Business Law Center Newsletter - Vol. 1, No. 1 - Western State College of Law

Creating Business Lawyers and Leaders of Tomorrow Vol. 1, No. 1 Fall 2015 The Business Law Center WESTERN STATE COLLEGE OF LAW(BLC) serves as a resource by Professor Tracie R. Porter and training center for students, lawyers, and It is my pleasure to continue the rich legacy of the business practitioners, by Business Law Center (BLC) at Western State College ofmatriculating students who Law. As its Director, I have the opportunity to work withbecome legal practitioners our talented students, and dedicated alumni and friends of the law school. who are adequately equipped to represent This year will be my second year as the Director. My clients in a variety of plans for the BLC are to fulfill its mission by offeringbusiness transactions, and programs and opportunities for our students and alumni. This newsletter is one of several program by supporting legal initiatives we are launching this year to reach our practitioners who wish to constituents.enhance their business law practice skills. The BLC The BLC will continue to host its Meet and Greet for students as well as a Holiday strives to be a community Networking Happy Hour for our alumni and friends of the law school. We are excited to continue the 16-year legacy of the BLC and welcome you to join us in expanding resource to both the our programs to meet the needs of the legal and business communities. business and legalcommunities supported by Friday, September 18: Top Trends Shaping Capital Markets, Governance & Western State College of Financial Reporting - 14th Annual SEC Financial Reporting Conference | 7:30 AM - 5:00 PM | Irvine Marriott | Sponsored by CSUF, Mihaylo College of Business & Law (WSCL). Economics | Register online: http://business.fullerton.edu/Event/CCRG/#Default.Website: www.wsulaw.edu Wednesday & Thursday, September 23 & 24: Student Meet & Greet | 5:00 PM -Email: [email protected] 6:15 PM | The Business Law Center in the Library (lower level). Tel: 714-459-1153 October 13, 27 & November 10: MCLE | 2:00 PM – 5:00 PM | Western State College of Law (1) Business Start Up Basics; (2) Business Advising Advanced Issues; (3) Small Business Counseling. December 11: BLC Holiday Happy Hour | Location: TBA.

BUSINESS LAW CENTER Western State College of Law James Cheydler California Limited Liability Company Senior Assistant Dean, WSCL Securities Law Overview Carolyn M. Dillinger Passion Law, PC By John E. Ohashi, Adjunct Professor Emile Gardner GT Tech, Inc. Clients and attorneys consider various Each state, including California, has its factors, such as liability concerns, tax own set of securities laws. The Grant J. Hallstrom considerations, and governance issues securities laws of the various states areHallstrom, Klein & Ward, LLP in selecting a LLC as an appropriate commonly referred to as “Blue Sky business entity. Another factor is the Laws.” The Blue Sky Laws generally Vincent Howard securities laws issues relating to LLC’s. track the 33 Act and the 34 Exchange Howard Law, PC The securities laws provide for Act; however, each state will have its significant potential liability if they are own unique issues, so it is important to Cheyanna Jaffke applicable and the LLC does not look at the applicable Blue Sky Laws Professor, WSCL comply with them. in each state where you have a Suzanne Kersh prospective LLC member. The The threshold question is whether a California securities laws are found at J.D., WSCL Alumna LLC interest is a security. If a LLC California Corporations Code Section Kevin Khoa Nguyen interest is a security, then the LLC 25000 et. seq. must comply with the “Securities J.D., WSCL Alumnus Laws,” which consists of two broad Is an LLC Membership Interest a John E. Ohashi categories of investor protection Security? Attorney at Law provisions under federal and state laws: Bryan Owens (1) the registration and qualification Federal Law – Investment Contract / Attorney at Law provisions; and (2) the anti-fraud Howey Test. Federal law defines Yihe (Echo) Yang provisions (disclosure requirements). stocks, bonds, and other instruments as securities; however, it does not East West Bank Dual Laws - Federal and State specifically define a LLC interest as a Securities Laws “security” (see Section 2[1] of the 33 To sign up for BLC emails and Act). Rather, a LLC interest must be announcements, send your A LLC that issues securities must analyzed to see if it is an “investment comply with both federal and state contract,” which is a security under request to Professor Tracie R. securities laws. The relevant federal Section 2(1). Porter at [email protected] securities laws are the Securities Act of 1933 as amended (“33 Act”) and the SEC v. W.J. Howey Co. 328 U.S. 293, Securities Exchange Act of 1934 as provides a four-prong test (the “Howey amended (“34 Exchange Act”). Test”) to determine if an interest (i.e., Broadly speaking, the 33 Act generally deals with “issuer” transactions, that is, (Continued on page 3) a company sells its securities to investors with the sale proceeds flowing to the company. The 34 Exchange Act generally deals with secondary trading, that is, the buying and selling of securities among investors after a company has sold securities pursuant to the 33 Act. The money flows between the buying and selling investors and not to the company. 2

BUSINESS LAW CENTER Western State College of Law3SECURITIES LAW (Continued from page 2) Business Law Center ProgramsLLC membership interest) is an “investment contract” and therefore asecurity under federal law. Howey provides that an investment contract (a • Business Law Resource Centersecurity) is a contract, transaction or scheme whereby a person: (1) invests • Business & Real Estate Lawmoney, (2) in a common enterprise and (3) is led to expect profits (4) solelyfrom the efforts of a promoter or a third party. Items (1), (2), and (3), Certificateabove, are almost always present, and only item (4) is usually open to • Mentorshipinterpretation - i.e., is the investor passive or actively engaged in the • Transactional Competitionsbusiness. LLC interest must be analyzed to determine if it fits within the • Continuing Legal Educationstatutorily defined term “investment contract,” which is a security under the33 Act. The federal court cases use the differences between a general and ***limited partnership as the framework to determine if a LLC interest is asecurity. If the LLC members act like general partners because they Business Law Certificateactively participate in the LLC’s management and affairs, then the LLC Requirementsinterest may not be a security. On the other hand, if the LLC interest isanalogous to a limited partnership interest, because of the investor’s limited Complete 27 units of BLC Coursesparticipation in management, then the LLC interest will probably be • Core/Mandatory Courses:classified as a security. Business Associations, BLC Networking Meet & Greet Business Law Ethics, Contracts I & II, Contracts Drafting,California – Presumption that a LLC Interest is a Security Corporate Finance, Federal Income Tax, Negotiations,California law, unlike federal law, presumes that a LLC interest is a Principles of Agency &security, unless the LLC meets certain tests. California Corporations Code Partnership, and Sales.Section 25019 provides: • Electives: see list on page 7 \"Security\" means any. . .; interest in a limited liability company For detailed information about the BLC except a membership interest in a limited liability company in program and courses, contact us: 714- which the person claiming this exception can prove that all of the 459-1153 or email [email protected] members are actively engaged in the management of the limited liability company; provided that evidence that members vote or have the right to vote, or the right to information concerning the business and affairs of the limited liability company, or the right to participate in management, shall not establish, without more, that all members are actively engaged in the management of the limited (Continued on page 4) 3

BUSINESS LAW CENTER Western State College of LawSECURITIES LAW (Continued from page 3) Registration/Qualification Provisionsliability company, or the right to participate in Every security offered or sold in the United States,management, shall not establish, without more, that all including a LLC interest, if it is a security, must bemembers are actively engaged in the management of the registered with the Securities and Exchange Commissionlimited liability company.” (“SEC”) or qualify for an exemption from registration (Section 5 of the 33 Act). The security must also beSection 25019 has potential traps. A LLC’s interest is a registered or exempt from registration or qualificationsecurity unless “all of the members are actively engaged under Blue Sky laws, including California (Corporationsin the management of the limited liability company.” The Code Section 25110). The burden of proof always reststerm “all of the members” apparently does not carve out with the LLC to demonstrate the availability of anmembers, such as founders, who are managing members. exemption for its securities.Thus, if a LLC’s members consist of founders, who areactive in managing the LLC, and an employee, who A registered offering of securities is referred to as areceives an incentive interest but does not participate in “public offering,” and an offering pursuant to anmanagement, then all of the LLC interests could be exemption is generally referred to as a “privatesecurities. There is also uncertainty as to how 25019 placement.” Registration and/or qualification ofworks if a founding member, who, along with the other securities involve extensive legal, accounting, andfounder members, is active in management, but then regulatory fees and is time consuming and expensive. Ifretires and becomes a passive investor. The issue is the LLC’s membership interests are securities, then thewhether the founders’ membership interests which were goal is to find an available exemption from registrationnot securities at the time they were issued become and/or qualification under both federal and state securitiessecurities upon the retirement of a founding member. laws i.e., a private placement. (Continued on page 5)a mastery of skill sets – professional skills, and aincluding accounting, finance, strong ethical foundation,tax, decision-making, game resulting in graduates ready tomodeling, and economics – all act as effective counselors,as applied to legal analysis; decision makers, and leaders in nearly any business setting.the proficiency to negotiate,structure, and document Western State’s Business Lawcomplex transactions, from courses are taught by facultyentrepreneurial business entity who possess strong practicalformation to structuringcorporate mergers and and theoretical backgrounds Inacquisitions to responding to addition to their strongregulatory inquiries; and practical experience. Many ofan integrative education that our Business Law facultyblends substantive legal theory, members hold advancedpractical experience, degrees and credentials, such as MBAs, CPAs, patent lawyer registrations, and LLMs. 4

BUSINESS LAW CENTER Western State College of Law5Business Law Center Bulletin BoardSECURITIES LAW Safe Harbor Rules of Regulation D Lauren E. Becker (Distinguished Scholar)(Continued from page 4) (Reg D). In response to the subjective Xing FangFederal Intrastate Exemption. Section and uncertain nature of 4(2), the SEC (with Distinction)3(a)(11) of the 33 Act and Rule 147provides a federal exemption if a LLC’s adopted Regulation D (Reg D). Reg D Chelsea Galebusiness is in California and it limits saleof its membership interests to California is a “safe harbor” that provides Kristen Gonzalezresidents. objective standards to obtain a federal Crystal GritzmacherFederal Private Placement Exemption.Section 4(2) of the 33 Act exempts from exemption. Reg D’s specific Deanna Kapelnikovregistration “transactions by an issuer (with Distinction)not involving a public offering.” The requirements include limitations on thedifficulty in applying 4(2) is that it relies David Krogmanon subjective standards that are number of investors, and in somediscussed in SEC v. Ralston Purina Co. Anthony Masi346 U.S. 119 (1953) in determining instances, limitations on dollar amountswhether an offering is public or private. Kevin K. NguyenSEC Release No. 33-4552 (November 6, of an offering, and disclosure (with Distinction)1962) follows-up Ralston Purina with adiscussion of various factors that requirements. Myrna Van Phamevidence private transactions, such as thenumber of investors and their California Private Placement Distinguished Scholar:relationship to the issuer, the disclosures Highest GPA in Business Lawprovided to the investors, and the Exemption. California has a series ofmanner of the offering. The critical Coursesfactor in determining whether an available exemptions from With Distinction:offering is private appears to be whether GPA of Business Law Coursesan investor needs the protection provided qualification, including the limitedby the registration requirements of the exceeding 3.0federal securities laws. offering exemption provided by California Corporations Code Section 25102(f). 25102(f) generally tracks Reg D. A violation of the California qualifications requirements under Section 25110 can lead to drastic remedies including investor rescission rights under Section 25502. As stated above, California law presumes that a LLC interest is a security, so it only makes sense to make sure that the (Continued on page 7) 5

BUSINESS LAW CENTER Western State College of LawPeople and Profit: California’s Social Purpose CorporationBy Carolyn M. Dillinger, Adjunct ProfessorThree months ago I finished reading Dale Partridge’s corporation identifies its social purpose objectives andbook “People Over Profit”.1 In People Over Profit he discusses the actions taken and expenses incurred toexplains the cycle that for-profit businesses tend to achieve those objectives.3 This annual report used to notfollow: the honest era, the efficient era, the deceptive be required if the Social Purpose Corporation had lessera, and the apologetic era. He then explains how a than 100 shareholders. However, effective January 1,business can break the cycle by understanding and 2015, there is no longer an exception to this requirement.following seven core beliefs: people matter, truth wins,transparency frees, authenticity attracts, quality speaks, For your own law practice and for advising yourgenerosity returns, and courage sustains. business clients, earning money is important. As Professor Kevin Mohr reminds his students inThere are two applications for business law attorneys. Professional Responsibility class “Baby needs a newFirst, in our own law practices, review the four stages in pair of shoes.” Consider the core beliefs that Dalethe cycle and determine whether your firm is currently in Partridge identified (people matter, truth wins,the honest era, the efficient era, the deceptive era, or the transparency frees, authenticity attracts, quality speaks,apologetic era. Even with the best of intentions in the generosity returns, and courage sustains) and don’tbeginning of your career you may be surprised to realize forget to analyze whether a Social Purpose Corporationthat you or your firm have moved past the honest era to is a good fit for your client.another stage of the cycle. Then consider the seven corebeliefs and decide what to implement in your law ________________________practice. 1 Dale Partridge co-founded the Orange County basedSecond, when you are guiding a client regarding whether organization Sevenly.to form a for-profit corporation or a non-profit 2 Formerly called a flexible-purpose corporation.corporation, remember that California law now allows 3 http://jeremychenlaw.com/what-is-a-california-social-for a “Social Purpose Corporation”.2 The Social Purpose purpose-corporation/ accessed on 8/18/2015.Corporation is a for-profit corporation that allows theshareholders to consider purposes in addition to Carolyn M. Dillinger, Esq. is an advisory board membermaximizing profit for the benefit of the shareholders. for the Business Law Center and is an adjunct professorThe client needs to be aware that there are at Western State College of Law teaching Law Practiceresponsibilities to maintain the Social Purpose Management. Carolyn Dillinger has just rebranded andCorporation. One key responsibility is that the Social relaunched her business and non-profit law firm and isPurpose Corporation must prepare an annual report that implementing these seven core beliefs at Passion Law,includes financial statements and a management PC.discussion and analysis (MD&A). In the MD&A the Moving to our new location | Irvine, CA | 2016 6

BUSINESS LAW CENTER Western State College of Law7 BUSINESS LAW (Continued from CENTER page 3)NEWSLETTER STAFF Administrative Law, Arbitration, Executive Editor Bankruptcy Law, Civil Externship TRACIE R. PORTER (Business Law-related), Consumer Finance Law, Employment Law, Editor Entertainment Law, Intellectual KEVIN KHOA NGUYEN Property, International Business Transactions, Law Practice Graphic / Layout Management, Mediation, Moot Court SKY WORLD, INC. (Business Law-related), Real Estate Transactions, Secured Transactions, Writers Securities Regulation, White Collar JOHN E. OHASHI Crime, Wills and Trusts Drafting.CAROLYN M. DILLINGER For detailed information about the Professor Porter and Lauren E. Becker, Please email contributing BLC Program and courses, contact: 2015 BLC Distinguished Scholar articles and/or questions, 714-459-1153 or email [email protected] suggestions to: [email protected]. SECURITIES LAW (Continued from page 5)Please do not publish, reproduce, or LLC’s offer and sale of membership interests complies with the qualification distribute any material in this provisions or, given its relative ease, is subject to an exemption from newsletter without prior written qualification i.e., 25102(f). consent. Out of State Investors. A LLC may have multiple members/investors, some of © Copyright 2015 by WSCL BLC. whom reside outside of California. If an investor resides outside of California, All rights reserved. then the LLC must look at that investor’s state’s Blue Sky Laws. Most states have a private placement exemption that is similar to Reg D and 25102(f), which are not difficult to fulfill. Some states may require a filing before an offer or sale is made in the state, which is not required by 25102(f). (Continued in the Winter Issue of Business Law Center Newsletter) _______________________________ John E. Ohashi is a practicing business attorney and an Adjunct Professor at Western State College of Law where he teaches Corporate Finance & Accounting. He is a commercial law and securities arbitrator/mediator on various panels including the American Arbitration Association (AAA) and the Financial Industries Regulatory Authority (FINRA). He has served on an advisory panel to the FINRA Board of Governors and on FINRA Task Forces. 7

BUSINESS LAW CENTER Western State College of Law VOL. 1, NO. 1 FALL 2015 Advertising in the Winter 2016 Newsletter Available Brandon Powell (Distinguished Scholar) For more information, contact [email protected] for space and pricing.The BLC Newsletter is distributed via E-Blast and hard copy to the WSCL community of students, Suzanne Kersh (with Distinction) alumni and friends of the law school. Kyan Behnood Brett Gover Michelle Nazarifar Joss Tillard-Gates Distinguished Scholar: Highest GPA in Real Estate Practice Courses With Distinction: GPA of Real Estate Practice Courses exceeding 3.0