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Corporate Law Monitor

Updates and Commentary on Corporate Law and Business Issues

Emergency Contact Information: Attorneys’ Cell Phone Numbers

By Joe Koshar on Posted in Uncategorized

We apologize, but our New Jersey telecommunication systems remain adversely affected and are currently not functioning.  This includes phone, voicemail and fax communication.  Thus, if you need to contact anyone at our NJ office, please click here for an attachment containing all of our attorneys’ mobile phone numbers. 

You may also access our attorneys’ phones numbers on our website.

Alternatively, you may also dial 212-752-8000 for our New York main line, where our Client Service Representative will direct your call accordingly.

All of our offices are open and operational.

Again, and most importantly, we truly wish our best to everyone.

Perhaps We Can Help During These Difficult Times

By Joe Koshar on Posted in Uncategorized

Dear clients, friends and neighbors,

We realize that in this difficult aftermath of the storm, many of our clients, friends and neighbors are dealing with issues where we may be able to present some relief.

We are very fortunate to have power and Internet in our New Jersey, New York, Delaware and Maryland offices.  For anyone who needs it, we would like to offer you the ability to use our conference rooms to charge your devices, check email or other important areas of your life that you are unable to access.

We very much realize that these are tumultuous times.  It is our utmost hope that we may be able to help alleviate some of the pain and trouble experienced by the people and families we care about.  Please do not hesitate to contact Gayle Englert, Director of Human Resources, at genglert@coleschotz.com or 201-320-2766, if you would like to make use of our facilities.  We will do our very best to accommodate everyone we possibly can.

Also, we hope that you may find the below list of important numbers and services to be helpful.

Lastly, we realize that many of you may have been trying unsuccessfully to contact us over the previous several days.  We deeply apologize for this as our systems were adversely affected and were not restored until today.

Again, we wish our absolute best to everyone affected.  During these times, we are reminded of the paramount importance of health, safety and family and hope that all are as strong for you as possible.  We hope you know that you are in our thoughts and we hope to help you as we surmount the obstacles ahead of us.

Is Your Trademark License Assignable in Bankruptcy?

By Jordan A. Fisch and Wylie D. Van Ness on Posted in General Business Information, Recent Developments

The Seventh Circuit Court of Appeals recently addressed in In re XMH Corp., 647 F. 3d 690 (7th Cir. 2011), whether or not trademark licenses are assignable in bankruptcy proceedings. In its ruling, the Court held that a trademark license may not be assigned by a licensee in a bankruptcy proceeding unless there is an express provision in the contract permitting assignment by the licensee.

XMH Corporation (formerly Hartmarx) (“XMH”), and a subsidiary, Simply Blue, filed for bankruptcy under Chapter 11 of the Bankruptcy Code. XMH asked permission of the Bankruptcy Court to sell assets of Simply Blue, which assets included an executory contract between Simply Blue and Western Glove Works (“Western Glove”). The contract with Western Glove was a two part contract which provided that Western Glove provide Simply Blue with a trademark license for a period of time, and once that time period elapses and the license expires, Simply Blue would provide Western Glove with certain support services with respect to the product using the trademark.

Western Glove objected to the assignment by Simply Blue of the contract, arguing that the contract was a trademark license and that, absent its permission, Simply Blue could not assign the contract to a third party.

The Seventh Circuit, in deciding whether the contract was assignable, recognized that Section 365(c)(1) of the Bankruptcy Code prohibits the assignment of an executory contract if “applicable law” authorizes the other party, in this case, Western Glove, to refuse to accept performance from an assignee, in this case, a third party purchaser, whether or not the contract itself prohibits assignment. The court found that “applicable law” means any laws other than bankruptcy law, and for the purposes of this matter, trademark law.

Citing a number of trademark cases, the Court noted that the default rule is that a licensee of a trademark license cannot assign the license unless the license expressly permits assignment. The Court’s reasoning was based on basic trademark policy. The Court explained that a trademark is a shorthand designation of a brand that consumers will use to associate with the particular product. If an unauthorized third party is granted the right to use the trademark (through the assignment of the license) without the owner’s permission, the owner will no longer be able to control the product or the use (or misuse) of the trademark.

Accordingly, because the contract between Simply Blue and Western Glove did not contain a provision expressly allowing assignment by the licensee, the Court barred the assignment absent the express consent of Western Glove.

Ultimately, the Court found that the first portion of the contract, the license portion, had expired, and only the second portion, the service portion, of the contract remained. Thus, because the trademark license was no longer in effect, the agreement was merely a service contract that was freely assignable by the Bankruptcy Court.

Notwithstanding the conclusion of the Court regarding the assignability of the contract, the Court’s holding is important to consider when drafting licenses and the effect such drafting can have during bankruptcy proceedings. To summarize, the Court held that absent an express provision in a trademark license, a licensee in bankruptcy does not have the right to assign the trademark license unless it has the express consent of the licensor.

As a practical matter, this holding emphasizes two important structure concepts. First, it is important how you designate your contract. A service contract, pursuant to this ruling, remains fully assignable in bankruptcy, despite language in the contract providing otherwise. However, a trademark license will not be assignable unless there is a provision in the license expressly permitting assignment. Second, to prevent any ambiguity regarding whether a court, bankruptcy or otherwise, would allow assignment of a trademark license, it is in the best interests of both licensees and licensors that the trademark license expressly address the assignability of the contract.

Has Your Company Adopted and Implemented Appropriate Electronically Stored Information (ESI) Preservation Procedures?

By Jordan A. Fisch and Wylie D. Van Ness on Posted in General Business Information, Recent Developments

Recently, the importance of adopting and implementing appropriate safeguards for the protection and preservation of electronically stored information (“ESI”) was addressed in Chura v. Delmar Gardens of Lenexa, Inc., No. 11-2090-CM-DJW, 2012 U.S. Dist. LEXIS 36893 (D. Kan. Mar. 20, 2012).  In Chura, the Court ordered an evidentiary hearing to discuss the defendant’s failure to produce any electronically stored information (“ESI”).  The hearing was to include a review of the adequacy of defendant’s attempt to preserve and search for responsive ESI1. ESI is information that is created, manipulated, communicated and stored in digital (or related) form, requiring the use of computer technology.

The Chura  case highlights the importance of these procedures in the context of  an employment dispute.  In the Chura case, plaintiffs had requested that defendant produce information regarding ten individuals who had been cited as possibly having knowledge of the facts regarding the plaintiffs’ claims of sexual harassment and hostile work environment.  The defendant responded to the various requests by referring plaintiffs to the complaints and personnel files of the plaintiffs.  Plaintiffs, in their motion, said that defendant failed to produce any responsive ESI or other documents that a defendant would typically produce in this type of case.  Defendant argued in response that “it cannot produce what does not exist.”  Plaintiffs also claimed that defendant never produced a litigation hold letter (a letter directing employees to preserve and segregate, notwithstanding the document retention policy, any and all documents and ESI that are, or arguably may be, relevant to threatened or actual litigation).  Defendants stated that there was such a letter, but referred to its original objection to plaintiffs’ interrogatory that the letter was subject to attorney-client privilege (but failed to discuss or support this privilege assertion).

As a result of defendant’s failure to produce responsive ESI and other documents, the Court found that such failure “raises justifiable concerns that Defendant may have 1) failed to preserve relevant evidence, or 2) failed to conduct a reasonable search for ESI responsive to the discovery requests.”  Accordingly, the Court asked the defendant to be prepared to present evidence with respect to the defendant’s litigation hold process, its system of creating and storing ESI, its efforts to preserve ESI, and the methods for searching and producing relevant ESI.

Based on the foregoing, the Court was to determine “whether 1) defendant has made reasonable efforts to search for responsive documents and ESI, 2) whether it should be compelled to make further efforts and 3) what those efforts should be.”

Now, more than ever, companies need to be aware that courts expect that they are properly preserving, searching and producing ESI.  Further, companies must appreciate the fact that a court will thoroughly review a company’s litigation hold and preservation standards and processes in order to make such a determination.  Having a comprehensive document retention policy that all employees understand and abide by is a crucial part of ensuring that ESI is correctly maintained should litigation arise in the future.

1 Please note that the Court cancelled the hearing as the parties reached a settlement of the case.

For Corporations, a “Virtual Office” in New Jersey Can Lead to an Actual Tax

By Kenneth L. Baum on Posted in General Business Information

For out-of-state corporations that do business in New Jersey through the use of “virtual offices,” the recent decision by the Appellate Division of the Superior Court of New Jersey in Telebright Corporation, Inc. v. Director, New Jersey Division of Taxation is a reminder that employees who “telecommute” from New Jersey will not relieve their employers of certain corporate tax obligations.

Telebright Corporation, Inc. (“Telebright”), which was incorporated in Delaware and maintained its offices in Maryland, employed a woman who lived in and telecommuted from New Jersey.  Her job was developing and writing software code from a computer in her home, which she uploaded to a repository on Telebright’s remote computer server.  Other than attending company-wide meetings in Maryland once or twice a year, she worked entirely from her home.

From the beginning of the employee’s tenure, Telebright withheld New Jersey income tax from her salary and remitted it to the New Jersey Division of Taxation (“Taxation”).  Taxation determined that Telebright was subject to the New Jersey Corporation Business Tax Act (“CBT Act”) and, thus, was required to file New Jersey Corporation Business tax returns.  The New Jersey Tax Court upheld that determination, and Telebright appealed to the Appellate Division.  On appeal, Telebright did not dispute that the employee’s activities satisfied the statutory test for “doing business” under the CBT Act.  Instead, Telebright argued that applying the CBT Act to those limited activities violated the Due Process and Commerce Clauses of the United States Constitution. 

In support of its due process argument, Telebright claimed that upholding the CBT tax against it would allow a state to tax any corporation whose employees resided in that state.  The court in Telebright rejected that argument, reasoning that Taxation imposed the CBT tax because the employee worked for Telebright on a full-time basis in New Jersey, and not because she lived there.  Taxing a business based on the presence of a full-time employee, the court held, does not violate the Due Process Clause.  The court further reasoned that if the employee violated the restrictive covenant in her employment contract, Telebright could file suit against her in the New Jersey courts.  Thus, Telebright had sufficient minimum contacts with New Jersey to justify taxation under the CBT Act, consistent with the Due Process Clause.

The court in Telebright then addressed Telebright’s argument that imposition of the CBT Tax violated the Commerce Clause.  As the court noted in citing Supreme Court precedent, imposition of a tax does not violate the Commerce Clause if the tax (i) is applied to an activity with a substantial nexus with the taxing state, (ii) is fairly apportioned, (iii) does not discriminate against interstate commerce, and (iv) is fairly related to the service provided by the state.  Telebright did not dispute that the latter three prongs of this test were satisfied, arguing only that employing one person in New Jersey does not create a “definite link” or “minimum connection” between Telebright and the state.  Notably, Telebright also argued that, given the prevalence of telecommuting, taxing companies on the basis that their employees work from remote locations would impose “unjustifiable local entanglements” and an undue accounting burden on those companies. 

The court in Telebright rejected that argument, holding that the fact that Telebright’s full-time employee worked from a home office, rather than one owned by Telebright, is immaterial for purposes of determining whether the employee’s activity had a “substantial nexus” with New Jersey.  As the court noted, the employee produced a portion of Telebright’s web-based product in New Jersey, and the company clearly benefited from all of the protections afforded to the employee under New Jersey law.  Thus, because the tax related to an activity with a substantial nexus with New Jersey, the application of the CBT Act did not violate the Commerce Clause.  Accordingly, the Appellate Division affirmed the Tax Court’s decision.

The Appellate Division’s decision in Telebright is instructive for corporations seeking to economize by establishing virtual offices in New Jersey.  While maintaining such offices may allow corporations to reduce the traditional cost of maintaining a physical presence in New Jersey, the presence of even one employee in the state is sufficient to trigger the most familiar of business expenses: the corporate business tax.

IRS Announces Third Offshore Voluntary Disclosure Program

By Steven M. Saraisky on Posted in Securities Laws and Regulation

The IRS announced a third voluntary disclosure program for offshore accounts recently.  The IRS has conducted two prior voluntary disclosure programs – one in 2009 and one in 2011.  According to the IRS, it had 33,000 disclosures from the 2009 and 2011 programs.  The Service has closed approximately 95% of the 2009 cases and collected approximately $3.4 billion in payments.  The IRS also stated that it has collected approximately $1 billion in up-front payments as a result of the 2011 program. 

The third voluntary disclosure program does not have a set termination date and includes a top penalty rate of 27.5%, slightly higher than the top penalty rate in the 2011 program.  IRS Commissioner Douglas Shulman said that the Service’s focus on offshore tax evasion continues to produce strong, substantial results. 

The IRS has also pursued a number of international banks to disclose the names and records of customers with undisclosed offshore accounts, and now also requires the filing of a Form 8938 for taxpayers to disclose specified foreign financial assets. 

The third voluntary disclosure program may be a benefit to taxpayers who have not disclosed offshore accounts previously and were otherwise facing uncertainty as to how the IRS would treat their disclosures.  If you have questions about the program please contact us.
 

Changes Made to Hart-Scott-Rodino Premerger Notification Rules Increase the Reporting Burden on Certain Investors

By Jordan A. Fisch and Wylie D. Van Ness on Posted in Recent Developments

On July 19, 2011, the U.S. Federal Trade Commission (the “FTC”) and the U.S. Department of Justice, Antitrust Division (the “DOJ”) issued a Final Rule Publication with respect to a number of revisions (the “Revisions”) to the Hart-Scott-Rodino Premerger Notification Rules (“HSR”).  The Revisions became effective on August 18, 2011.

The FTC and the DOJ adopted the Revisions as part of their continuing efforts to streamline HSR compliance paperwork by eliminating certain reporting requirements.  However, the Revisions also increase the burden on filing entities, especially certain investors such as private equity firms, who acquire other companies through multiple investment vehicles.

The prior HSR rules only required the reporting of information related to the “ultimate parent entity” of the acquiring party and the entities directly or indirectly controlled by the ultimate parent entity.  The Revisions now require the acquiring entity to also report information with respect to its “associates.”  An “associate” includes any person that is under common management with the acquiring entity (not just under common control).  The Revisions provide that associates include “general partners of a limited partnership, other partnerships with the same general partner, other investment funds whose investments are managed by a common entity or under a common investment management agreement, and investment advisers of a fund.”

To give effect to the expansion of the HSR reporting requirements, Item 6(c)(ii) of the HSR form now requires the acquiring entity to identify all of its associates’ investments of five (5%) percent or more (up to fifty (50%) percent) in other companies that either report earnings in the same North American Industry Classification System (“NAICS”) revenue code or that fall into the same industry category as the acquired company.

The FTC and the DOJ have provided that the reason for including this additional reporting requirement is to allow them to determine whether there are any competition issues raised as a result of an acquiring entity’s associate’s ownership in a company that operates in the same industry as the acquired entity.

This expanded reporting requirement may have a notable impact on certain investors, namely private equity firms and other multiple investment vehicles, who acquire companies through different acquisition entities (including limited partnerships), where all of such entities are under common management (or have the same general partner).  Investors will now have to review all possible NAICS overlaps, increasing the burden on them when reporting under HSR.  While the new reporting requirement may be viewed by some investors as unduly burdensome, in order to alleviate the burden, acquiring investors should try to maintain detailed records with respect to all associates, including the NAICS codes for all associates, so that when they must file an HSR form, the information requested in revised Item 6(c)(ii) is readily available.

 

Supreme Court Issues Decision in Securities Fraud Case

By Wylie D. Van Ness on Posted in Securities Laws and Regulation

On June 13, 2011, the United States Supreme Court rendered a decision in the Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525.  In a 5-4 decision, the Court held that a mutual fund’s investment adviser cannot be held liable for securities fraud under Rule 10b-5 over false statements in a mutual fund’s prospectuses.  In sum, the Court found that Rule 10b-5 provides a private right of action only against the person or company with “ultimate control” over the statements in the prospectuses (i.e. the mutual fund itself), not the mutual fund investment adviser who was “significantly involved” in the preparation of the prospectuses.

Rule 10b-5 of the Securities Exchange Act of 1934 (the “Act”) provides that it is unlawful for “any person, directly or indirectly,…[t]o make any untrue statement of material fact” (emphasis added) in connection with the sale or purchase of securities.  The Court in Janus Capital therefore had to determine who may be held liable in a private right of action for having “made” untrue statements of material fact in the mutual fund prospectuses.

Janus Capital Group (“Janus Capital”), a public company, created a group of mutual funds called The Janus Investment Fund (“Janus Investment”).  Janus Investment hired Janus Capital Management LLC (“Janus Management”), a wholly-owned subsidiary of Janus Capital, to act as its investment adviser and administrator.  Janus Investment is a separate legal entity from Janus Capital and Janus Management and owned by mutual fund investors.  Janus Management provides investment advice and administration to Janus Investment. 

Pursuant to securities laws, Janus Investment issued prospectuses to its investors describing investment strategies and operations of its mutual funds.  First Derivative Traders, a company owning stock in Janus Capital, sued Janus Capital and Janus Management for securities fraud, alleging that Janus Investment’s prospectuses falsely provided that Janus Management would implement policies to restrain trading strategies based on market timing and delays and that those statements led to a fall in Janus Capital’s stock value.  First Derivative Traders claimed that Janus Capital should be held liable for Janus Management’s acts as a “controlling person” under Section 20(a) of the Act.

The Court provided that Janus Management did not “make” untrue statements of material fact, which is required to pursue a 10b-5 action, stating that the Court must interpret Rule 10b-5 with “narrow dimensions.”  Accordingly, the Court held that the “maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it” and that “one who prepares or published a statement on behalf of another is not its maker.”  The Court likened the relationship between investment adviser and mutual fund to a speechwriter and the speaker, stating “[e]ven when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it.”  In this case, it is Janus Investment, not Janus Management or Janus Capital, that is statutorily obligated to file the prospectuses with the SEC   Thus, Janus Management, because it did not have ultimate control over the statement, did not “make” the statement for purposes of 10b-5. 

The Court came to this conclusion despite recognizing that there exists a very close relationship between mutual funds and their investment advisers and that investment advisers exert significant influence over mutual funds.  Notwithstanding the foregoing, the Court found that “corporate formalities were observed,” Janus Investment had an independent board of trustees different from the board of trustees of Janus Management, and that Janus Capital and Janus Management “remain separate legal entities.”  Finally, the Court stated that redistributing liability in securities cases based on the close relationship between investment advisors and the mutual funds they advise is not the responsibility of the courts, but rather Congress.

Justice Thomas wrote for the majority, in which Chief Justice Roberts and Justices Kennedy, Scalia and Alito joined.  Justice Breyer wrote for the dissent, in which Justices Sotomayor, Ginsburg and Kagan joined.

New Jersey Creates A New Corporate Structure, The Benefit Corporation, Enabling Companies To Pursue Public Benefits As Well As Profits

By Robyn Pellegrino on Posted in Legislation

On March 1, 2011, New Jersey became the third state to enact legislation authorizing the creation of “benefit corporations”.  A benefit corporation is a corporation designed to generate profits while promoting public benefits.  The legislation is designed to promote performance, accountability and transparency with respect to achieving public benefits, while providing legal protection to directors and officers for considering the interests of its employees and customers, the communities in which the company operates and the environment, as well as the interests of its shareholders, in making corporate decisions.  Maryland, Vermont and Virginia have enacted similar legislation, and a number of states are considering similar bills.

A benefit corporation is formed in the same manner as any other for-profit corporation, except that the certificate of incorporation of a benefit corporation must include a statement that the corporation is a benefit corporation.  N.J.S.A. 14A:18-2.  An existing corporation can become a benefit corporation by amending its certificate of incorporation to include such a statement.  N.J.S.A. 14A:18-3.

A benefit corporation must have as its purpose the creation of a general public benefit, which purpose may be in addition to any other purpose or specific public benefit set forth in its certificate of incorporation.  N.J.S.A. 14A:18-5.  A “general public benefit” is defined as “a material positive impact on society and the environment by the operations of a benefit corporation through activities that promote some combination of specific public benefits.”  N.J.S.A. 14A:18-1.  “Specific public benefits” include “(1) providing low-income individuals or communities with beneficial products or services; (2) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; (3) preserving the environment; (4) improving human health; (5) promoting the arts, sciences or advancement of knowledge; (6) increasing the flow of capital to entities with a public benefit purpose; and (7) the accomplishment of any other particular benefit for society or the environment.”  Id.

By statute, the achievement of general and specific public benefits are deemed to be in the best interest of a benefit corporation and directors of a benefit corporation are required to consider the effects of any action on various stakeholders when considering the best interests of a benefit corporation.  N.J.S.A. 14A:18-5; 14A:18-6.  Specifically, directors of a benefit corporation are required to consider the effects of a corporate action upon its shareholders, as well as upon the employees of the benefit corporation, its subsidiaries and suppliers; its customers, as beneficiaries of the public benefit purpose of the corporation; the community, including communities in which the benefit corporation or its suppliers are located; the environment; and the short-term and long-term interests of the benefit corporation, including benefits that may accrue from the company’s short term and long-term plans.  Moreover, directors are not required to give priority to the interests of any one group of stakeholders, including shareholders.  N.J.S.A. 14A:18-6.  Officers of benefit corporations are also required to consider these factors in connection with any action within the officer’s discretion that reasonably appears to potentially have a material effect on the creation of a general or specific public benefit or the above-referenced factors.  N.J.S.A. 14A:18-8.

In addition, a benefit corporation is required to elect an independent director, designated as the “benefit director”, who shall prepare an annual statement as to whether, in the opinion of the benefit director, the benefit corporation acted, in all material respects, in accordance with its stated general and specific public benefit purposes and whether the directors and officers of the corporation complied with their obligations to consider the impact of corporate actions upon its various stakeholders, including its shareholders.  N.J.S.A. 14A:18-7.  A benefit corporation may designate a “benefit officer”, whose management duties shall relate to the creation of general or specific public benefits.  N.J.S.A. 14A:18-9.

The public benefit purpose of a benefit corporation and the duties of directors and officers of a benefit corporation are enforceable in a “benefit enforcement proceeding”, in which a claim is brought against an officer or director for failing to pursue the general or specific public benefit purpose of the company or for violating a duty or standard of conduct of an officer or director of a benefit corporation.  N.J.S.A. 14A:18-1; 14A:18-10.  Benefit enforcement proceedings may be commenced directly by the benefit corporation or derivatively by a shareholder, director, the holders of ten percent or more of the equity of the benefit corporation’s parent entity or any other person specified in the company’s certificate of incorporation.  N.J.S.A. 14A:18-10.  Benefit directors are protected from personal liability for their actions or omissions in that capacity, unless a benefit director engaged in self-dealing or his actions or omissions constituted willful misconduct or a knowing violation of law.  N.J.S.A. 14A:18-7.  In addition, officers or directors of benefit corporations are not personally liable for money damages if a benefit corporation fails to create general or specific public benefits.  N.J.S.A. 14A:18-6; 14A:18-8.

Finally, a benefit corporation is required to deliver an annual benefit report to its shareholders containing a narrative describing the ways in which the benefit corporation pursued general or specific public benefits, the extent to which such public benefits were created, and any circumstances hindering the creation of such public benefits.  In addition, the annual benefit report is to contain an “assessment of the social and environmental performance of the benefit corporation, prepared in accordance with a third-party standard . . . .”, as well as the statement of the benefit director as to whether the company acted in accordance with its general and specific public benefit purposes.  N.J.S.A. 14A:18-11.  A “third-party standard” is defined as a “recognized standard for defining, reporting and assessing corporate social and environmental performance” which is prepared by an independent person and is “transparent” because the factors considered in applying the standard, the weighting of those factors and the identity of the person who developed and controls any changes made to the standard is publically available.  N.J.S.A. 14A:18-1.  Finally, a benefit corporation is required to list in its annual benefit report the names and contact address for the company’s benefit director and benefit officer (if any), the compensation paid to each of its directors and the names of each person owning, beneficially or of record, five percent or more of the outstanding shares of the benefit corporation.  N.J.S.A. 14A:18-11.  The annual benefit report must be posted on the company’s website and be filed with the Department of Treasury, provided that the benefit corporation may omit references to compensation of its directors, as well as financial and proprietary information, from the publically posted and filed version of the annual benefit report.  Id.

Definition of “Accredited Investor” Modified for Purposes of the Securities Act

By Jennifer Horowitz on Posted in General Business Information, Legislation, Securities Laws and Regulation

The Frank-Dodd Wall Street Reform and Consumer Protection Act (the “Act”) amended the definition of “accredited investor” under the Securities Act of 1933, as amended, by requiring that any natural person who is intending, with or without that person’s spouse, to be deemed an “accredited investor” based on the $1 million dollar net worth test, exclude the value of the primary residence of the natural person in the calculation. The Act authorizes the Securities and Exchange Commission to review the definition of “accredited investor” as such term applies to natural persons, to determine whether other requirements of the definition should be modified for the protection of investors, in the public interest and in light of the economy and, thereafter, make such adjustments as the SEC deems appropriate. While the SEC has not issued amendments to its rules to reflect this change, this amendment to the calculation of net worth in the definition of accredited investor was effective upon adoption of the Act on July 21, 2010.

Offering documents and purchase/subscription agreements (and, in some cases, operating or governing agreements) currently being used or in the process of being prepared should be revised to reflect these amendments to the definition of “accredited investor”.

The Act contains numerous other changes in or proposed changes to current laws which are not summarized herein. A copy of the Act is available at http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf.