If You Purchase the Wrong Franchise Your Legal Remedies May Be Limited

Comment from BBP:

The following article points out a number of reasons buyers need to complete their due diligence and choose wisely when selecting a franchise. This is important information for business brokers to be able to share with their buyers.

Current franchise agreements and judicial decisions can provide obstacles to franchisees who take legal action against their franchisor. The result is that prospective franchisees had better make the right decision when choosing and purchasing a franchise.

Individuals that decide to purchase a franchise should do an exhaustive evaluation of the franchise to confirm the following:

Daubert Challenge - What You Need to Know as an Expert Witness

The United States Supreme Court issued a landmark ruling in 1993 in the case of Daubert v. Merrill Dow. In that decision, the Supreme Court changed 70 years of case precedent for the admission of expert testimony. 

Daubert changed the w ay in which federal courts are required to evaluate scientific and technical evidence. Prior to Daubert, federal courts admitted scientific and technical evidence only if the principle upon which it was based was sufficiently established to have general acceptance in the field to which it belonged. In Daubert, the Supreme Court invalidated the "general acceptance" standard, and instead held that, according to Rule 702 of the Federal Rules of Evidence, scientific and technical evidence is admissible only if...

Section 338(h)(10) Election - Both a Stock and an Asset Purchase (Part 3 of 3)

This is a continuation from Tuesday's posting and Wednesday's posting on H-10 Election Requirements.

• As stated in yesterday's posting, a C Corp cannot own an S Corp. But if Purchaser (P) is an S Corp and acquires 100% of Target's (T's) stock, it can make a Qualified Subchapter S Subsidiary (QSub) Election. The QSub Election is done by filing IRS Form 8869. Both P and T then become pass through entities thereby eliminating tax at the corporate level.
• Because of potential ordinary income recapture in a deemed asset purchase, T's S Corp sellers - who agree to the H-10 Election - are likely to pay more taxes than they would have paid in a stock purchase (for tax purposes). The parties will often negotiate a higher price to compensate for this additional tax cost borne by the seller.

Section 338(h)(10) Election - Both a Stock and an Asset Purchase (Part 2 of 3)

 This is a continuation of yesterday's posting which gave an overview of H-10 Election Requirements. 

• T has several assets that require title transfer that would be burdensome in an asset purchase.
• T has contracts that are difficult to transfer.
• T has favorable workers compensation and/or unemployment ratings that P wants to preserve.

Section 338(h)(10) Election - Both a Stock and an Asset Purchase (Part 1 of 3)

Purchasers in a business transaction generally prefer an asset purchase in order to step up the basis of acquired assets. Yet, a stock purchase may be preferable for a variety of non tax reasons. Normally in a stock purchase, the consideration paid becomes the tax basis of the stock from the purchaser's standpoint.

However, in certain circumstances, the Internal Revenue Code gives the purchaser and the seller the ability to make a joint election where the actual transaction is a stock purchase, but for tax purposes it is treated as an asset purchase. This is accomplished by making a Section 338(h)(10) Election (H-10 Election) - the subject of this article.

The Independent Contractor Revisited

As the federal government and the state governments look for more ways to bring in money, the independent contractor status is a likely place for them to look. After all, by using independent contractors rather than employees, employers don't have to withhold taxes, provide workers' compensation, contribute to unemployment compensation, or provide any benefits such as 401-k programs, health insurance or other benefits. Plus you can use and discontinue independent contractors as needed.

Certainly, in this age of home-based businesses, the use of outside sources makes a lot of sense. After all, outsourcing a lot of business needs has been done for years and will only increase with growth of small business. Most one-person and small businesses don't need full-time employees. Many requirements can be outsourced to independent contractors who in turn outsource many of their requirements.

It is the use of workers who are classified as independent contractors but who are really employees that can cause legal issues. 

WEB SITES - 5 Legal Tips

Web sites get stale and out of date. Laws and regulations change. If you haven't updated your Web site in the past 12 months, it's time for a review.

1. Jurisdiction Statement?

The Internet makes access to Web sites possible from anywhere on the planet. You want to make it clear that your Web site is governed by the laws of your selected state. This way, you are less likely to find yourself being sued for violating the laws of some other place.

For example, my Web site says, "This Web site shall be governed by and construed in accordance with the laws of Massachusetts, USA, without regard to its choice of law rules." http://www.smartfast.com/pages/juris.html 

2. Disclaimer?

Does your site have a disclaimer?

Massachusetts Coverall Court Ruling: A Warning to Franchisors

The Massachusetts Supreme Court announced its decision in the case of Awuah v. Coverall North America, Inc. As a result of this ruling misclassifying workers as franchisees in Massachusetts could be very costly to franchisors. This important alert from Nixon Peabody provides a detailed summary of this important decision. Franchisors that currently operate in Massachusetts who bill customers and collect revenues on behalf of their franchisees and advance or submit payments to their franchisees, should be in touch with franchise counsel. Read the complete article and obtain the opinion.

Ed Teixeira is the founder and President of FranchiseKnowHow, LLC, a franchise-consulting firm. Ed has worked in the franchise industry for thirty years. He has served as a corporate executive for firms in the retail, manufacturing, healthcare and technology industries.

The Independent Contractor

The following article provides some up-to-date information on the independent contractor status. Business brokers in states requiring real estate licenses are probably safe. The real estate lobby through the National Association of Realtors (NAR) is powerful and has battled the appropriate federal committees and those in Congress. The real estate industry is the only business exempted, as far as I know. I believe that real estate agents are really employees: they work for only one employer; they must follow the dictates of the owners of the firm; they can’t work for any other firm at the same time; the list goes on. So, it follows that agents that work for business brokers and follow the same rules would also be exempted from independent contractor regulations. The states really call the shots since they require a real estate agent to follow certain rules and be employed by only one broker, etc.

ValuTrax ValuHints

Comment from the BBP Staff

A Note on Engagement Letters – With the large increase in business brokers providing business valuation services, making sure that the client knows exactly what he or she is getting is critical. There have already been some issues with business owners thinking they are getting a business valuation that can be used in legal situations, to address IRS problems, etc. Most business brokers really only supply “opinions of value” which serve most purposes, but obviously not all. Using an Engagement Letter which outlines exactly what the client is receiving can protect the business broker or appraiser from any misunderstandings or worse yet, any legal problems.

We realize that the following article concerns a program we are marketing – ValuTrax, but it should be of interest to anyone providing valuation services. Keep in mind that even if you are just providing a business owner with an informal “written” appraisal or opinion of value or pricing report – you should still get something in writing and signed that tells a potential seller that it is just your opinion of what you think it should sell for. Regardless of what you may tell potential clients, if they have a written report on the value of their business, they could end up using it for purposes other than what you intended.

Len Krick Documentation

Len Krick has supplied us with the documentation related to his recent case with the Nevada Securities Division.  This documentation includes everything from the 2006 No-Action Letter from the SEC to Country Business, Inc., all the way through to the compliance checklist and listing agreement language now being used by Len Krick as a result of his experience.

You can view all the below forms at this link with numbers 2 and 9 in MS Word Format if you would care to use them.

1. November 8, 2006 – SEC’s “CBI” No‐Action Letter
2. Len Krick’s Stock Sale Acknowledgement, Notification, and Disclaimer
3. March 23, 2011 ‐ Subpoena from the State of Nevada Securities Division
4. May 17, 2011 ‐ Position Paper from Krick to State of Nevada Securities Division
5. April 20, 2011 ‐ Amendment to listing Agreement Converting to Consulting Agreement
6. May 23, 2011 ‐ Proposal by Krick to Nevada Securities Division
7. May 24, 2011 ‐ No‐Action letter from the Nevada Securities Division to Krick
8. June 8, 2011 ‐ Compliance and Indemnification Letter From Krick to Thomas Schuman (Shareholder selling stock to Michael Baker Corporation)
9. May 25, 2011 ‐ “CBI” No‐Action Letter Compliance Checklist to be used by Krick going forward
10. June 28, 2011 ‐ Language added to Sunbelt Business brokers of Las Vegas, Inc. Listing Agreement

REAL‐LIFE CONSEQUENCES AND SOLUTIONS FOR BUSINESS BROKERS WHEN THE PARTIES CONVERT AN ASSET SALE TO A STOCK SALE - Part 2 of 2

Before continuing, I thought I would tell you what happened to the transaction. I was in New Orleans at the IBBA Conference, when my client copied me on an e‐mail saying to the Buyer (a public company) that the deal was "off". I thought, "I've been working on this deal for a long time. I need this large commission to pay my legal bills. Now that my client has notified me, in writing, that the stock deal is "off”, I'm going to step back in.” I did and came up with a way to indemnify the public company against potential future liability, from a possible construction defect suite, by purchasing an insurance policy from Lloyds of London. The deal was "back on." This just proves the point that the business brokers need to stay in these deals to the end, and cannot back off once the parties notify the broker that they intend to conclude the deal as a stock sale.

The Chief of Enforcement returned from her vacation, and presumably, the Division’s investigators concluded their review of my submission. We have no explanation for what happened next. ...

REAL‐LIFE CONSEQUENCES AND SOLUTIONS FOR BUSINESS BROKERS WHEN THE PARTIES CONVERT AN ASSET SALE TO A STOCK SALE- Part 1 of 2

The following is a true account of events that actually happened in the spring of 2011. While business brokers have been “theoretically” at risk when a transaction is concluded through the transfer of equity in the selling entity to a buyer, I actually lived this nightmare. As a result, I thought I would let everyone learn from the experience. All the major documents referred to herein will be linked to in future blog postings, for your review.

Civil Suit Pending Against Krick in Federal Court:
I am still battling a major civil suit, filed in Federal Court, brought by a former client who is accusing me of among other baseless claims, "unjust enrichment" because I received commission for selling the equity he personally owned in his business entity after he and the Buyer decided to convert the $5,450,000 transaction from an "asset" sale to a "stock" sale in August 2006. Their contention is that...

Len Krick Update -- State Case Closed

The following email is from Len Krick regarding his case with the State of Nevada Securities Division. Knowing how important the details and outcome of his case are to all brokers, Len has sent us a great deal of information.  Because his case is extremely pertinent to all brokers, we will be sharing this information over the next few weeks. 

Today's posting will just include his email and a link to the Nevada no-action letter.

Dear Fellow Business Brokers and Supporters:

Each of you has sent me e-mails of support and interest in my fight with the State of Nevada. So, I thought I would bring you up to speed now that I have resolved that issue. My civil case in Federal Court is still in full swing, though.

The “case is closed” with my State of Nevada Securities Division’s investigation; I received and paid my “assessment.” Now I can provide the detail I promised.

Len Krick: Some Good News

Below you will find Len Krick's latest update to me regarding his issue with the State of Nevada's Securities Division.  If you are not yet familiar with what is going on, you will want to read theprevious postings regarding Len Krick's case.  Certainly the information from Len concerning this issue is good news. The fact that the lawsuit goes on as does the federal inquiry, doesn’t lessen the attorney fees or the time it must take for Len to deal with this issue. If you would like to contribute to Len’s legal fees, as many already have, just email me and I will follow up with instructions on what to do.

The fact that Nevada has seen fit to issue a “no action” letter may inspire other states to follow suit.

COMMENT FROM TOM WEST:

And the saga continues...

Franchisors Shouldn’t Hold Back on Financial Disclosure

It’s important that franchisors disclose as much meaningful financial information about their franchise opportunity as possible. Providing franchise candidates this kind of information can prevent future franchisee problems from arising.

Recently, I received a telephone call from an individual looking to purchase a franchise. The person received my newsletter and asked if I could answer an important question. He explained that he was considering several locations to lease space for a franchise. He had contacted the franchisor about operating costs. In particular, he was seeking some information regarding the costs for leasing retail space. According to the prospect the franchisor told him that he couldn’t provide any cost or expense data other than the information contained in the FDD. My first response was to ask if he was represented by a franchise attorney. His response: “Not yet.”

I explained to him, that under the Revised Franchise Rule, cost and expense data was not considered to be a financial performance representation. I provided a quick overview of the FDD and in particular Item 19, explaining how the previous regulations were strict and somewhat ambiguous when it came to financial disclosure. Now, franchisors can disclose expense and cost data, which should help franchise prospects make a more informed decision. My admonition to the individual was to seriously consider whether he should proceed in purchasing the franchise.

This isn’t the first time this situation has come up. Franchisors that hide under the previous Item 19 requirements

Personal Goodwill Revisited

In Darrell Arne's recent newsletter dealing with personal goodwill, Darrell notes that a case tried over 12 years ago is still being cited in recent personal goodwill cases.  He provides a summary of this case, Martin Ice Cream Co. v. Commissioner 110 TC 189 (March 17, 1998), and then goes on to summarize four more recent tax cases that challenged PGW allocations.  Darrell closes his newsletter with five lessons from the court, including what industry makes it harder to argue personal goodwill and what type of agreements support the allocation to personal goodwill. Recommended reading!

Loan Issue Threatens Closing

Hi Tom,

Once again I need your opinion.

Situation:
I have a deal that made it through due diligence and all parties agreed to move to the closing (scheduled for yesterday). In late 2010 the seller had taken a personal unsecured loan and paid off his business equipment loan from 2008 (UCC filed with the state). After weeks of pressure to produce the payoff letter, the seller informed me the second loan was in fact not an unsecured loan as he thought but a restructured loan which still used the equipment as collateral. I have confirmed it is a personal loan, but the UCC is still in place and naturally the bank will not terminate it. The seller refuses to pay off his personal loan with the proceeds of the sale. The buyers are not happy.

Question:
Do you have any suggestions as to how this deal might be structured which will allow the sale to go through and the seller not to pay off the personal loan?

JG

Update on Len Krick's Situation in Nevada

Here’s an update on the issue with the Nevada State Securities Division:

1. I delivered the 200,000 pages of documents plus 2,750 electronic files to the State by the deadline on the subpoena.
2. I am currently in a deal which is scheduled to close escrow this Friday. The parties decided to do it as a stock sale and I backed away at that point. The selling entity is an old C-corp. I have been working on this deal for a year. The commission due is $297,500.
3. The State warned my securities attorney that if I was involved in any stock deals after I received the subpoena, that I cannot conclude them that way. Instead, I need to “turn them into a consulting agreement” and “bill” my client for time at standard rate.
4. They did not indicate that they were unaware of my big deal that I am doing and that, on January 28th, it turned into a stock, but we know that they must be aware because they were emphatic about “any deal since the subpoena”.
5. So, I had my attorney draft the Second Amendment to the Listing Agreement, which I discussed in my last e-mail. I spoke with my client. He said he would sign it if I gave him a discount on my fee (meanwhile it was his idea to do the transaction into a stock deal, not mine). I agreed and sent him the amendment, which is a $52,500 discount from the full fee.

FDA Proposal for Restaurants Food Labeling is Far Reaching

This article from Nixon Peabody in their Franchise Law Alert, outlines key components of proposed food labeling regulations by the FDA.

The Food and Drug Administration has issued two proposed regulations to implement calorie labeling requirement for menus, menu boards, and drive-through menu boards in franchised restaurants and retail food establishments with 20 or more locations. The requirements would include vending machines. Considering that approximately 50% of restaurants are franchise operated, these proposed regulations if enacted, will impact franchisees.

More from Len Krick in the All-Important Stock vs Asset Issue

I delivered my 200,000 pages of documents plus 2,757 e-files by the deadline, last Friday, to the State of Nevada in response to their subpoena. I also decided to “kiss their ring” and amend my listing agreement on another deal I am doing right now (set to close this Friday or a week from today, to a consulting agreement. This will cost me $52,500 in foregone fee, but I can’t slap the State securities Division in the face right now with another stock sale, now that I am under investigation. I have included the amendment language below that we are doing  to satisfy the State (we hope), until a permanent solution can be found. Note that the State specifically DOES NOT recognize the November 2006 “CBI” No-Action Letter.

I am now soliciting all my friends with the following e-mail. If we can find commercial deals that converted to stock deals, then the State will have to take on the commercial real estate people as well. This would be good for business brokers. Here’s what I am sending out. Note that this is the message to my friends, so they already know who I am, etc.:

Len Krick's Proposal

by Len Krick

Gentlemen:

Obviously I am trying to figure out how to defend myself in the asset sale conversion cases I face. Notwithstanding attaining the ultimate goal of having the SEC address the issue formally through either an exemption or special license, or both, I have an idea to propose for your consideration:

Here are the points:

1. The SEC is asking for actual cases where business brokers were harmed, etc. Based on Mike and John’s e-mails, it appears that they believe that the CBI No-Action Letter should provide sufficient protection.

2. The SEC still believes that any deal where the Seller receives a promissory note, secured by the assets or stock of the business, also should require the Broker to have a securities license. If the SEC actually “ruled” on that, it would have a disastrous effect on the profession of business brokerage, and thousands of business owners would not be able to sell their businesses.

3. I have an action (MSI Case) that alleges, in U.S. District Court, that I am in violation with Nevada State Securities Law.

4. I also am under investigation by the Nevada State Securities Division for possible violation with Nevada State Securities Law. As a result of that investigation, the State is going to uncover at least 8-10 additional transactions that, for different reasons, ended up as a stock sale.

5. Both of these actions are based on “State” law, not Federal.

Records Subpoenaed -- Len Krick's Nightmare Continues

Comment from Tom West:
The issues between the state of Nevada and Len Krick continues. So far, as Len points out, the federal government has not become involved – yet.

So far, this civil case only claims I violated Nevada State Securities laws. It could very easily be expanded, though, to claim I violated Federal laws as well. We are sort of waiting for that shoe to drop.

At this point, the Nevada State Securities has only subpoenaed all my records (which I am reproducing right now); they have not yet indicted me. Obviously, we are hoping that they decide not to proceed. The question is, would I be willing to sign a “Consent Decree,” promising not to do any of these deals in the future? The answer is “How can I promise that when I didn’t create the problem in the first place and am powerless to prevent it in the future? But, my question to you is: Other than showing the SEC that state regulators are starting to deal with this problem on their own, what relevance does the subpoena have to the SEC?

Incidentally, producing confidential records for the State is an issue in and of itself.

Broker Licensing Options

by Jack R Sanders, CBA, CBI, CMEA, CM&AA

Today, Business Brokers/Intermediaries have a whole world of new options for legally securing commissions. In the past, most brokers have been licensed as Real Estate Salesman/Brokers in the state they were in or not licensed at all if their state did not require licensing or if there was no real estate involved. That would include a lease to be transferred to the buyer. The lease was a favorite way of requiring brokers to be licensed and to pay a DRE (Department of Real Estate) fee. The place where being properly licensed really becomes an issue is in court when you are trying to collect your fee. That is where the rubber really meets the road.

Not much attention was paid to the business being transferred if it became a stock transaction instead of an asset sale under the Uniform Commercial Code. Attorneys can handle stock transactions but may try to reduce your fee to justify theirs. With the advent of the new FINRA (FINANCIAL INDUSTRY REGULATORY AUTHORITY) Series 79 license there is now an option for handling stock, multi-state, partial interest, equity financing and a whole variety of other transactions we were prohibited from doing as business brokers. Also, currently underway with a big push from several organizations, is another type of license that would permit transactions similar to those described in the SEC CBI (Country Business, Inc) No-Action letter. It has been nicknamed a BrokerLite license and is still under negotiation. It would require limited background check and almost no testing. Opinions vary as to the success of this license being approved.

For the purposes of this discussion, I will limit further comments to the Series 79 license and what is required to obtain one.

Why Don’t More Franchisors Disclose...? Part 2: The Options

by Ed Teixeira

Yesterday's blog post discussed Item 19 disclosures for franchisors including some of the benefits. Today's post will explore other options that enable a franchisor to provide important financial data to prospects.

The Options:

Under the amended FTC Rule franchisors can provide prospective franchisees operating cost estimates, such as for labor, ingredients and products, so long as this information is not presented as a percentage of gross revenues. If it is, then an Item 19 disclosure must be made. Additionally, a franchisor can provide the prospective franchisee with a price list for its product line. If the franchisor does provide prospective franchisees with cost and expense information, the information must be consistent with the information contained in Items 5, 6, and 7 of its FDD. Cost information in combination with additional FDD disclosures can enable a franchise candidate to construct financial projections.

In addition, a franchisor can make an Item 19 disclosure for revenue only. By providing revenue figures a prospective franchisee has a basis to develop a break even and cash flow projection.
Some franchisors list franchisee revenue without identifying the franchisee by name or location. This is a rather simple process that a franchisor can follow.

When a franchisor refuses to provide the most basic financial information to prospective franchisees, some consider this to be a red flag. It creates the perception of negative financial results from their franchise network.

Why Don’t More Franchisors Disclose Franchisee Results?

by Ed Teixeira

An Item 19 disclosure is an optional franchisor disclosure made in the Franchise Disclosure Document (“FDD”). It presents the financial performance of the franchisor affiliates, franchisees and company-owned units. It’s been reported that 25-40% of franchisors make a disclosure under Item 19. Based upon various discussions with industry experts I will err on the conservative side and say it’s probably around 30%.
 

There are numerous reasons why more franchisors don’t provide an Item 19 disclosure:

• Difficulty in obtaining consistent and credible data from the franchisees. The fear that some data is not accurate.
• Complexity of gathering, verifying and presenting the data especially on the part of large franchise systems.
• Disclosing financial data that can be viewed by competitors.
• Mixed financial results, whereby some franchisees perform poorly.
• Reluctance to project future financial performance to prospective franchisees.
• Impacting the due diligence process of prospective franchisees, whereby some could be swayed by the disclosure when making a decision to purchase the franchise.

I expect these reasons will continue to play a role in the decision not to make an Item 19 disclosure.

Franchisor benefits from an Item 19 disclosure:

• Can provide credible financial data to franchise prospects (providing it’s verified).
• Sets the franchisor apart from those franchisors that fail to make this disclosure.
• Can accelerate the franchise prospects due diligence process.
• Forces the franchisor to gather franchisee financial results and thus better monitor the network.
• Can boost the sale of new franchises.
• Can be used by the franchise prospect to conduct a more thorough financial analysis.

The Legal Nightmare Continues...

Fellow Intermediaries and Brokers:

More good news… The State of Nevada may bring a criminal indictment against me in this case.

I have decided to retain the additional attorney who was the State’s first Administrator of the Nevada Securities Division when it was developed to be a real division in the mid-80s. He is considered to be the Nevada Division of Securities “expert.” My regular attorney and I are meeting with him tonight.

Can you spell N I G H T M A R E ?

Len Krick, MBA, SBA, CMEA
Certified Business Intermediary
Merger and Acquisition Master Intermediary

Fellow Intermediaries and Brokers

by Len Krick

First I would like to thank all of you who sent me so many great expressions of sympathy and support.  It’s nice to know that I am not alone out there.  I appreciate that you have “circled the wagons.”
 
Secondly, I can tell you that our efforts, to-date, to get the original claims in the civil suit dismissed have not succeeded, so the legal actions are still on track.  As you can imagine, I am spending a lot of time and more money than I have to defend myself.  No more racing for Len in the foreseeable future, that’s for sure.  I now work to pay legal bills.  It seems ironic since I present a workshop for the IBBA called “Minimizing Business Broker Liability:  An Ounce of Prevention…”
 
Thirdly, yesterday I received the attached subpoena from the State of Nevada alleging violations of state securities law.  While this was, no doubt, prompted by the original case where I was named a third-party defendant in a civil suit, this is much broader.  As you will see, they are asking me to produce all my records since January 2006. Those records will include several deals, in addition to the original transaction, where the listing was for the sale of the business’s assets, but the parties decided, sometimes at the last minute based on tax considerations or continuity of existing contracts, to morph the deal into a stock sale.  So, the State will have evidence of numerous potential “violations” through the years. Each one is identical to the original one:  

From the Desk of Tom West: SEC Suit

by Tom West

The letter to members of the M&A Source from Len Krick (see previous blog entry) should be read by all business brokers. We don’t know how far this will go and more importantly, what the ramifications will be. The unfortunate part of this is that Len is one of the good guys. He is a leader in the profession, always willing to share, works hard, has been very successful, does nothing wrong,...and look what happens.

If this case didn’t have so much importance in the workings of our business, we could say, "Well, these things happen." Of course, in this case, Len had nothing to do with what happened over the past five years. The deal closed that long ago. But, because of the asset sale changing to a stock sale, Len is in the middle. He had no decision in the change and informed all of the parties of the situation and his concern. They went ahead and paid him, and now, due apparently to the poor decision-making of the new owner (the buyer’s son-in-law), the seller, Len, and Len's firm have been sued.

Hopefully this case will die a quick death and court will see what actually happened and dismiss it. But, as Len points out, if it goes further, we may all pay the price.

Dear Fellow M&A Source Members:

by Len Krick 

As most of you know, I have a dual “Main Street” and “M&A” practice in Las Vegas. I try to do things by the books, minimize my exposure to liability, and document everything I do. I have also been involved in the effort to have the SEC address licensing requirements for business brokers for a long time. Back in 2005, when all we had was the IBEC letter, I drafted a document, entitled “Stock Sale Acknowledgment, Notification, and Disclaimer,” to disclose the fact that I didn’t have an SEC license and didn’t intend to structure a deal as a stock sale. This document was based on the IBEC No-Action letter (1986) and I did the things it said I should do, and didn’t do the things it said I shouldn't do; I performed in accordance with the IBEC letter. In every deal I was involved in, which morphed into a stock sale, I obtained the signatures of both the buyer and seller. I never had a party refuse to sign it.

Subsequently, as soon as the CBI No-Action letter came out in the Fall of 2008, I updated the document to reflect the CBI letter “clarified” points. Shane Hansen, the attorney for the Task Force, has reviewed this agreement. Most of you know that I freely give it to anyone who requests an electronic copy; I have a sample in the workshop handout materials for my IBBA workshop “Minimizing Broker Liability.” Countless numbers of business brokers and intermediaries now use this agreement as a band-aid, when an ordinary asset sale turns into a stock sale. However, the SEC laws are still in force and a “no-action” letter is merely SEC staff’s opinion on that specific case.

It’s really no big deal to get a series 7 or 62/63 license; that’s not the point. I took two companies public on NASDAQ and was president of one of them; I simply do not want to get involved in anything that requires more SEC reporting. So, I choose not to get licensed. If I did big deals all the time and they tended to start out or morph into stock sales, maybe it would make sense.

Three weeks ago something occurred that I thought you might want to know about because it might be used as a legal precedent regardless of which “side” wins. If I prevail, then that will be good for all of us. If I lose, I believe that it will be really bad for all of us. That assumes that I am not the only one in the world who was forced to conclude a transaction as a stock sale, unintentionally.

Here’s a quick overview: