Forbes Best States For Business List
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NOV 12, 2014 @ 09:57 AM 10,412 VIEWSRanking The Best States For Business 2014: Behind The Numbers
I cover sports business with rare dip in education & local economies
Our ninth annual Best States for Business is headed by Utah, which previously finished on top between 2010 and 2012. The ranking measures six vital categories for businesses: costs, labor supply, regulatory environment, current economic climate, growth prospects and quality of life. We factor in 36 points of data to determine the ranks across the six main areas. Below is a breakdown of each category, along with the sources.
Business costs incorporate Moody’s Analytics cost of doing business index which includes labor, energy and taxes. Moody’s weighs labor costs the most heavily in its index. We also included a state tax index from the Tax Foundation that launched in 2012 and looks at the tax burden on businesses in each state across different industries. Business costs are the most heavily weighted component in the Forbes Best States for Business.
Labor supply measures college and high school attainment based on figures from the Census Bureau. We also consider net migration over the past five years and the projected population growth over the next five years. Lastly we included the percentage of the workforce that is represented by a union.
The Best And Worst States For Business 2014
Regulatory environment includes metrics influenced by the government. We incorporated the regulatory component of the Freedom in the 50 States report from the Mercatus Center at George Mason University. It considers labor regulations, health-insurance coverage mandates, occupational licensing, the tort system, right-to-work laws and more. We also factor in an index from Pollina Corporate Real Estate that measures tax incentives and the economic development efforts of each state. Other data points include Moody’s bond rating on the state’s general obligation debt and the transportation infrastructure including air, highway and rail.
The economic climate category measures job, income and gross state product growth as well as average unemployment during the past five years. Other metrics include the 2013 unemployment rate and the number of the 1,000 biggest public and private companies by revenue headquartered in the state.
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The growth prospects category measures job, income and gross state product growth forecasts over the next five years from Moody’s Analytics. This year we added a second component for employment growth (it was the only change to the 2014 methodology). EMSI’s “bottom-up” forecasting approach compliments Moody’s “top-down” forecasts. Other factors in the growth prospects category include business opening and closing statistics in each state based on data from the Small Business Administration. We also measured venture capital investments per the MoneyTree report from PricewaterhouseCoopers, the National Venture Capital Association and Thomson Reuters TRI +%.
Quality of Life
Quality of life takes into account poverty rates per the Bureau of Economic Analysis and crime rates from the FBI. Other factors include cost of living from Moody’s, school test performance via the Department of Education and the health of the people in the state per the United Health Foundation. We considered the culture and recreation opportunities in the state based on an index created by Bert Sperling, as part of our annual Best Places for Business. We factored in the mean temperature in the state as a proxy for the weather. Lastly, we included the number of top-ranked four-year colleges in the state from Forbes’ annual college rankings.
Complete Coverage: The Best States For Business
Nevada's GOP Gov. Brian Sandoval starts new term with tax-hike surprise
Nevada Gov. Brian Sandoval during his State of the State address in Carson City in January. (Lance Iversen / Associated Press)
Mark Z. BarabakContact Reporter
Nevada governor seeks tax increase for education, winning Democrats' praise and his fellow Republicans' anger
If 2014 was a good year for Republicans nationally, in Nevada it was an election for the ages.
Gov. Brian Sandoval won his second term with an extravagant 70% support. Republicans not only seized control of the Legislature — giving them full run of the Capitol for the first time since 1929 — but also staged an unprecedented sweep of statewide offices.
Sandoval then did something uncharacteristic for a Republican, especially one in a state with such a deep and abiding hostility toward government: He called for the largest tax increase in Nevada history.
And he did so after nearly 80% of voters in November rejected a tax hike that, while differing in size and scope, was touted as addressing the same problem Sandoval hopes to remedy with his plan: the state's woeful public education system.
"I know this will cause debate," Sandoval said after springing his plan in last month's State of the State address.
Indeed it has, along with a revolt by anti-tax Republicans, rumblings of a legislative recall and a man-bites-dog display of Democrats hailing the GOP governor and his brave leadership.
The governor loves this state. And he has a vision of what it needs to look like moving forward.- Marilyn Kirkpatrick, Democratic leader in the Nevada Assembly"The governor loves this state," said Marilyn Kirkpatrick, the Democratic leader in the Nevada Assembly. "And he has a vision of what it needs to look like moving forward."
Apart from turning Nevada politics upside down, Sandoval has launched a frontal assault against the tea party — perhaps the boldest in the country — in a state where the movement's minimal-government philosophy has one of its strongest followings.
The showdown promises no small amount of political drama. The Legislature has yet to convene and already there have been intrigues surrounding a GOP speaker shoved aside for racially insensitive and homophobic comments and a lawmaker booted from the Republican leadership over personal tax troubles.
Nevada GOP Gov. Brian Sandoval is popular, but not within his partyThe latter, Assemblywoman Michele Fiore, has emerged as one of the fiercest opponents of the governor, rounding up votes to kill his tax plan even before the Legislature opens for business Monday.
(In a separate headache, the state's new Republican attorney general, Adam Laxalt, last week joined a multi-state lawsuit seeking to overturn President Obama's order blocking deportation of millions of people in the country illegally. Sandoval, who was blindsided by Laxalt's move, said the matter should be worked out by Congress and the president, not the courts.)
To a large extent, the governor is a victim of his own political success.
He was so popular he scared off serious competition in November, giving Democrats little incentive to turn out. The result was a GOP wave of such magnitude it surprised even Republican strategists; no one expected the party to win control of the state Assembly, where Democrats held a near two-thirds majority, but they did.
Among the GOP newcomers are a number of deeply conservative candidates with scant political experience and, notwithstanding Sandoval's place atop the ticket, no allegiance to the governor. Many seem likely to vote against his tax plan.
Sandoval's $1.1-billion proposal would replace the state's $200 business license fee with a levy based on annual revenue and industry type. The tax on cigarettes would increase, and a 2009 tax hike that was supposed to end in June 2013 but was extended would become permanent.
The added revenue over two years would pay for a sizable investment in the state's public schools — among the worst-performing in the nation — including an expansion of full-day kindergarten, more money for English-language learning and special programs to benefit gifted students.
Delivering his State of the State address, Sandoval crowed about Nevada's comeback from the Great Recession, which hit harder here than just about anywhere else. He touted renewed job and population growth and the state's attraction of new business, including a huge factory to make batteries for Tesla's electric cars, which Nevada won amid stiff competition with California and other states.
But Sandoval said the prosperity would continue only if the state modernized its economy, ending its overreliance on up-and-down revenue from gambling and tourism, and thoroughly overhauled its schools and outmoded tax system.
"We must decide if [the state's next] chapter is about getting through the next two years" of the legislative session "or about creating a new Nevada for the generations to come," Sandoval said.
To critics, the tax plan sounded suspiciously like a ballot measure that voters overwhelmingly rejected in November. That proposal, pushed by organized labor, would have imposed a 2% tax on any business generating more than $1 million in annual revenue, with the proceeds going to the state's schools.
"We saw voters basically say 'no' to the idea that we can simply raise taxes and spend our way to greater education performance," said Andy Matthews, president of the Nevada Policy Research Institute, a libertarian-oriented think tank. "In the aftermath of that loud rebuke … the governor has basically proposed something that looks a lot like what got shot down."
But supporters point to key differences in Sandoval's plan, which they say makes it simpler and fairer than the measure voters rejected.
The governor, along with business leaders and prominent lawmakers in both parties, opposed the November ballot measure. But if one listened closely — Sandoval barely campaigned for reelection — there were hints of his far-reaching plans.
Meeting in late October with the editorial board of the Reno Gazette-Journal, Sandoval vowed to fix the state's troubled education system and change the way the state's penny-pinching government funds itself. Asked if that meant new taxes, he replied, "You'll find out."
While the backlash from Republican quarters has been fierce, Sandoval is viewed as politically unassailable. So critics have launched an effort to recall three of the GOP lawmakers who have refused to publicly oppose the governor's tax plan.
One of them is Assembly Speaker-designate John Hambrick, who was hastily chosen to replace Ira Hansen, a tea party favorite, after newspaper columns and past comments surfaced in which Hansen, among other things, compared homosexuality to bestiality and wrote that African Americans were insufficiently grateful to whites for ending slavery.
Sandoval helped push Hansen from the speakership, and that too has rubbed feelings raw. Hansen claimed he was ousted over his anti-tax beliefs.
Republican Assemblyman Jim Wheeler, whose job includes rounding up votes for the GOP leadership, said the governor was owed a respectful hearing of his tax and education proposals — but no more.
"We have three branches of government … that's what the checks and balances of this country and this state are all about," Wheeler said, after doffing his cowboy hat and settling in an office decorated with a lasso, among other western regalia.
He was undecided on Sandoval's tax plan, Wheeler said, but appeared to have his doubts. Any law that passes, however well-intended, is an infringement on personal freedom, Wheeler said.
"This is the freest state in the freest country on earth," he said. "And we plan to keep it that way."
Nevada The facts on Nevada’s Tax ClimateNevada's Individual Income Tax System
Nevada levies no individual income tax, joining seven other states with the same policy: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
50-State Table of Individual Income Tax Rates
50-State Table of State Individual Income Tax Collections
50-State Table of State and Local Individual Income Tax Collections Per Capita
Tax Freedom Day Arrives on April 8th in NevadaTax Freedom Day is the day when Americans finally have earned enough money to pay off their total tax bill for the year. In 2014, Nevada taxpayers worked until April 8th (7th earliest nationally) to pay their total tax bill. The Tax Freedom Days of neighboring states are: California, April 30th (ranked 4th latest nationally); Oregon, April 20th (ranked 16th latest nationally); Idaho, April 11th (ranked 15th earliest nationally); Utah, April 17th (ranked 21st latest nationally); and Arizona, April 11th (ranked 15th earliest nationally).
Nevada's State and Local Tax Burden Below National AverageNevada's 2011 tax burden of 8.1% ranks 8th lowest out of 50 states, and is below the national average of 9.8%. Nevada's taxpayers pay $3221 per capita in state and local taxes.
Nevada's State-Local Tax Burden, 1977-Present
Other States' State/Local Tax Burdens
Map of U.S. Showing all State's Burdens and Ranks
Historical Chart Comparing All States' State/Local Tax Burdens from 1977 to 2009
Nevada's 2015 Business Tax Climate Index Ranks 3Nevada ranks 3rd in the Tax Foundation's State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and taxes on property, including residential and commercial property. The ranks of neighboring states are as follows: California, 48th, Oregon, 12th, Idaho, 19th, Utah, 9th, and Arizona, 23rd.
State Business Tax Climate Index (full study)
If you found this material useful, please consider making a donation to the Tax Foundation.
State with no income tax: Better or worse? By Chris Kahn • Bankrate.com
Taxes » Income Taxes » State with no income tax: Better or worse?
Is it better to live in a state with no income tax?
It's a great question to ask -- especially while you pore over tax forms this year. Seven U.S. states currently don't have an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. And residents of New Hampshire and Tennessee are also spared from handing over an extra chunk of their paycheck on April 15, though they do pay tax on dividends and income from investments.
A handful of other states have considered joining the no-income-tax bandwagon recently.
The main benefit, proponents say, is that states with no income tax become a beacon for growth. They're better at creating jobs and keeping a core of young, educated workers from moving to other states. Others, however, are not so sure.
"It's a way to disguise taxes to people," says Curtis Skinner, a labor economist at Columbia University. States still need to balance their budgets, and critics like Skinner say the substitute for income taxes tends to be a system that puts an unfair amount of pressure on the poor.
The issue is undoubtedly controversial. Public opinion usually swings with the size of one's paycheck and the role people think governments should play in shaping society. Before taking a side, however, consider these factors.
There are other ways to get youHow does a state pay its bills without an income tax? The answer is all around you: the food you eat, the clothes you wear, the gasoline you put in your car. These goods are taxed by many state governments.
This is how they make ends meet.
Tennessee, for example, has the highest sales tax in the country. The Volunteer State, which reviles income taxes so much that voters changed the Tennessee Constitution last year to forbid these taxes for good, charges a 7 percent sales tax statewide. When combined with local sales taxes, the combined rate increases to an average of 9.45 percent, according to estimates from the Tax Foundation. That's more than double the combined rate in super-touristy Hawaii.
In New Hampshire, homeowners pay some of the highest effective property taxes in the nation, according to an analysis by RealtyTrac. And average in-state tuition at New Hampshire's public universities is the highest in the country, according to a Bankrate analysis of statistics from the Department of Education's College Affordability and Transparency Center.
In Washington, pump prices are routinely among the highest in the country -- in part because of a sky-high gasoline tax. The Energy Information Administration says Washington charges 37.5 cents per gallon in gas taxes, the fifth-highest in the country.
Elsewhere, Texas and Nevada have above-average sales taxes, and Texas also has higher-than-average effective property tax rates. Florida relies on sales taxes, and its property taxes are above the national average. Wyoming and Alaska make up for the lost income tax revenue through their natural resources. Both states enjoy hefty tax revenues from coal mining and oil drilling operations, respectively.
All of those extra taxes contribute to higher-than-average living expenses in some of those states. Florida, South Dakota, Washington and New Hampshire all have higher than the median cost of living, according to data compiled by the Center for Regional Economic Competitiveness. Alaska is among the most expensive places to live, but a big part of that is because it's so remote.
The "Terrible 10" listThe most regressive state tax systems in the US
Taxes as a percentage of income on the poorest to the wealthiest.
Rank State Poorest 20% Middle 60% Top 1%
10Alabama10.29.43.8*Does not levy a personal income tax.
**Income tax only for interest and dividend income.
Source: Institute on Taxation & Economic Policy
Don't expect an economic benefitGov. Bobby Jindal wants Louisiana to be the next state to get rid of the income tax.
"We need to do more to stay competitive," Jindal told state lawmakers in 2013. "States with no income taxes are outperforming other states in terms of economic growth and population growth."
And he's not alone. Policymakers in several other states, including Kansas, Michigan, Nebraska, Ohio and Wisconsin, have either cut their state's income tax or are considering eliminating them altogether.
They're driven by the same line of thinking: Cutting the income tax will boost take-home pay for everyone. It'll make the state more attractive than its neighbors, drawing new businesses, creating jobs and sparking an influx of talented workers.
But does this really happen? A variety of economic policy groups have pushed back over the past few years, raising questions about whether any of those claims are true.
Read more: http://www.bankrate.com/finance/taxes/state-with-no-income-tax-better-or-worse-1.aspx#ixzz3shgyHkWL
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United States: Don't Get Used By Usury LawsLast Updated: November 23 2009
Article by Lee J. Potter, Jr.
Duane Morris LLP
Originally published by The Deal Online
As difficult economic times continue, it is no surprise that private equity and venture capital firms are seeing many of their portfolio companies struggle. Some of these businesses need or likely will need additional cash infusions to meet near-term expenses. With banks still reluctant to lend, the portfolio company might have nowhere else to turn but to its current PE or VC owners. The PE/VC owners -- not wanting to lose their existing investment and perhaps believing that the company can, with only a modest infusion of cash, get past its current problems and achieve long-term growth and prosperity -- might be willing to front the company some needed cash.
The terms of any such loan the PE/VC owners might be willing to make in this type of situation will of course vary widely depending on the circumstances. However, it would not be shocking to envision a PE or VC lender asking for an up-front fee, and maybe a recurring administrative fee as well. The lender might also require the company to issue it warrants, preferred stock or other securities in exchange for the loan. While these terms may seem straightforward and reasonable, there is a potential legal trap lurking: If New York State law is applied to the transaction, and if the effective interest rate (which, depending on the terms, might include the fees, securities and other consideration paid to the lender on top of the nominal interest) exceeds 25% per year, the transaction might be in violation of New York's laws against usury.
That's right -- your friendly PE or VC lender, in trying to help out a troubled business, may have just broken the law. Not only that, the law in question is a criminal statute, violations of which constitute a Class B felony.
New York, like most other states, has had on its books laws against usury, or the charging of excessive interest, since the 19th century. There are separate civil and criminal usury statutes. These laws were passed to protect borrowers from loan sharking and other unscrupulous tactics. As one New York court put it, the statutes are intended "to protect desperately poor people from the consequences of their own desperation." New York's usury statutes have many exceptions, some of which are intended to differentiate the truly helpless, who are deemed in need of the laws' protections, from more sophisticated parties, who presumably can fend for themselves. However, these distinctions are imperfect, and there are more than a few examples of cases in which New York's usury laws have been raised by sophisticated businesses as a defense against claims by their lenders who were trying to recover their money.
In one recent case, Funding Group Inc. v. Water Chef Inc., a New York court ruled that a $25,000 45-day loan made to a corporation at a very high effective rate of interest was usurious. The terms of this loan, which included 10% interest per month, plus the issuance to the lender of shares of convertible preferred stock, were indeed rich for the lender, resulting in an effective interest rate of 363%, as noted by the court. However, it appears that the borrower was a sophisticated commercial entity and was eager to enter into this transaction. (The terms of the loan were contained in a letter agreement written on the borrower's letterhead and signed by the borrower's president.) Nonetheless, when the borrower failed to repay the loan and the lender sued, the borrower claimed that the loan was in violation of the criminal usury statute, and the court agreed.
An important limitation on New York's usury laws is that they apply only to loans of less than $2.5 million. Any loan over this amount is not subject to either the civil or criminal usury provisions. (Loans from more than one lender to a single borrower as part of a single financing will be aggregated for purposes of determining whether the total amount loaned meets or exceeds $2.5 million.)
New York's usury laws also carve out from their application any loan made to a corporation for business purposes in an amount of $100,000 or more that is secured under the Uniform Commercial Code. However, that is only if the interest rate is not greater than the prime rate plus 8%. Thus, for many types of transactions that a PE/VC lender might be contemplating that include fees, warrants or other securities, this interest rate ceiling will be too low to help.
If a VC/PE firm is contemplating making a loan of less than $2.5 million, it should consider whether New York's usury laws, as opposed to the laws of another state, would apply. Choice of law issues can be bedeviling, and neither time nor space permit even a broad overview of the potential issues. Suffice it to say that if the borrower is an entity formed under New York law, or if its business is based largely in New York, or if the loan documents choose New York as the governing law, then there is at least a possibility that New York's usury statutes will be implicated, and the parties will need to structure the transaction so that these laws are either complied with or avoided altogether.
If it appears that New York's usury statute will apply, then the parties need to consider not only the nominal interest rate stated in the loan agreement or promissory note, but possibly also the fees that the lender plans to charge, in computing the interest rate for usury purposes. Shares of the borrower's stock or warrants or other securities being issued to the lender as part of the consideration for the loan also need to be considered. One can easily see how the resulting interest rate could exceed the 25% maximum allowed under New York's criminal usury statutes.
Under the civil usury statute (which sets a 16% maximum rate for certain loans of less than $250,000) the answer is straightforward and draconian -- most lenders (other than certain types of banking or savings and loan institutions) forfeit all interest and principal and, as an added insult, must repay the borrower any interest previously received. In essence, the loan becomes a gift. So what happens if a loan transaction is indeed found to be usurious under New York's criminal usury law?
Interestingly, the answer is not at all clear. One would think that the New York criminal usury statute would specify a remedy to the borrower that is just as bad or worse for the lender. However, while the law specifically permits a borrower to raise violation of the criminal usury statute as a defense in a civil suit, it does not specify what remedies should be available to the borrower if such a defense is successful. One New York court pointed out this anomaly, but the legislature has yet to address it.
In an effort to avoid usury, lenders often include so-called savings clauses in their loan documents (that is, provisions indicating that, if the loan is found to be usurious, the interest rate will be deemed reduced to the highest rate permissible under law, and payments previously received in excess of such rate will be deemed to be principal payments). New York courts have not tended to view these clauses with much sympathy.
So, a word to the wise for all prospective lenders out there: If you're thinking about making a loan of less than $2.5 million and the borrower or the transaction appears to have some nexus to New York, be careful how you put the deal together -- don't get used by New York's usury laws.
Lee Potter is a partner in the corporate practice group of law firm Duane Morris LLP in New York. He practices in the area of corporate law with a concentration on mergers and acquisitions and private equity.
This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.
Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets.
The Deal Pipeline
Finra may be getting more aggressive in regulation of microcaps
by Bill Meagher | Published November 3, 2014 at 3:10 PMWhen Michael Siegel, CEO of EcoloCap Solutions Inc. (ECOS), signed an agreement last year to sell convertible notes to Asher Enterprises Inc., he knew the money could dilute his shareholders, but he had no idea that months later the agreement would keep his company from completing a 1-for-2,000 reverse share split.
But a Sept. 16 letter from the Financial Industry Regulatory Authority says that the agreement between EcoloCap and microcap financier Asher and a 2013 SEC enforcement action against Asher president Curt Kramer caused Finra to deny the fairly common corporate action.
The denial could be a sign that Finra is now using more discretion and doing more due diligence when considering even the most common corporate actions of microcap companies.
A securities lawyer who has had at least 10 such applications before Finra in the last three months says the securities industry regulator is moving in a more deliberate fashion.
"It doesn't make any difference whether it was a name change, a ticker symbol or reverse or forward splits. Finra is looking at these things more deeply," the attorney said. "They are looking at who the officers are, who the directors are. It doesn't matter what kind of application is being considered. Companies that have solid balance sheets won't have problems, but companies that are shaky are going to be looked at closely."
Finra is responsible for regulating broker-dealers and transfer agents and for tracking trades that take place on domestic securities exchanges and OTC Markets Group Inc.'s (OTCM) platforms, where a substantial number of microcap stocks are listed.
Finra spokeswoman Nancy Condon said the time it takes the regulator to process applications is a reflection of whether the companies provide complete information. She declined to comment on whether Finra was performing more due diligence or whether it had adopted new or different standards for review or enforcement.
EcoloCap, based in Barrington, Ill., describes itself as a network of companies using nanotechnology to develop alternative energy products.
In its second-quarter financial statement, EcoloCap reported no revenue and losses of $622,042 for the first half of the year, and zero cash on hand at the end of the quarter. The company also had $1.88 million in notes outstanding.
Prior to submitting its reverse-split application to Finra, EcoloCap had processed the change with the state of Nevada, where the company is registered, and obtained shareholders' permission to reduce its number of shares.
Finra stated in its letter denying the reverse split that it had "actual knowledge" that the company or people connected to the company or its proposed corporate action "are the subject of a pending, adjudicated or settled regulatory action or investigation by a federal, state or foreign regulatory agency, or a self-regulatory organization; or a civil or criminal action related to fraud or securities laws violations."
The person that Finra was referring to is Kramer, by virtue of the convertible note agreement.
Last November, the SEC announced a settlement with Kramer and his companies Mazuma Holding Corp., Mazuma Funding Corp. and Mazuma Corp. over allegations that they had purchased 2 billion unregistered shares of Laidlaw Energy Group Inc. and more than 1 billion shares of Bederra Corp. Inc. at significant discounts and sold the unregistered shares into the market, making more than $1 million on the transactions.
Without admitting or denying the allegations, Kramer and the Mazuma companies agreed to pay $1.4 million in disgorgement of profits plus interest and penalties.
Finra noted that Asher controls 640.5 million EcoloCap shares and a $32,500 promissory note that will be convertible into stock in January. Converting the note would give Asher about a 10% stake in EcoloCap, Finra said.
An attorney who represents EcoloCap says that the regulator is wrong.
"The magic word is, 'connected,'" said Conrad Lysiak with the Law Office of Conrad C. Lysiak PS in Spokane, Wash. "What does that mean exactly? Kramer is not an officer, a director, a promoter, advisor or transfer agent. Does the company have a debtor-creditor relationship? Sure. But is he connected? Let me ask you this: What if ECOS had filed for a name change? Would Finra be holding that up as well?"
A securities lawyer who is familiar with Finra said the regulator would likely process the name change application because a name change doesn't affect the market, but a change in outstanding shares and share value does.
EcoloCap submitted a notice of appeal of Finra's decision, but failed to pay the $4,000 filing fee, according to a Sept. 30 filing with the SEC.
"I literally had to decide whether to pay my mortgage or pay the $4,000 to Finra," EcoloCap CEO Siegel said.
Lysiak questions why it costs so much to appeal a decision with Finra.
"You can bring an appeal in federal court for no more than $500," he said. "Why is Finra charging so much? It's because they don't want to see any appeals."
Siegel has said in a blog post on EcoloCap's website and in SEC filings that Kramer wasn't connected to the company.
In an interview, Siegel said that the agreement between Asher and EcoloCap is perfectly legal. Siegel said that Kramer paid his fine to the SEC and was not subject to any sort of ban.
"They were looking for any reason to say no to the split," Siegel said. "That's how it feels."
Asher and Kramer, along with related entities like Mazuma, are active providers of convertible debt financing to microcap companies. Kramer, based in Great Neck, N.Y., typically offers high-interest loans that he can convert into stock at deep discounts to market price. Free trading shares can be picked up by Asher at discounts as deep as 70% to the companies' recent trading lows. This structure is often referred to as toxic or death spiral financing.
The companies that avail themselves of this type of finance are aware of how it is viewed by investors. On at least half a dozen occasions in the last year, companies took the unusual step of issuing press releases to let the market know that convertible debt held by Asher had been paid off in full.
Siegel defended his company's use of financing from Asher.
"If it wasn't for guys like Asher, companies like us would be out of business," he said. "They do a service."
Kramer did not respond to a request for a comment.
Laura Anthony, founding partner of law firm Legal & Compliance LLC in West Palm Beach, Fla., said in a recent blog post that Finra's denial of EcoloCap's proposed transaction shows a split between state and federal law.
Before 2010, states had the main authority to approve or disapprove of actions such as reverse splits by companies whose shares were traded over the counter.
But then the SEC approved Finra Rule 6490, which required companies to notify Finra of actions such as reverse splits, dividends or name changes. It also gave Finra power to conduct reviews when such actions were proposed and to refuse to allow the actions when it received incomplete paperwork or when it saw indications of potential fraud.
Finra used its authority under Rule 6490 to deny EcoloCap's reverse split, even though the company had already amended its articles of incorporation on file with the state of Nevada, making the reverse split effective under state law, Anthony wrote.
"Clearly it is problematic when state and federal rules and regulations cause a conflicting result, leaving a board of directors, shareholders and the investing public in a state of flux," she stated. "What is the capitalization of ECOS? In accordance with the state law, the company has approximately 3.4 million shares issued and outstanding; however, according to the over-the-counter marketplace, the company has approximately 6.8 billion shares outstanding. Legally it seems the company has 3.4 million shares of stock outstanding at a trading price of $.0001 and that Finra's refusal to process relates solely to a refusal to re-price the stock as a result of the reverse split and not a broader refusal to recognize the validity of the share reduction itself."
A former Finra enforcement official said that cases like EcoloCap's may become more common.
"They are concerned with the bad actors and they are looking more closely at this niche. I think that is fair to say," the former official said.
OTC Markets CEO Cromwell Coulson said he welcomes Finra looking more closely at companies whose shares trade over the counter.
"Having a more active regulator in this niche will be a good thing for everyone," he said.
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Players Network Has Filed a Complaint Against Vis Vires Group, KBM Worldwide, Asher Enterprises, Seth and Curt Kramer, Individually
November 09, 2015: 04:18 PM ET
Players Network, Inc. (OTC PINK: PNTV), a fully reporting publicly traded company, announced today that it has filed a law suit in the district Court of Clark County, Nevada, against Vis Vires Group Inc., KBM Worldwide Inc., Asher Enterprises Inc., and Seth Kramer and Curt Kramer, individually. The case is currently contested by the defendants in both Federal and State Courts in New York and Nevada.
The forgoing defendants are all companies owned or controlled by Curt or Seth Kramer, both defendants in PNTV's actions, and Curt Kramer is a defendant in other actions filed by FINRA relating to by virtue of FINRA Rule 6490(d)(3)(3), that states the regulator has "actual knowledge that ... promoters or other persons connected to the issuer ... are the subject of a pending, adjudicated or settled regulatory action or investigation by a federal, state or foreign regulatory agency, or a self-regulatory organization; or a civil or criminal action related to fraud or securities laws violations," it can reject corporate action requests.
In the FINRA case against Curt Kramer, it is specifically stated that it: "has actual knowledge of a November 25, 2013 Securities and Exchange Commission ("SEC") Cease-and-Desist Order (Administrative Proceeding File No. 3-15621) ("SEC Order") involving Curt Kramer ("Kramer"), President of Asher Enterprises, a convertible note holder of ECOS. The SEC's investigation found that Kramer and his firms Mazuma Corporation, Mazuma Funding Corporation, and Mazuma Holding Corporation ("his Mazuma firms"), obtained unregistered shares in penny stock issuers Laidlaw Energy Group ("Laidlaw") and Bederra Corporation ("Bederra"). According to the SEC Order Kramer and his Mazuma firms purchased two billion Laidlaw shares, which amounted to 80% of Laidlaw's outstanding shares at the time. They purchased these shares at a significant discount from prevailing market prices. Kramer and his Mazuma firms purchased the shares in 35 tranches with no six-month gaps, thus quantifying the transactions as a single integrated offering through which Laidlaw exceeded the $1 million limit under Rule 504 by raising a total of $1,259,550. No registration statement was filed for any shares that Laidlaw offered and sold to Kramer and his Mazuma firms, nor was any registration statement filed for any shares that Kramer and his Mazuma firms subsequently re-sold into the public market. Despite exceeding the $1 million limit, Kramer and his Mazuma firms continued to acquire and sell additional Laidlaw shares and profited by $126,963 from these transactions.
"Further, according to the SEC Order, Kramer and Mazuma Holdings Corporation acquired more than one billion shares of Bederra in 2009 and 2010 through 21 separate transactions from the principal of Bederra's transfer agent, who had misappropriated the Bederra share certificates. Again they purchased the shares at a significant discount from prevailing market prices and re-sold the misappropriated Bederra shares to the public without any registration statement for profit of $934,404."
In this case PNTV is suing for an undisclosed amount for injunctive relief, actual damages and punitive damages.
The suit was filed on behalf of PNTV by Bloom Donohue Young LLP (www.bdyllp.com), a national law firm with offices in New York, Pennsylvania, California and Nevada which specializes in toxic debt relief cases.
About Players Network:
Players Network is a diversified company with holdings in the Legalized Medical Marijuana and Media Industries. The Medical Marijuana asset is primarily through the Company's 80% ownership in Green Leaf Farms Holdings, Inc. The Company uses its proprietary Enterprise Web Platform to develop Branded Digital Lifestyle Television Networks for itself and its partners in a wide range of lifestyle categories. Players Network's current channels "Players Network," "Vegas on Demand" and "Real Vegas TV" focus on Las Vegas and Gaming Lifestyles. Its newest channel, "WeedTV.com," targets the rapidly expanding cannabis community. These VOD Channels are on TV in over 23,000,000 homes on Comcast, and on the Internet and Mobile Platforms on Hulu, Google, YouTube and Yahoo Video, and on DVD and through worldwide television syndication. For more information please visit www.playersnetwork.com
Statement under the Private Securities Litigation Reform Act: With the exception of the historical information contained in this Release and the attached Shareholder Report, the matters described herein contain forward-looking statements that involve risk and uncertainties that may individually or mutually impact the matters herein described, including but not limited to: the ability of the Company to increase revenues in the future due to the developing and unpredictable markets for its products, the ability to achieve a positive cash flow, the ability to obtain orders for or install its products, the ability to obtain new customers and the ability to continue to commercialize its products, which could cause actual results or revenues to differ materially from those contemplated by these statements.
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Comparing Equity, Debt And Convertibles For Startup Financing
Opinions expressed by Forbes Contributors are their own.
Entrepreneurs are not always aware of the various financing structures that may be available to them when raising new capital to finance their growth. And, even if they are, they are not always sure what fair terms look like when receiving term sheets from investors. Let’s explore the plusses and minuses of equity vs. convertible debt vs. venture debt, understanding there are many subtleties to each of the securities below, that may not be addressed in this high level overview.
Issuing stock in your company is the route most entrepreneurs pursue, especially for growth companies where cash flow is difficult to predict, hence making it tough to forecast repaying debts. Equity is typically secured from angel investors or venture capital firms.
Representative Terms: A typical Series A (first institutional round) investor is looking for 25% to 35% of the company, in exchange for its investment. So, if you are worth $4MM pre-money, an investor would likely give you $2MM for a 33% stake, as an example. Most professional investors will be seeking equity in the form of preferred stock, not common stock, where they get a 6% to 8% interest and a liquidation preference of one times their money back before the common shareholders begin to participate in any sale proceeds for the business.
There are a number of types preferred – including participating preferred, where investors “double dip” on their interest and liquidation preference and also get their equity upside pro rata with common, however, if this structure is used there is frequently a limit of two to four times the liquidation preference before the participating feature goes away. The other type of preferred is straight convertible preferred where an investor will get their 6% to 8% interest rate plus money back or they can convert and get the equity upside of their stock pro rata with common.
The security will include some form of anti-dilution protection for the investor, typically a weighted-average rachet in the event of a subsequent financing at a lower valuation. The investor will also be looking for protective provisions, in terms of their rights as a shareholder to block certain major actions (e.g. change of control, modification of the board size, changing the charter so as to adversely affect their security, etc). Typically all employees will be required to enter into invention assignment, non-disclosure, non-solicitation and non-compete agreements. In addition, an investor may ask the founder to vest some portion of their shares, in case they need to make an executive change or if the founder quits. As an example, a founder may be asked to vest 50% of their ownership over a two to three year period, a pro rata portion “earned” each month.
· Advantages: Does not have to be repaid, like debt does. Gives certainty of valuation for your company which can also be a disadvantage if the value is too low (for diluting founders’ stake) or too high (which can impact interest from next round investors who do not like to price downrounds from the round before, to avoid legal risks from diluted shareholders).
· Disadvantages: The most complex to structure (highest legal bills, longest time to close). Usually involves giving some level of board control to investors.
For situations where you do not want to set an equity valuation (to not impede subsequent financings from other investors), or you simply want the option of potentially paying back the cash, for a period of time prior to taking in permanent equity capital, a convertible note is the way to go. A convertible note is a hybrid, part debt and part equity, where it functions as debt, until some point in the future, when it may convert to equity at some predefined terms. Convertible debt is typically secured from the same angel investors and venture capitalists that fund equity deals and is usually used for smaller rounds of financing at the early stages of a company’s life.
Representative Terms: A convertible note typical carries an interest rate of 4%-8% per year, which is usually paid “in kind” (grow the principal each month, not paid as cash interest). The note will typically convert into equity in the company’s next financing, typically at a 20% discount to the valuation realized in a subsequent round or with warrant coverage of 20%. The discount can be as low as a 0% discount and as high as a 50% discount, depending on the situation. The conversion valuation of the company is not fixed, however, investors often will negotiate a cap on the highest valuation their loan may be converted at regardless of the price on the next round. Being uncapped is the best position for the entrepreneur, but cannot always be achieved in the negotiation. The term of the convertible note can be as short as six months or as long as two years, depending on the needs of the company or the investor (with most in the 12-18 months range). If no following investment round is achieved during the term, the note can either auto-convert into equity at some preset terms, or be required to be repaid in cash at such time. The latter potentially being a gun to your head that could force you to sell the business at a distressed price to repay the loan. So, shoot for the former, where you can. Convertible notes can typically be repaid at anytime with cash, at 150% of the principal amount.
· Advantages: Much quicker and cheaper than issuing equity, both for legal bills (can close in weeks, not months) and ownership dilution (deferred until down the road and you can use the note proceeds to increase the value of your company). It leaves valuation flexible in order to meet the needs of subsequent investors. Interest payments do not typically need to be paid in cash each month.
· Disadvantages: You have a limited time frame before it needs to be repaid, or convert into equity.
For startups with an existing product/track record or existing or future assets to secure a loan, venture debt is another option to consider. Venture debt is a senior secured loan that sits on top of the pile, in terms of liquidation preference (repaid before all other debt or equity holders). Venture debt is typically issued by more aggressive banks, like Silicon Valley Bank and Square 1, or venture debt investors, like Western Tech, Hercules or Oryx Capital.
Representative Terms: The note will most likely be secured by 100% of the assets of the business, and the lender will typically lend 25%-75% of the fair market value of assets, depending on the nature of the assets (e.g., ease of liquidating) and the stability of your business (e.g., consistent performance over last couple quarters). The lender will also most likely require that cash collateral be posted or the executives to personally guarantee the loan, in the event the company cannot repay it. The note typically comes with a six- to 18-month term, and carries a monthly cash-paid interest rate in the range of prime plus 2%-4% per year. There are often, but not always, warrants issued to the lender in these types of transactions (in the 1%-5% ownership range). This issuers are typically looking for a 25-35% annual return on their investment, not as much as equity in the 35%-55% range, and not as high as traditional bank debt in the 5%-10% range.
· Advantages: The least dilutive to your ownership, allowing you to keep 100% control and economic upside.
· Disadvantages: Do not take this on if you do not have 100% visibility into repaying the loan, as the bank can force you to liquidate the company to recoup their loan, forcing the company (or yourself as guarantor) into liquidation or bankruptcy. Interest payments needs to be paid in cash each month.
Be sure to read my previous posts on How to Raise Capital for Your Startup, How to Value Your Startup, and Frequent Legal Questions of a Startup, for more details as it relates to this topic.
There are many “variations to a theme” as it relates to investment structures, and the above just touches on the big themes. So, be sure to solicit the advice of an experienced startup lawyer who knows the various intricacies of these investment structures, and can help you navigate through these complex options. Here is a list of good startup lawyers that I know in Chicago who can help.
George Deeb is a Partner at Red Rocket Ventures, a startup consulting firm, and author of 101 Startup Lessons-An Entrepreneur’s Handbook. For future posts from George, please follow him here or on Twitter at @georgedeeb or @redrocketvc.