Background on “Crowdfunding”

Crowdfunding is a new and evolving financing method that can be used to raise relatively small amounts of capital from a large number of investors at a low cost using the Internet as a means to market the offering.  Regulation Crowdfunding are the new rules which will be applicable to crowdfunding offerings relying on Section 4(a)(6) of the Securities Act of 1933 (“Securities Act”).  This Section was added by Title III of the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) which allows private companies to raise capital through new “crowdfunding” exemptions.  We last wrote on the topic of crowdfunding in this post.

Many provisions of the JOBS Act require rulemaking by the SEC.  Regulation Crowdfunding and its forms will be effective 180 days after they are published in the Federal Register (tentatively, May 2016). This will complete the SEC’s major rulemaking requirement as mandated under the JOBS Act.

The final rules can be found here.

Summary of the Rules:

The recommended rules would, among other things:

1)      Permit issuers to offer the sale of and for investors to purchase securities in crowdfunding offerings, subject to limitations.

  • Such limitations on crowdfunding include:
    • the maximum aggregate amount of financing an issuer can raise through crowdfunding in a 12-month period is $1 million;
    • across all crowdfunding offerings, an individual investor, over a 12-month period may only invest, in the aggregate:\
      • the greater of $2,000 or 5% of the lesser of their annual income or net worth (if their annual income or net worth is less than $100,000); or
      • 10% of the lesser of their annual income or net worth, not to exceed $100,000 in value (if both the investor’s annual income and net worth are equal to or more than $100,000); and
    • an issuer will only be able to make an offering through a registered broker-dealer or through a funding portal and can only use one intermediary for an offering made pursuant to the exemption.

2)      Require issuers raising capital through crowdfunding to disclose certain information regarding their business and the securities being offered through Form C and other requirements.

  • The initial disclosure an issuer must file about the offering is a Form C, which must be provided to the SEC, investors and the intermediary facilitating the offering.
  • Information that must be disclosed on a Form C includes:
    • the price of the securities offered to the public or the method for determining the price, the target offering amount, the deadline to reach the target offering amount and whether the issuer will accept investments in excess of the target offering amount;
    • a discussion of the issuer’s financial condition, a description of the business and how the issuer plans on using the proceeds from the offering, information about the officers and directors of the issuer, information about owners of 20% or more of the issuer and certain related-party transactions; and
    • financial statements of the issuer that are accompanied by information from the issuer’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor.

3)      Create a regulatory framework for intermediaries facilitating the crowdfunding transaction.

  • An issuer must use a registered broker dealer or a funding portal.
  • A funding portal is required to register with the SEC on new Form Funding Portal and become a member of a national securities association (currently, FINRA).
  • Regulation Crowdfunding requires the registered funding portals to:
    • provide investors with educational materials that explain the process for investing on the platform, the types of securities being offered and information an issuer must provide to investors, resale restrictions and investment limits;
    • take certain measures to reduce risk of fraud by having reasonable basis for believing issuers on the platform comply with the Regulation Crowdfunding and that such issuers have a way of keeping accurate records of security holders;
    • make information that an issuer is required to disclose available to the public on its platform for a minimum of 21 days before any security may be sold and throughout the entire offering of such security; and
    • provide channels of communication for discussions about the offerings on the platform, provide disclosure to investors about compensation to the intermediary, only accept an investment commitment after such investor has opened an account, has a reasonable basis for believing an investor complies with investment limitations, provide investors notices once they made investment commitments and confirmations at or before completion of the transaction, comply with maintenance and transmission of funds requirements and comply with completion, cancellation and reconfirmation of offerings requirements.
  • Regulations prohibit intermediaries to engage in certain activities, such as:
    • providing access to their platforms to issuers that they have reasonable basis for believing there is a potential for fraud or other investor protection concerns;
    • having a financial interest in an issuer where it is offering or selling securities on its platform, unless the intermediary is receiving such interest in the issuer as compensation for its services, subject to certain conditions;
    • compensating any person for providing the intermediary with personally identifiable information of any investor; and
    • offering investment advice or making recommendations, soliciting purchase, sales or offers to buy securities, compensating promoters and other solicitors, and holding possessing or handling investor funds or securities.

4)      Require issuers raising capital through crowdfunding to be subjected to ongoing reporting requirements, such as annual reports, to be filed with the SEC and provide such annual reports to investors through the intermediary.

  • If an issuer is raising $100,000 or less, the following are required to be reported (among other things):
    • amount of total income, taxable income, total tax as reported on federal tax forms (if any) and financial statements of the issuer certified by the principal executive officer of the issuer.
  • If an issuer is raising more than $100,000 and less than $500,000, the following are required to be reported (among other things):
    • financial statements of the issuer reviewed by an independent public accountant.
  • If an issuer is raising more than $500,000, the following are required to be reported (among other things):
    • financial statements of the issuer audited by an independent public accountant.

This post is only a summary of selected sections of Regulation Crowdfunding.  Crowdfunding is a very new and nuanced form of raising capital and we recommend you contact your attorney before pursuing any such transaction.  If you have any questions concerning the information in this post, please do not hesitate to contact me at ryan.carroll@hermanlawllc.com.  


Recent Massachusetts case finds defendant liable on a verbal personal guaranty, notwithstanding Statute of Frauds

Posted on Aug 13th, 2015

By: Richard Gauthier

In Chivian vs. Lepler, the Massachusetts Appellate Court recently held that an unsigned personal guaranty is valid, notwithstanding the Statute of Frauds writing requirements.  This case is a somewhat surprising result and a reminder that great care should be made with verbal promises or assurances of personal guarantees or liabilities.

In 2003 the defendant, who was married to the plaintiffs’ daughter, approached the plaintiffs about a real estate investment. The parties agreed to invest $150,000 in the opportunity. Initially, the plaintiffs were equity investors, but after their initial investment turned a profit, the parties agreed that the equity would be converted into loans payable with interest. Both plaintiffs repeatedly asked the defendant to execute written personal guaranties; the defendant apparently agreed to do so, but never actually did. As of 2010, they had not received repayment and filed this action. At trial, the defendant admitted that he had promised to provide personal guaranties of the loans, but never signed them. He then asserted that the Statute of Frauds barred recovery on the personal guaranties absent a writing.

On appeal, the defendant claimed that because the Statute of Frauds bars recovery in contract on a personal guaranty absent a sufficient writing, it was error for the trial judge to send the case to the jury on a theory of promissory estoppel.  The Court held that it was “unpersuaded by the defendant’s contention that a partial writing is necessary to overcome the Statute of Frauds defense in the context of promissory estoppel.”  Because promissory estoppel is an equitable doctrine, the Court reasoned that it would be “harsh injustice to permit the Statute of Frauds to bar recovery for the plaintiffs where the defendant admits he induced the plaintiffs’ reliance by promising to execute a written agreement, the absence of which he now seeks to use to avoid the debt.”