Securities for small businesses

Federal Securities Laws and Your Small Business

Small business is not automatically exempt from the federal securities laws. Depending on the circumstances of the transaction, these laws can apply to any company, partnership or organization.

What is a Security?

The Supreme Court test for determining if something is an investment contract, i.e., security:

If something is an investment contract, it is a security. In the case of Securities and Exchange Commission v. W. J. Howey Co. 328 U.S. 293 (1946), the US Supreme Court defined an investment contract as follows:

  • It is an investment of money
  • There is an expectation of profits from the investment
  • The investment of money is in a common enterprise
  • Any profit comes from the efforts of a promoter or third party

Examples of Securities Utilized by Small Businesses

Securities can include such investment contracts as bonds, derivatives, leaseholds, intellectual property investment syndicates, options, leaseholds, publication syndicates, ownership interests in limited liability companies, corporations and partnerships and stocks.

Is Your Security Exempt?

If a security is associated with your business, it will fall under the registration and reporting requirements of the 1933 and 1934 Securities Acts – unless your business has obtained an exemption from registration.

  • Obtaining an exemption from the 1933 and 1934 Securities Acts is important – most small businesses cannot afford the costs of registering the security
  • Violations of the 1933 and 1934 Securities Acts can bankrupt most small businesses
  • Be cautious in accepting any risk capital investment from a potential investor who is not an “accredited investor” as defined in SEC Rule 501 of Regulation D
  • Be cautious in accepting any risk capital investment from a potential investor where your business has not first provided the potential investor with a private placement memorandum
  • Exempted securities can be an excellent source of capital for your company, partnership or organization

Before your company accepts the at risk investment capital, contact Business Patent Law, PLLC and we will discuss possibilities for your business and intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

Patent Portfolios Increase Profits

Patent Portfolios Increase Profits

Patent Portfolios – A Way to Reduce Inventories And Increase Profits?

By using a Patent Portfolios business model, entrepreneurs, start-ups and established companies can:

  • enhance profitability
  • reduce inventory
  • decrease product liability risks

A Nontraditional Business Model utilizing Patent Portfolios

After spending years in your market space, you invented an improved Widget. Actually, it was the genesis of a long line of better Widgets. Instead of plodding along with the traditional business model of raising capital, building a sales staff and increasing inventory, you opted for the “brain rather than brawn” marketing strategy. To be sure this business model is not for everyone, but for a select few, here is what can happen…

Implementation of a Nontraditional Business Model can include the following:

  • Develop and test several prototypes to determine the best prototypes.
  • File as many Patent Applications as is economically feasible.
  • Patent, Patent, Patent as many improved Widgets as possible!
  • After the Patent Applications are filed, advertise as best fits the company’s budget.
  • Take the line of Widgets to trade shows to demonstrate the improved Widget line for potential manufactures.
  • When one or more manufacturers appear interested in the Widget line, offer reasonable royalty rates and license agreements to keep the manufacturers coming back – don’t be greedy, when the manufacturers profit, you will too.
  • Purchase intellectual property insurance to protect and preserve your Widget Patents, if the need arises.
  • Sell your company’s services to assist the manufacturer with the advertising, making and selling of the Widget Line.

Licensor of Patent Portfolios instead of Manufacturer

As a licensor rather than a manufacturer, you can eliminate all or at least most of the following expenses: inventory, transportation, property taxes, regulatory and labor. You also have the potential to perpetuate your company’s Patent monopoly for decades.

Business Risk

With each new endeavor, there is the risk of failure. However, if your licensor business model should fail, your monetary losses would likely only be a small percentage of the losses associated with the traditional model of scaling up your Widgets for sale.

This nontraditional business model is not for every company, but if your company is interested, please contact Business Patent Law, PLLC and we will discuss possibilities for your business and intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

Intellectual property as collateral for small businesses

Can Intellectual Property Be Used As Collateral For A Loan?

Can your company’s intellectual properties be used as collateral for a loan? Yes, under certain situations. For instance, if a specialized insurance policy is used to establish a value for the intellectual property, the property can be used as collateral for loans from commercial banks.

Sources of Quick Cash

Occasionally, your company may need a quick influx of cash that exceeds your balance sheet’s liquid assets.

Traditional Sources for Cash Include:

  • Commercial Bank Loans
  • Government Grants
  • Small Business Administration Loans
  • Sale of Stock or Bonds

Other Sources of Cash: Angel Investors

Other potential sources of quick cash for your company are “angel investors.” Angel investors generally take greats risks when in investing in a startup or a company with few sales and expect large returns for their investments in return.

Beware of using Angel investors since the terms of “angel contracts” can cause companies to cease doing business.

Quick Cash for Publicly Traded Companies

You may have heard, “When you don’t need a loan, the bank is ready to lend more than you need!” If you do need a loan and your publicly traded company needs quick cash, you may consider:

  • Prime Rate Loans from Large Commercial Banks
  • Lines of Credit
  • Sales of Stocks or Bonds

Quick Cash for Private Companies

Private sales of stocks or bonds are an excellent source of capital for companies not traded in the public markets, but this is not usually an option for quick cash.

Before offering or issuing stocks or bonds, a privately traded company must be careful not to violate the Securities Laws of the United States or the “Blue Sky” laws of the state were buyers reside.

Disputes over the dilution of equity for current stockholders is a serious deterrent for using the sale of stock or bonds to raise capital.

SBA Secured Loans

Currently, the Small Business Administration will not guarantee an intellectual properties secured loan.

Collateral Protection Insurance for Your Company

Some startups or smaller and medium-sized companies have valuable intellectual property portfolios. These same companies frequently encounter cash flow difficulties.

Although intellectual properties are valuable assets for companies, most commercial banks are ill-equipped to determine the fair market value of the intellectual properties.

If you decide to leverage your company’s intellectual property portfolio, you can purchase a collateral protection insurance policy from a commercial insurance carrier. The collateral protection insurance policy establishes the value of the company’s intellectual properties (which can be used as collateral for the loan) and insures the lender against default on the loan.

Is An Intellectual Property Secured Loan Right for My Company?

This quick cash strategy is not for every company, but if you want to learn more about this option for your company, contact Business Patent Law, PLLC . We can discuss possibilities for your business and your intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

manufacturing and business strategy

Business Strategy: Patent Portfolios and Holding Companies

Is it a prudent business strategy for a holding company (Company H) to own the patent assets used by Company A in manufacturing products sold by Company A?

Perhaps, let’s consider the following scenario:

Manufacturing/Distribution Considerations

  • Company A has been in business for several years and has an impressive twenty percent market share for its Widget.
  • The Widget generates one-half of Company A’s profits.
  • Company A has a superb engineering staff that has patented various improvements of the Widget invention creating a profitable patent portfolio for Company A.
  • Company A also generates royalties from its patent license agreements with other companies.

Supply Chain Problems

  • For several years, SupplyCo provided Company A with 99% pure Critical Composition to manufacture its Widgets, but due to temporary utility power supply limitations, Company A was able to deliver only 96% pure Critical Composition to Company A.
  • To meet pressing needs of its customers, Company A shipped 20 tons of Widgets made with 96% pure Critical Composition.
  • During the subsequent six week period, due to the number of injuries to the users of the Widgets manufactured with 96% pure Critical Composition, a national recall of the 20 tons of Widgets was initiated by Company A.
  • Unable to weather the recall and the pending lawsuits, Company A was forced to declare bankruptcy and the Widget patent portfolio was eventually sold in liquidation by the bankruptcy trustee.

Could the Sale of Company A’s Patent Portfolio been Avoided?

Generally – Yes – as long as the transactions between Company A and Company H are arms’ length dealings.

To minimize devaluation of an intellectual property portfolio, management can use one or more holding companies in their business strategy, such as limited liability companies to stabilize the value of the portfolio in the event the “unthinkable” occurs.

Advantages of Using a Holding Company for Intellectual Property

If Company H had owned the Widget patent portfolio and granted Company A an exclusive license to make, use and sale the patented Widgets, then:

  • The Widget patent portfolio would not have been part of Company A’s bankruptcy and liquidated by the bankruptcy trustee.
  • Company H would remain in business and could grant an exclusive license to Company X to make, use and sale the profitable Widgets.
  • Company H could sell the valuable Widget patent portfolio to Company Y.
  • It is likely that royalty income to Company H would be deemed as passive income.
  • It is probable than any sale of the Widget patent portfolio to Company Y would be determined to be a long term capital gain.

Other Considerations for Using a Holding Company as a Business Strategy

  • Better supply and manufacturing quality control – thereby avoiding the Widget recall and the ultimate demise of Company A.
  • Remove Company A’s engineering department from Company A and setup Company E to do business with Company H, identified above, to better take advantage of the tax code’s provisions for intellectual properties.
  • Company E can provide special enticements for its engineering staff to better retain and recruit the best engineering staff that will create subsequent generations of better and more profitable Widgets for licensing by Company H to Company A.
  • Special enticements for the engineering staff apply only to Company E – not Companies H or A.
  • Company E can be easily located in an area where Company E takes maximum advantage of governmental tax incentives.
  • Regardless of what happens to Company A utilizing this business strategy, Companies H and E remain viable entities.

As you can see, there are many different business strategies which o utilize corporate structures to maximize profits and reward the best efforts of employees. This illustration provides only a few of those options.

Contact Business Patent Law, PLLC and we will discuss possibilities for your business and intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter