S&A Newsletter Summer 2009
Show Me The Money!

by Anthony J. Spotora, Esq.

Many business owners require start-up or early stage capital to help realize their professional dreams. They have personally assembled each piece of their business puzzle and have invested their time, sweat and tears in an effort to significantly increase the likelihood of their business’s success. They have established a corporate entity to create a foundation to build from and to further entice potential investors. Now, the only thing they lack is –> MONEY. Calling all Angels!

Businesses in their infancy often turn to private individuals for funding. In exchange, the investor, although also often a stranger (an “Angel”), is given an equity interest in the company. Commonly, the instrument delivered to the investor in consideration of their investment meets the definition of a “security” and therefore, the business must comply with federal and state securities laws.

With the advent of the internet, it was only a matter of time before business owners utilized and in some instances, manipulated this ubiquitous vehicle to discover parties interested in funding their dreams. However, while such a means of capital acquisition remained relatively unregulated for a time, eager business owners should not confuse the fact that securities themselves have long been regulated. So, while a “Click Here to Invest” icon or similar financing webicon may not only seem appealing but quite ingenuous; potential, sometimes likely consequences should be considered.

Most commonly, when a business decides to offer securities to investors it either registers its offering or it meets and complies with the requirements of an exemption from registration under applicable securities laws. For example, whereas a business might seek to benefit from the “safe harbor” exemptions offered through Regulation D of the Securities Act of 1933, even this exemption generally requires that the offering not involve a “general solicitation” (Rule 502(c)). Essentially, this means that the business (or even a broker-dealer hired by the business) must refrain from prospecting for investors through any form of broad-based or blind solicitation or advertising.

Subsequently, and in response to the public’s growing interest in using the internet for investment purposes, the Securities and Exchange Commission (“SEC”), along with many states, have explored ways to allow for internet solicitations without each necessarily resulting in an action for “general solicitations”.

For starters, and as a means of background, when a pre-existing, substantive relationship between an issuer (or its broker-dealer) and an offeree exists, general solicitations are not typically found. The SEC first extended this principle to private offerings posted on the internet in 1996. In IPOnet, SEC No-Action Letter (Division of Corporate Finance and Market Regulation Interpretive Letter dated July 26, 1996), the SEC staff indicated that a securities dealer and underwriter could distribute questionnaires to prospective, accredited investors via the internet to determine their suitability to participate in private offerings, and that those investors may be invited to access a secured website to review private placement offerings not contemplated or commenced prior to the lapse of a sufficient period of time (a “cooling off” period) after completion of an investor’s questionnaire.

Naturally, with the increase of this issue and the more flexible measures permitted, the SEC later issued a clarifying release to circumvent business owners/website operators that began to broadly interpret their No-Action Letters so as to apply very loose qualification methods for prospective investors.

So while the good news is that the internet can be used as a source for attracting angel investors so long as it’s done according to federal and state securities laws; the possibly more notable fact to be recognized by those business owners anxious to cyber-sell some stock is this à the SEC has focused on broker-dealer operated sites and has routinely resisted providing no-action relief to non-broker dealer website owners! Have you spoken to your attorney today?

Not So Common Law

So you’re surfing around the internet one day and you decide to type in the name of your business, followed by “.com”, to see what comes up. To your surprise and horror, there is another company in the same line of business as you located only a few zip codes away! NOW, you’re anxiously clicking, clicking, clicking around the internet to determine if the other business has already registered a trademark on the name or if you can register for it first??? You perform a Boolean search on the United States Patent & Trademark Office (“USPTO”) web site and it appears that they have NOT registered a trademark on it! Phew! Without delay, you call your I.P. attorney and ask him to quickly file an application for principal registry on your company name. Once you’ve secured the rights to your tradename, you will then be able to formally demand that the other business cease and desist from using your name further. You will be able to do this because federally registered trademarks have rights that trump trademarks governed only by common law. . . right? Sometimes.

First, it is important to recognize that both registered and non-registered trademarks are eligible for protection under the Lanham Act. As you’ve probably gathered, the Lanham Act defines the statutory and common law boundaries to trademarks and service marks. [1] As such, while rights can and do differ between registered versus non-registered marks, what is all-important is the date of first use of a mark in commerce, irrespective of its registration, or lack thereof.

So let’s look to the common law. What is “common law”? In this context, the term “common law” indicates that trademark rights have developed as a result of the use of a trademark in commerce. Unlike a federally registered trademark, a common law mark is not governed by statute, but rather, by the state your mark is used in via a judicially created scheme of rights. [2] Subsequently, these rights are available to you without the need for registration of any kind.

However, and significant, common law trademark rights are limited to the geographic area in which the mark is used. [3] A federally registered trademark, on the other hand, can provide rights on a national scope. Keep in mind, I said “can” and not “will.” If a trademark is registered with the USPTO after another person or business has acquired common law rights to the same or similar mark in a certain geographic location or locations, then the owner of the federal registration would have rights to the use of that mark in all territories but for the ones where the common law rights holder uses the mark. For example, if an energy drink without federal registration was being sold under the name, “NRG”, but only in California, then the rights to that name would exist only in California. If another company began to advertise another sports drink under that same, yet federally registered name in Florida, there would be no trademark infringement. However, if the Florida company decided to distribute its product on a nationwide basis, they could do so in 48 other states without issue. If and when they entered into California however, they could face a claim of trademark infringement without a proper licensing agreement or other arrangement with the California trademark owner.

So, how do you know if someone has common law rights to a trademark or service mark similar or the same as a mark you wish to file? Well, as you can imagine, without registration of any kind being necessary, it can be very difficult to determine if a mark’s rights are already being used. Consequently, when you’re calling your I.P. attorney to ask that he secure rights to a particular mark, you should first request that a comprehensive trademark search be performed. The results of such will provide you information on the same and similar marks in a number of categories including, (1) federal registries; (2) state registries; (3) common law data bases and; (4) domain names. Not only will a thorough review of the findings allot you a significantly enhanced idea as to whether you will infringe upon another’s rights, but it can potentially save you a great deal of time and money (i.e., circumvent potential infringement actions; avoid the high costs associated to redoing marketing and advertising campaigns; etc.).

An ounce of prevention is worth a pound of cure!

[1] See http://legal.web.aol.com/resources/legislation/tradeact.html

[2] See http://www.bitlaw.com/trademark/common.html

[3] See id.

Divorce Defined

Divorce (dì-vôrs’, -vôrs’) n.

1. The legal dissolution of a marriage.
2. A complete or radical severance of closely connected things.

In California, “divorce” is formally known as the “dissolution of marriage.” However, no matter how you define it, the result is theoretically the same and the participants can be understandably wrought with anxiety during its process. They are anxious to understand it; anxious to get through it and; anxious to get on with their lives. As such, and aside from retaining legal counsel well-versed in divorce law, it’s also important for you to remember that ‘knowledge is power’ and therefore, you may wish to familiarize yourself with the process associated to this “radical severance” and help reduce your anxiety. For example, you might want to know that a divorce can involve the court making decisions in three key areas: distribution of property, child custody, and spousal support.

Dividing Property

California is one of only nine (9)states in the U.S. that bases the distribution of property in divorce proceedings on the couple’s community property. “Community property” is defined as “any asset acquired or income earned by a married person while living with his or her spouse.”

When a couple files to dissolve their marriage, community property law defines how assets are divided between the married couple. There are generally only three instances when property is not considered community property: (1) The property was obtained prior to the marriage; (2) The property was acquired during the marriage and is a gift or an inheritance or; (3) The property is acquired during the marriage and is a personal injury settlement. Aside from these three instances, all of the couple’s assets are to be divided equally.

But not so fast – the law does not explicitly state that every asset owned by a couple is divided 50/50. Subsequently, the courts have some discretion in determining how property will ultimately be divided. For example, it is simply not feasible for the primary residence to be divided equally – it’s impossible for a house to be split in half! Instead, the presiding judge may grant one spouse the primary residence and the other spouse the family business, which may be equal in value. Also, keep in mind that community property does not solely include real estate. Other forms of community property include vehicles, stock options, pension plans, and cash, just to name a few.

The Issue of Child Custody

If you have children and are planning to divorce in California, things can get even more complicated. Amongst other matters, there is the issue of which spouse will gain custody of their child or children. As one might imagine, this can be an emotionally charged and very difficult decision to make. Subsequently, California law attempts to make the decision less painful by requiring that the couple undergo mediation before asking the court to determine who is granted custody. The couple is permitted to select a mediator or use one appointed by the court. Whether or not that mediator is ultimately able to recommend who should be granted custody varies by County. Most commonly, the mediator’s task is to assist the couple in coming to an agreement which may be presented to the court by means of a custody and visitation order.

If, however, the couple is unable to reach an agreement during mediation, the court will ultimately make a decision of child custody based on what is “in the best interest of the child.”

Alimony Considerations

Sometimes in divorce, one person is and/or ultimately will be better off, financially speaking, than the other. In cases like these that result in one spouse being left with insufficient means to pay for living expenses, California courts will often determine that alimony should be paid by the more affluent spouse. In these cases, the judge determines who pays, how much, and for how long. The judge will typically consider such issues as the less affluent spouse’s health, ability to earn income in the future, and the length of the marriage.

Let’s face it – divorce is not easy! By understanding the unique issues associated to your divorce however, you can minimize your anxiety and in turn, make the experience less intimidating and a lot easier to deal with – both mentally and emotionally.

DISCLAIMER: The information provided herein is intended to provide general information and does not constitute legal advice. You should not act or rely on such information without seeking the advice of an attorney and receiving counsel based on your particular facts and circumstances. Some of the legal principles mentioned might be subject to exceptions and qualifications which are not necessarily noted. Furthermore, laws are subject to change and vary by jurisdiction. Please see our entire web site disclaimer, available in our menu options and incorporated herein by this reference.
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