Crowdfunding: rewriting the investment rules

Dear Mary, I’d like to start a new business, but I need money. I don’t know any big investors, but I have a lot of friends who believe in my idea and can invest a little. Is there a way for me to have a lot of little investors, instead of a few big ones?

You are not alone. In fact, there are so many other entrepreneurs in similar circumstances that earlier this year, Congress passed a law to address your situation. The Jumpstart Our Business Startups (JOBS) Act of 2012 allows for a wider pool of small investors, known as “crowdfunding.”

You may have already heard of websites like Kickstarter.com, where people can support business ideas by making small donations in exchange for something of value. The difference between these websites and the crowdfunding concept boils down to whether you’re getting a T-shirt or equity in the supported company. Under the JOBS Act, you could invest in a company for a relatively small amount of money, and receive an ownership stake.

Why isn’t everyone doing it? Well, it’s not quite legal (yet). The Securities and Exchange Commission (SEC) has until the end of the year to draft the crowdfunding regulations, but they’ve already requested more time.

We don’t know exactly what the final rules will look like, but there are some things we’re pretty sure about. Crowdfunded offerings will be limited to $1 million.

Under the new rules, crowdfund investors won’t have to qualify as “accredited investors,” which will allow these investors to invest in “the next Facebook” (or neighborhood food truck) without satisfying the $200,000 income or $1 million net worth accredited investor tests.

Investors with less than $100,000 in net assets or annual income will likely be limited to investing the greater of $2,000 or 5 percent of their annual income.

One of the big unknowns is how the SEC will regulate “solicitation,” which really just means securities advertising. If the regulations are liberal, we may see television commercials for the “next big thing,” or magazine ads offering investment opportunities.

Crowdfunding is very exciting — for businesses as well as for people who just want to make small investments in innovative businesses and ideas. Potentially, it could open up the previously secretive venture capital markets and level the playing field.

Of course, any time we have a new regulation, there are people who will abuse it. As an investor, be on the lookout for potential scams. And as a business, remember that you may be held liable for fraudulent offers posted on a crowdfunding portal.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached atmary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.

Whose job file is it, anyway?

In my last column, we discussed whether an employer must provide a current or former employee access to his or her personnel file and payroll records. This week, we’ll look at the specific information an employee may review.

The general rule is that a current or past employee has the right to inspect his or her personnel and payroll records, but what does that include?

Typically, you need to retain and provide his or her job application, payroll authorization form, wage garnishments, education or training certificates, performance appraisals and reviews, attendance records, and all employee action documents, including commendations, warnings, disciplinary actions, layoffs, leaves of absence, vacations and termination notices.

As with most laws, there are exceptions. You need not provide access to reference letters, nor are you required to provide access to records relating to a possible criminal offense. Employees have no right to access records obtained before the employee was hired.

If an employee or job applicant makes a request for any documents that they have signed relating to obtaining or keeping a job, you must provide them a copy, not just allow them to inspect.

The reference letter exception excludes not only pre-hire letters, but also responses from persons who were asked about the character or ability of the employee after the person was hired.

If there are reference letters in an employee’s file and you don’t want to share them or they’re confidential, you may choose to provide the former employee with the author’s name or a comprehensive summary of the contents.

If the file includes any third-party confidential communications, those people have a right to keep their names, addresses and telephone numbers confidential.

I’m not sure whether it applies to your particular business, but if your employees are exposed to potentially toxic materials or harmful physical agents, you must provide accurate records of that exposure.

Be careful with the timeline in allowing an inspection. If you receive a written or oral request from a current or former employee to inspect or copy his or her payroll records, you are required to comply as soon as possible, but no later than 21 calendar days from the request. If you don’t comply in time, the employee can recover a penalty from you.

It’s also a good idea to keep a record or log of employee inspection requests, including when the request was made, whether you allowed the inspection, and if so, when it took place.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached atmary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.

File this under “Important!”: Employee Files

Dear Mary, I terminated an employee recently and they just sent me a letter demanding that I send them their employee file and payroll records. Am I required to do this? What do they have access to?

You raise two major issues: 1) are you required to give an employee their employee file; and 2) what specific information must you provide? In this week’s column, I’ll answer the first question. Stay tuned for part two, in which we’ll look at what particular documents they can see and which documents you do not have to provide.

To answer the first question: You absolutely must allow employees reasonable access to inspect their personnel file and the opportunity to inspect or copy their own payroll records. That doesn’t mean that you necessarily have to send them a copy of the contents of their file, or that they even have the right to copy their file — it just means that they have the right to inspect it.

To make it easier for your employees, you should either keep a copy of each employee’s personnel file at the employee’s primary work location and make those records available within a reasonable amount of time after an inspection request, or allow the employee to inspect the records at the location where you keep them. Regardless of how you store records, employees may not be penalized or lose wages when they inspect their file.

You must allow inspection at “reasonable” times. “Reasonable” usually means during the office’s regular business hours, or during the employee’s regularly scheduled work shift. You need to give the employee sufficient time to thoroughly inspect their record(s), which will depend on the volume and content of the file.

Having said that, if you receive a written demand from a recently terminated employee to provide their file, it’s probably a good idea to send a complete copy in the manner requested. What you don’t want is a former employee who claims that you added or deleted items later to cover any wrongdoing.

How long do you have to allow a former employee the right to inspect? Employees may inspect their records until the statute of limitations expires on any claims. Keep in mind that a breach of contract claim has a statute of limitations of four years, so you may have to allow inspections for at least that long.

You may be liable for civil penalties and injunctive relief for failure to allow an employee to access their file. There are also different rules for public and large employers.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at mary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.