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The Venture Alley

A blog about business and legal issues important to entrepreneurs, startups, venture capitalists and angel investors.

Bitcoin is property, not currency, IRS says – Notice leaves many open questions about convertible virtual currencies

Posted in For Entrepreneurs and Companies, For Investors and Fund Managers, Tax

Article prepared by and republished courtesy of our colleagues Joseph Langhirt, David Plewa and Michael Greenberg; originally published here: http://www.dlapiper.com/en/us/insights/publications/2014/04/bitcoin-is-property-not-currency/.

The Internal Revenue Service has joined several other jurisdictions in publishing guidance regarding the income tax consequences of certain convertible virtual currency transactions.i IRS Notice 2014-21ii clarifies that existing general tax principles apply to transactions using convertible virtual currency and that such virtual currencies should be treated as “property” rather than “currency” for US federal income tax purposes.  Classification as property may affect the timing and character of income, gain or loss. While the immediate implications of the Notice are apparent, the mid-term and long-term consequences are still being considered.  The IRS has indicated that penalties may apply to taxpayers that have taken return positions that are inconsistent with its position in the Notice or that have failed to file the appropriate information returns.

Virtual currency, such as bitcoin, that is “convertible” (i.e., has an equivalent value in or acts as a substitute for “real currency”iii) and that is sold or exchanged or used to pay for goods or services in certain transactions has tax consequences that may result in a tax liability to the person disposing of such virtual currency and/or receiving such virtual currency.

In addition, such tax consequences may be immediate or deferred, and any tax imposed may be at varying rates, depending on the nature of the transaction and the type of person disposing of or receiving such virtual currency.

In the following paragraphs, we discuss the Notice and its immediate implications, and we point out some legal, factual and practical issues that the Notice raises. Continue Reading

Muddy employee incentive issues in a disappointing exit: 9 practical tips for public company acquirers

Posted in For Entrepreneurs and Companies, IPOs & M&A

Article prepared by and republished courtesy of our colleague Ed Batts; originally published here: http://www.dlapiper.com/en/us/insights/publications/2014/04/muddy-employee-incentive-issues/.

In mediocre payout situations, transaction proceeds are unlikely to give a substantial (if any) return to common stockholders, yet may be sufficient to at least return the initial investment, and perhaps a liquidation premium, to preferred stockholders. In such a scenario, the practical implementation of fiduciary duties for privately held boards has historically been somewhat murky.

Prior to 2013, many issues generally surrounded liquidation payouts to preferred investors when allocated among various series of preferred investments, whether structured as bridge notes that attached large additional preferences, or as a pay-to-play, which immediately diluted non-participating legacy stockholders at the time of a bridge financing. Continue Reading

Accredited Investor Verification under Rule 506(c)

Posted in For Entrepreneurs and Companies, For Investors and Fund Managers, Fundraising, News and Recent Events, SEC, Startups, VC & Private Equity

Megan Muir.jpgCONTRIBUTED BY
Megan Muir
megan.muir@dlapiper.com

Bill Carleton has a good post regarding the recent comments from Keith Higgins, the Director of the Division of Corporation Finance, who spoke at the 2014 Angel Capital Association Summit.  Higgins discussed the SEC’s principles-based approach with respect to meeting the requirements of new Rule 506(c). 

Since the SEC’s adoption of new Rule 506(c) in September 2013 allowing general solicitation by issuing companies in certain circumstances, angel investors have been concerned about the accredited investor verification standards set forth in those new rules.  The debate has centered around what actions are required by an issuing company to satisfy the requirement of taking “reasonable steps to verify” the accredited status of its investors when utilizing general solicitation as now permitted under the rule.  The rule itself provides a number of safe harbors that the SEC has determined will satisfy the standard, but many of those require detailed financial information about the investor to be provided to an issuing company or third party.  The Angel Capital Association has been out in front of this issue, advocating on behalf of angel investors in the SEC comment process and publishing its own guidance on verification of accredited investor status using membership in an established angel group (with various criterion spelled out).

It remains to be seen what ultimately becomes standard accepted procedures outside of the safe harbor provisions set out by the SEC, but the angel community is actively engaged in addressing the issue.

Angel investment trends; 2013 year in review

Posted in For Entrepreneurs and Companies, Fundraising, News and Recent Events, Startups

pic-trent.jpgCONTRIBUTED BY
Trent Dykes
trent.dykes@dlapiper.com

Today the Angel Resource Institute, Silicon Valley Bank and CB Insights released their angel group 2013 year in review, the Halo Report. The Halo Report analyzes angel investment activity and trends in the United States. Here are a couple interesting 2013 highlights:

  • The median angel round size remained steady over the last three years at $600K;
  • The median angel round size for 2013 was $1.7M when angel groups co-invest with other types of investors, which was an increase over the median 2012 round size of $1.5M;
  • The median pre-money valuation for early stage angel group deals in 2013 was $2.5M, which was consistent with 2012 median valuations although 2013 saw more high-valuation deals close than 2012;
  • Together, Internet, healthcare and mobile companies comprised 74% of angel group deals and 79% of angel group dollars, a significant increase from the prior year;
  • The median angel round size for healthcare deals jumped to $1.6M in 2013 (from $1.1M in 2012), which was the largest increase by sector; and
  • As with prior years, California was the most active region for angel deals, both in number of deals (18.6%) and total dollars invested (19.6%).

A copy of the full report can be found here and the infographic can be found here.

Prize promotions across the world handbook

Posted in For Entrepreneurs and Companies, IP/Privacy/Social Media

CONTRIBUTED BY
Scott W. Pink
scott.pink@dlapiper.com

DLA Piper’s Advertising Group is pleased to present the 2014 edition of our Prize Promotions Across the World Handbook, covering 20 jurisdictions. Many companies use prize promotions as an effective and increasingly popular marketing tool — and the internet and various social media platforms make this an attractive, cost efficient means of reaching a large, multi-jurisdictional customer base, but it is not without its legal challenges. The handbook provides a high-level overview of some of the key requirements surrounding prize promotions, from the management of the early stages, and highlights potentially problematic issues. A .pdf of the full handbook can be found here.

Major U.S. tax reform plan unveiled today – key points

Posted in For Entrepreneurs and Companies, News and Recent Events, Tax

Article prepared by and republished courtesy of our colleagues Evan M. Migdail and Bruce Thompson; originally published here: http://www.dlapiper.com/camp-unveils-major-tax-reform-plan-today/.

House Ways and Means Committee Chairman Dave Camp (R-Michigan) today unveiled his comprehensive tax reform proposal. Released as draft legislation, the Camp proposal calls for the most fundamental reform of the tax code in 27 years.

Upon releasing the plan, Camp said his reforms would make the tax code simpler and fairer for families and job creators, spur economic growth, create jobs, and put money back in the pockets of hardworking taxpayers.

The proposal would reduce the top individual tax rate to 25 percent from 39.6 percent and the corporate tax rate to 25 percent from 35 percent. The seven individual tax brackets would be reduced to two brackets of 10 and 25 percent, and a 10 percent surtax would be imposed on certain income above $450,000. Capital gains and dividends would be taxed as ordinary income, with a 40 percent exclusion.

The lower tax rates would be offset by eliminating or limiting a long list of individual and corporate tax deductions, exclusions and credits. Continue Reading

Interactive 2014 Data Protection Laws of the World Handbook

Posted in For Entrepreneurs and Companies, For Investors and Fund Managers, IP/Privacy/Social Media, News and Recent Events

Compliments of our DLA Piper colleagues in the data protection and privacy practice, and co-editors Kate Lucente and Paul McCormack, here is the DLA Piper 2014 Data Protection Laws of the World Handbook.  This new online edition of the handbook offers a high-level snapshot of selected features of international laws as they currently stand in 72 jurisdictions across the world.  For example, here is a heat map that provides a visual representation of the privacy challenges faced in certain jurisdictions.

Here is a .pdf of the full 349-page handbook.

Franchise tax due on or before March 1 for Delaware corporations: two methods of calculation, two vastly different results

Posted in For Entrepreneurs and Companies, News and Recent Events, Startups, Tax

pic-trent.jpgCONTRIBUTED BY
Trent Dykes
trent.dykes@dlapiper.com

Just a reminder to those who have Delaware corporations, your annual report and franchise tax payment are both due on or before March 1 (which falls on a Saturday this year). At this point, you have likely already received from Delaware your notification of annual report and franchise tax due, which is sent to a corporation’s registered agent in December or January of each year. Delaware requires these reports to be filed electronically.

As you will notice, there are two methods that you can use to calculate the amount of Delaware franchise tax due for your corporation (i.e., the “Authorized Shares Method” and the “Assumed Par Value Capital Method”), which result in vastly different amounts due. The default payment amount listed on your notification is set by Delaware using the Authorized Shares Method, which method will almost always result in a much high amount due for startups with limited assets. The minimum franchise tax is $75 and the maximum franchise tax is $180,000.

Franchise taxes are generally due in arrears for the prior calendar year. However, note that Delaware requires corporations owing $5,000 or more for the prior year to make estimated payments for the current (going-forward) year’s franchise tax with 40% due June 1, 20% due by September 1, 20% due by December 1, and the remainder due March 1.

Here are some examples showing how the different methods can dramatically impact the amount of Delaware franchise tax due:

Continue Reading

2013 annual venture investment dollars rise 7%

Posted in For Entrepreneurs and Companies, For Investors and Fund Managers, Fundraising, Startups

pic-trent.jpgCONTRIBUTED BY
Trent Dykes
trent.dykes@dlapiper.com

According to the MoneyTree Report by PricewaterhouseCoopers LLP and the National Venture Capital Association (NVCA), venture capitalists invested $29.4 billion in 3,995 deals in 2013, an increase of 7% in dollars and a 4% increase in deal volume over 2012 levels.  The full Q4 and FY 2013 investing trends are available here.

A couple of interesting highlights for 2013:

  • Internet-specific companies captured $7.1 billion, marking the highest level of Internet investment since 2001.
  • Investments into the software industry also reached their highest level since 2000 with $11.0 billion flowing into 1,523 deals, which accounted for 37% of total venture capital invested for the year.
  • Biotechnology investment dollars rose 8% while volume decreased 2% to $4.5 billion going into 470 deals, placing it as the second largest investment sector for the year.
  • Investments into Seed Stage companies increased 14% in terms of dollars but fell 26% in deal volume, with $943 million going into 218 companies, the lowest number of seed deals since 2003.
  • Early Stage investments experienced a 17% increase in dollars and a 15% increase in deal volume, with $9.8 billion going into 2,003 deals.
  • Expansion Stage investments increased by 4% in dollars and were flat in terms of deal volume, with $9.8 billion going into 984 deals.
  • Later Stage investments experienced a 1% increase in dollars and a 6% decrease in deal volume, with $8.8 billion going into 790 deals.

 

Employers: 2014 Deadlines to Furnish ISO and ESPP Information Statements and Returns

Posted in For Entrepreneurs and Companies, News and Recent Events, Startups, Uncategorized

Megan Muir.jpgCONTRIBUTED BY
Megan Muir
megan.muir@dlapiper.com

Employers, from startups to public companies, need to be aware of the following requirements and take action by January 31st if they apply.  Section 6039 of the Internal Revenue Code requires a corporation to furnish a written statement to any employee or former employee who either (i) exercised an incentive stock option within the meaning of Section 422 of the Code (ISO) during 2013 or (ii) during 2013 first transferred legal title to shares acquired under the corporation’s employee stock purchase plan within the meaning of Section 423 of the Code (ESPP). This requirement applies to both privately held and publicly traded corporations. The corporation must furnish these statements on Forms 3921 and 3922 no later than January 31, 2014.

IRS return filing requirement for 2013 transactions

In addition to the employee information statements, corporations must file returns with the Internal Revenue Service on Forms 3921 and 3922 no later than February 28, 2014, if filed on paper, or March 31, 2014, if filed electronically.  These information returns, Form 3921 for ISO exercises and Form 3922 for initial ESPP share transfers, must be filed electronically by any corporation required to file 250 or more of a particular return and may otherwise be filed either electronically or in paper form.

Deadlines

Employee information statements for 2013 transactions must be furnished no later than January 31, 2014. Information statements may be furnished to employees electronically in accordance with requirements set forth in the General Instructions for Certain Information Returns.

Paper filings of Form 3921 and 3922 for 2013 transactions must be submitted to the IRS with transmittal Form 1096 for each type of return and are due no later than February 28, 2014. However, corporations required to file 250 or more of either type of form must file that form electronically following the procedures contained in Publication 1220. Electronic filings of Forms 3921 and 3922 for 2012 transactions are due no later than March 31, 2014.

For more information on the contents required to be provided in such information statements, as well as links to the relevant forms and IRS instructions, see this recent DLA Piper Client Alert by William H. Hoffman of our Employee Benefits and Executive Compensation Group.