News Type: Blogs

The legal use of cannabis-be it for medical or recreational purposes-is the rule, as opposed to the exception, throughout the U.S. And with cannabis in all its forms, including CBD, taking the country by storm, the sky’s the limit for companies entering or already operating within the legal marketplace.

Recent estimates suggest that the size of the global legal cannabis market will climb to $84 billion by 2028. This is a staggering number that spells opportunity for budding cannabusiness entrepreneurs in the U.S.

No doubt about it, with more and more states like New Mexico, New Jersey, New York and Virginia recently hopping on the legal cannabis bandwagon-and it looks to be just a matter of time before Connecticut turns green and fully legalizes weed-there’s certainly room for additional players in the legitimate cannabis space. But before any would-be cannabis operators open their doors for business, a broad range of legal issues must be considered.

Licensing

For those ready to jump into the legalized cannabis business, step one is obtaining the proper license. That may be easier said than done. With a patchwork of licensing laws that are ever-changing and dependent upon jurisdiction, the licensing application process can be complex, time intensive and expensive to say the least. To pave the way for a streamlined licensing journey and achieve the best results possible, it can be very helpful to align with experienced consultants and professional service providers.

It bears repeating, cannabis licensing requirements vary from state-to-state. In any event and no matter the location, those wanting to launch a cannabusiness can expect to be asked for at least some, if not all, of the following in conjunction with a license application:

  • a non-refundable application fee;
  • a business entity operating agreement, by-laws, or articles of incorporation;
  • an agent training and education certificate;
  • a business plan;
  • a security plan;
  • a proposed floor plan; and
  • an inventory monitoring and recordkeeping plan, among other things.

A word to the wise: to expedite the cannabis licensing process, these items should be prepared well in advance and as soon applicants become aware of their application mandates.

Corporate, Banking and Tax Concerns

Anyone dipping a toe or jumping head first into the legal cannabis industry will want to create a corporation or limited liability company as an umbrella for operations. Doing so will help limit personal liability and protect personal assets in the event debts or legal judgments are claimed against a cannabusiness.

In terms of entity selection and formation, legal counsel can provide guidance based upon state-specific and financial considerations (including those related to taxation). Whatever type of entity is chosen, a legal cannabis business must abide by all applicable formalities and operate within the parameters of any by-laws or operating agreements to ensure that stakeholders can avoid any potential personal exposure in the event of litigation.

Conflicts between federal and state laws should also be on the radar screen of every cannabis entrepreneur. Despite the legal status of cannabis throughout the country, the possession, cultivation and distribution of medical or recreational cannabis remains illegal under the federal Controlled Substances Act (CSA). Consequently, there are difficult banking and tax issues that every cannabusiness must face.

As of this writing, federal banking laws severely restrict access to financial services for companies selling cannabis-related products. Translation: banks can’t do business with cannabis companies, which is problematic for so many reasons, not least of which is that those in the sector must maintain large amounts of cash on hand for payment of expenses, including inventory and employee salaries. This unfortunate reality makes legal cannabis outfits the targets of crime.

The good news is that relief could be on the horizon. The SAFE Banking Act of 2021, which would provide a safe harbor for banking institutions providing services to cannabis clients, was passed in the U.S. House of Representatives and referred to committee. Whether the legislation passes in its current form is anyone’s guess, though our federal legislature does seem to be inching closer to relaxing existing cannabis restrictions.

Until the federal law changes, taxes will also continue to be an area of concern for cannabis operators. This is because the IRS currently doesn’t allow for the deduction of ordinary business expenses from gross income associated with the sale or distribution of Schedule I or Schedule II substances as defined by the CSA (yes, that includes cannabis). What this means is that without the ability to take advantage of the typical deductions and credits leveraged by other businesses, those in the cannabis biz must pay taxes on gross income.

Real Estate

A lease on commercial space will be in the cards for anyone opening a consumer-facing, retail-oriented cannabusiness, such as a dispensary. Those looking to lease space for their cannabis operations should consider these key lease provisions:

  • Compliance with law: a cannabusiness lease should specifically exclude the requirement that the tenant abide by all federal laws.
  • Landlord acknowledgment: the tenant should demand a lease provision stating that the landlord expressly acknowledges and authorizes the tenant’s cannabis-related use of the subject property.
  • Landlord cooperation: a cannabusiness should demand robust landlord cooperation provisions obligating the landlord to sign any documents and make necessary acknowledgments in furtherance of the tenant’s core cannabis operations.
  • Lease termination: the termination provision in any commercial lease related to cannabis should afford the tenant the right to terminate early in the event of a change in the law or enforcement patterns, nuisance claims or other occurrences that disrupt or hinder the purpose of the lease.
  • Contingency: the tenant should negotiate for a contingency provision allowing for early termination in the event it fails to obtain the necessary license or financing contemplated when the lease was executed.

Insurance

Anyone starting a cannabusiness should engage an insurance agent or broker with specific cannabis industry experience who can obtain all necessary coverages. When procuring insurance policies, applicants must be honest, transparent and forthcoming about their operations. Misrepresenting the nature of a cannabis company to an insurance producer or omitting material facts can set an insured up for rejection of claims and fraudulent procurement issues.

Employment 


Management in the legal cannabis industry is subject to the same employment-related issues facing counterparts in other businesses. These include wage and hour, benefits and compensation, equal pay, employee hiring, and discipline and termination issues, along with privacy, disability, and harassment and discrimination concerns. Regarding the latter, comprehensive anti-harassment and anti-discrimination policies should be drafted and consistently enforced.

Another major employment law issue facing business owners today is marijuana use in the workplace. It’s rather ironic given the nature of a cannabusiness, but cannabis operators must decide whether to allow (or if they’re obligated to allow by way of workplace accommodations) the use of medical or recreational marijuana on the job. Clear policies on this topic are crucial.

With Opportunity Come Potential Pitfalls

Without question, the legal cannabis industry is still in its relative infancy and poised for exponential growth. And while this may translate to real upside for those wading into the legalized cannabis waters, the associated legal issues (this article presents just a sampling of them) are significant and shouldn’t be ignored.

This post has been adapted from a piece written by Bryan Johnson and previously published in Cannabis Business Executive titled, “5 Key Considerations When Starting Your Cannabusiness.”

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

The headlines at the beginning of this year touting the ever-expanding list of GameStop paper millionaires-Redditors and its WallStreetBets group and others following in their footsteps, who bought the stock well before its meteoric rise to a record closing price of $483 per share-were soon replaced by cautionary tales of millennials who lost it all. Yes, these market players (many young and less than sophisticated investors leveraging the power of the commission-free Robinhood stock trading app) were riding high, at least temporarily, while sticking it to the hedge funds and big time institutional investors that are the subject of their collective ire.

Seemingly everyone was captivated by the David vs. Goliath battle playing out on Wall Street when GameStop shares climbed over 1700% (from a market value of $2 billion to over $24 billion) from December 2020 through late January 2021, before it came tumbling back down to earth in early February. Since then, share prices have been on the upswing once more. As of this writing, Game Stop stock is trading in the neighborhood of $225.

While the recent climb has much to do with a cult following of individual investors hoping  GameStop’s struggling business turns around, so-called meme-stock investing driven by Reddit and Robinhood represents much more than a goldmine for some and financial fiasco for many others. Beyond the GameStop gains, losses and gains again that’ve been fodder for coverage is the congressional and regulatory (read: SEC) fallout that’ll ultimately define this rags-to-riches (or riches-to-rags) story.

The Truth, the Whole Truth, and Nothing but the Truth

Back in February, with burned GameStop investors-hedge funds and Redditors-finding themselves picking up the pieces, the U.S. Congress came calling. The House Financial Services Committee put the leader of Robinhood on the hot seat, questioning him (and a few others, such as Reddit CEO Steve Huffman) under oath.

How exactly did Robinhood boss Vlad Tenev find himself center stage in front of lawmakers such as Alexandria Ocasio-Cortez? The answer was short selling.

Hedge funds and other institutional investors have long used short selling to profit on equities, particularly microcap stocks. Borrowing shares and then selling them in anticipation of the stock price falling can create an extraordinary opportunity. Sellers look to cover these “shorts” by purchasing shares cheaply in the future, allowing them to close out their positions at a profit. This is a strategy not typically available to the average retail investor, but it was at the root of the GameStop frenzy.

And to an extent, it still is. But what the GameStop drama brought to the surface is a trend among bloggers and online financial platforms populated by small “anti-Wall Street” investors fighting this practice of shorting stocks. By way of Reddit, among other network communities, retail traders united to purchase blocks of GameStop stock to inflate prices and leave short sellers in a squeeze when it came time to cover. Robinhood made that possible and particularly attractive because it’s “free” to use and gamifies the process by offering interactive elements and game-like features.

Maybe too attractive. Robinhood had to temporarily halt trading in the midst of the GameStop fever because they weren’t sufficiently capitalized to support the volume of activity generated by the meme-stock mania. Enter Congress and the SEC.

The Question of Legality

There’s nothing illegal about short selling or touting stocks online. In fact, retail investors and day traders revolting against hedge funds do so at their own peril. Securities laws on the books since 1933 don’t protect the unwary from making potentially rash investment decisions, such as buying GameStop at $483 a share, so long as issuers give full and fair disclosures in their public filings.

In terms of the users of online platforms like Reddit touting particular stocks as “buys,” the practice isn’t unlawful (at least not presently) because they don’t get paid commissions. The same can be said for Robinhood’s method of selling order flow, which is regulated, disclosed and supports free trading, though arguably, the app’s gamification of the trading process may run afoul of FINRA rules.

What’s in Store in the Wake of GameStop?

The SEC may be cracking down. Indeed, the oversight agency is contemplating the imposition of regulations that create certain obligations on the part of low-and-no fee brokerages like Robinhood that have gamified high-stakes investing and stock trading. According to reports, the SEC may attempt to require Robinhood and platforms like it to warn investors about the pitfalls of buying risky stocks (such as GameStop) before a trade is completed. In so doing, the Robinhoods of the world (at least those operating in the U.S.) would be asked to act more like fiduciaries and not just passive processors of trades. However, imposing fiduciary status upon trading apps may be easier said than done, and such an action by the SEC would surely be met with litigation.

Looking forward, there’ll certainly be additional congressional hearings in the aftermath of the market disruption caused by the GameStop hysteria. Even so, the continued coming together of online communities to move markets is a virtual certainty-this by virtue of the incredible work of Redditors, Super Stock Bros. and others who weaponized GameStop (and now AMC Entertainment) against their hedge fund foes.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

An appellate court in California has just issued a ruling related to wage and hour law that should be of interest (and a relief) to all employees in the state.

By way of background, Labor Code § 226 sets forth nine categories of information that must be included in wage statements. With that being said, it was broadly held last week in General Atomics v. Superior Court that an employer will not be in violation of section 226 when its wage statements allow employees to readily determine whether their wages were correctly calculated.

In the case, Tracy Green sued her employer, General Atomics, based on its alleged failure to provide accurate, itemized wage statements showing “all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee,” as is required by the Labor Code. More specifically, Green’s two causes of action (a putative class action and a representative action under the Labor Code Private Attorneys General Act) contended that General Atomics violated section 226, by providing wage statements that did not identify the correct rate of pay for overtime wages. Getting into the weeds, Green maintained that the correct rate was 1.5 times (1.5x) the regular rate of pay, and the wage statements provided by General Atomics showed only 0.5 times (0.5x) the regular rate.

The lower court agreed with Green’s position, though that was not the case on appeal. The higher court made clear that showing the 1.5x overtime rate would be impractical or cause confusion when an employee (like Green) earns multiple standard hourly rates during a single pay period. Consequently, it was decided on appeal that General Atomics’ wage statements complied with the Labor Code because they showed the total hours worked, with their standard rate or rates, and the overtime hours worked, with their additional premium rate.

As otherwise stated, the appellate court found that while other formats may also be acceptable, given the complexities of determining overtime compensation in various contexts, the format adopted by General Atomics adequately conveyed the information required by statute. And with that, the takeaway for employers is simply this: courts will not be dogmatic about Labor Code rules and will not find section 226 violations where pay stubs provide the information necessary for employees to check the accuracy of wages paid.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

We have all received them, those unsolicited-and unwanted-calls regarding our supposed student loans, credit card debt, troubles with the IRS, even health insurance opportunities. While the subject matter varies, the calls are a constant, as is the nuisance factor. And that, in a nutshell, is what prompted enactment of the Telephone Consumer Protection Act (TCPA) back in 1991.

The very purposes of the TCPA is (and was) to stop unwanted telemarketing phone calls-and now text messages-to consumers. Toward that end, the law prohibits businesses from contacting cellular telephone numbers using automatic telephone dialing systems (ATDS), unless, of course, recipients have already given their express consent to receive such communications. That being said, an interpretive question at the very heart of liability under the TCPA-and one that should be of great interest to GCs and other stakeholders in any consumer-facing business-is as follows: what exactly qualifies as an ATDS for the purpose of triggering statutory penalties under the law?

Last month, the U.S. Supreme Court provided a straightforward answer to this query in a landmark TCPA case captioned Facebook, Inc. v. Duguid. In short, the Court stated that equipment dialing from a list of numbers cannot be characterized as an ATDS (commonly referred to as an “autodialer”). Instead, to qualify as an autodialer, “a device must have the capacity either to store a telephone number using a random or sequential number generator, or to produce a telephone number using a random or sequential number generator.”

The Facebook Litigation

By way of background, Facebook had sent several login-notification text messages to Noah Duguid alerting him of attempts to access his Facebook account from an unknown browser. However, Duguid did not have a Facebook account, and never gave the social media giant his telephone number. Consequently, he brought a putative class action against Facebook, alleging that its text messages violated the TCPA. Significantly, the litigation was premised upon the claim that Facebook used an autodialer to place the texts at issue.

Facebook vehemently opposed the notion that it used an ATDS, and the Supreme Court agreed. Ultimately, it was determined that Duguid failed to allege that Facebook sent text messages to numbers that were randomly or sequentially generated. Stated another way, Facebook’s notification system did not qualify as an ATDS under the TCPA.

Now What?

With its determination, the Supreme Court left countless parties breathing a collective sigh of relief, as it drastically limits (for now) the instances of TCPA violations. Indeed, the Facebook decision is a decisive victory for companies that use automated equipment to make calls or send text messages to their consumers. And that is because in the wake of the ruling in the Facebook case, unless their dialing equipment uses a random or sequential number generator, businesses will not be required to obtain prior written consent from consumers prior to contacting them.

Note, however, that the TCPA’s prior express consent requirements still prohibit calls using an artificial or prerecorded voice to various types of phone lines, including home and mobile numbers, unless an exception applies.

Waiting for the Other Shoe to Drop

Mere hours after the Facebook opinion was released, the legislative fight to overturn it began. Senator Edward J. Markey (D-Mass.), one of the original authors of the TCPA, joined with Congresswoman Anna G. Eshoo (CA-18), to issue a joint statement calling the Supreme Court’s decision “disastrous for everyone who has a mobile phone in the United States.” In their release, Senator Markey and Congresswoman Eshoo went on to state that “the Court is allowing companies the ability to assault the public with a non-stop wave of unwanted calls and texts, around the clock,” and that the decision, rather than enforcing the TCPA, actually ignores its clear legislative history. According to the legislators, “the TCPA makes it clear that Congress was not only concerned with corporate America randomly generating numbers and calling those numbers, but was also concerned with corporate America buying lists to make telemarketing calls.”

Not surprisingly, the lawmakers gave voice to their intention to “introduce legislation to amend the TCPA, fix the Court’s error, and protect consumers.” As such, it may be a bit premature for businesses to celebrate what seems to be such an enormous win for them. To be sure, even a U.S. Supreme Court decision can be overturned by bipartisan legislation in Congress that is signed into law.

The Takeaway

Given the likelihood of congressional action, there is only one way for companies to be absolutely certain and play it safe when it comes to telephonic outreach to their customers: by being informed and obtaining express written consents after appropriate disclosure, they will never have to worry about the ongoing twists and turns of the TCPA.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Federal labor law is in the crosshairs of the U.S. Congress. In recent days, the House of Representatives passed the Protecting the Right to Organize (PRO) Act (H.R. 842), which, among other things, would (1) prohibit employers from retaliating against employee unionization efforts, (2) protect workers’ right to strike, and (3) override state “right to work” laws that allow employees to opt out of paying dues in unionized workplaces.

This overhaul to the National Labor Relations Act is a priority for organized labor, which seeks to bolster the federal law currently in place that guarantees private-sector employees the right to unionize, engage in collective bargaining, and take collective action such as strikes.

The bill made its way through the House essentially along party lines-the vote was 225-206. That being said, labor groups should not celebrate too early, as passage by the Senate appears to be a longshot.

This is the case despite the current realities of workers nationwide: (1) those seeking safer working conditions in the shadow of the COVID-19 pandemic and (2) the victims of economic inequality that is undermining the middle class. For their part, management argues that the legislation would eliminate jobs.

The Finer Points

Should the PRO Act win approval in the Senate and become law, employers would no longer be permitted to hold “captive audience” meetings, during which anti-union messages are conveyed. Likewise, under the PRO Act, the National Labor Relations Board could levy fines against companies that engage in unfair labor practices. The NLRB could also mandate arbitration when unionized workers are unable to reach agreement on their contracts with employers.

There is more. The bill would reverse current practice by authorizing employees to hold offsite union elections by way of mail or electronic ballots. In addition, the PRO Act speaks to employee classification issues by adopting the test to determine workers’ employment status now used in California (AB 5). This would be a fly in the ointment particularly for app-based companies like Uber, Lyft and Doordash to the extent it would make it easier for workers to demonstrate they are employees under federal labor law. And while on the topic of gig workers, the PRO Act would authorize them to organize unions and protest retaliation under the NLRA.

Voices From the Senate

Senate Republicans have gone on record suggesting that the proposed law would be harmful to business to the extent it would serve to make unions bigger and reduce individual freedoms. Consequently, given that 60 votes are required to bring the bill to a vote in that chamber, passage of the PRO Act is unlikely. Still, the Biden administration enthusiastically backs the legislation, and Michelman & Robinson, LLP will continue to monitor its progress.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

On the surface, a case just decided by the U.S. Court of Appeal for the 9th Circuit looks to be one primarily of interest to those in the aviation space. In Bernstein v. Virgin America Inc., a Ninth Circuit panel ruled on February 23 that California wage and hour laws pertaining to meal and rest breaks are not preempted by federal law; namely, the Federal Aviation Act.

But beyond that determination, which was a win for the flight attendants who initiated the litigation, is an additional ruling that represents a huge victory for the defense bar and should be of interest to all employers, not just airlines. Specifically, the court in Bernstein decided that heightened penalties for “subsequent violations” under California’s Private Attorney General Act (PAGA) cannot be imposed until the Labor Commissioner or a court notifies the employer in question of the Labor Code violation(s) at issue.

The net effect of the decision in Bernstein: California employers defending PAGA claims now have clarification regarding “subsequent [Labor Code] violations” and whether they will give rise to increased legal exposure.

Why Does All of This Matter?

Pursuant to PAGA, default civil penalties are $100 “for each aggrieved employee per pay period for the initial violation,” and $200 per aggrieved employer, per pay period, per “each subsequent violation.”

The problem was that before Bernstein, courts had not clearly identified when a “subsequent violation” of wage and hour law occurs. Prior case law (Amaral v. Cintas Corp.) simply held that such a violation did not trigger until an employer learned that its conduct violated the Labor Code.

But this left a fair amount of wiggle room for aggrieved employees, who could point to any given PAGA notice, prior employee complaints and lawsuits, internal or third-party payroll audits, employer retention of third-party human resource agencies, or other evidence to demonstrate that their employers acted willfully or had knowledge of ongoing Labor Code violations that justified the $200 “subsequent” penalty rate. But now, after Bernstein, employers cannot be subject to such heightened exposure until they hear from the Labor Commissioner or a court about the occurrence of a wage and hour violation.

What Employers Need to Know in the Aftermath of Bernstein

First and foremost, Bernstein is very favorable to management because it prevents employees from arguing that heightened civil penalties under PAGA should apply after the first California Labor Code violation within the statute of limitations, and after an employer has received a PAGA notice letter or an employee’s civil complaint.

Next, employers should remember that in the event of an unsuccessful appeal of (1) a trial court decision related to a wage and hour claim or (2) a Labor Commissioner citation, they will be subject to heightened penalties that have accrued during the appeal process.

Finally, it must be understood that Bernstein only addressed civil penalties. It remains unclear whether the ruling will also apply to claims for heightened statutory penalties for wage statement violations and the like.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

The California Department of Insurance has invited the public to participate in a pre-notice discussion regarding a contemplated addition to the California Code of Regulations (“CCR”) dealing with mitigation in rating plans and wildfire risk models. The web-based virtual event will be held on March 30, 2021 at 1:00 pm (PST).

The Proposed Regulation

The regulation open to public comment touches upon all of the following:

  1. Incentivizing individual and community mitigation efforts by requiring consideration of property- and community-level mitigation against wildfire risk;
  2. Reducing the risk of loss posed by wildfires;
  3. Improving accuracy in the classification of wildfire risk and the resulting rates and premiums;
  4. Increasing transparency in, and consumer awareness of, insurers’ rating and/or scoring of wildfire risk;
  5. Enhancing consumer protection by establishing a consumer appeals process;
  6. Reducing unfair discrimination by enhancing consistency in insurers’ wildfire rating practices and/or risk scoring practices; and
  7. Potentially improving availability and affordability of property-casualty insurance for communities and properties where wildfire mitigation measures have been implemented.

Participants in the pre-notice discussion will be asked to offer their specific questions about-and potential alternatives to-the proposed regulation.

A Deeper Dive

If adopted, the proposed regulation would require insurers to implement rates based on a compliant rating plan or wildfire risk model, defined as “any computer-based, map-based, or other measurement or simulation tool used by an insurer to segment rates, create a rate differential, or determine the premium discount or surcharge for residential or commercial structures.” Of note, any insurer looking to modify its rates would have to provide its wildlife risk model along with a new rate application to be filed no later than January 1, 2023.

At its core, the proposed regulation seeks to prohibit an insurer from using a rating plan or wildfire risk model that does not consider and take into account certain mandatory factors, including (1) community-level mitigation efforts and (2) property-level mitigation efforts undertaken with respect to an individual property being assessed for risk. Optional wildfire-related factors that insurers can weigh when developing rating plans or risk models are fuel, slope, access, distance to other high-risk areas, aspect, structure characteristics and wind.

Should the proposed regulation ultimately take effect, carriers will have to be mindful of several details and mandates related to their initial rate change applications, including the incorporation of wildfire loss data and the provision of specific wildfire risk model scores. Of course, these are items that the insurance regulatory professionals at Michelman & Robinson, LLP can assist with.

In the meantime, the full text of the proposed regulation can be found here, and M&R reminds anyone interested that the pre-notice discussion (which we will monitor and report on) is not a formal public hearing; as such, public comments will not be included in any rulemaking record.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

When is a 30-minute lunch break a 30-minute lunch break?

Certain employers have made it a practice of rounding time-up or down, typically in five- to 15-minute increments-in lieu of recording the actual time that employees spend working or for meal breaks. Until now, California law has generally permitted rounding time, provided certain criteria are met. For instance, an employer’s rounding policy must be fair and neutral on its face and cannot systematically undercompensate employees over a period of time.

While rounding time is still permitted at the start and end of a shift (though this is not without its own challenges), the California Supreme Court has just ruled that rounding time for meal breaks is unlawful.

In a class action case called Donohue v. AMN Services, the high court determined that state law imposes “precise time requirements” for meal breaks, and shaving off (or even adding) a few minutes here or there is contrary to the “precision” required by statute. Translation: employers must accurately track employee meal breaks to ensure that they are being given the full 30 minutes California law allots to them.

In the aftermath of this decision, employers may need to change their timekeeping practices, as “even minor infringements on meal period requirements” are disallowed and can subject an offending employer to significant damages. Employers must also understand that even where rounding time may be permitted at the start and end of an employee’s shift, this is an area of wage and hour law that remains heavily litigated, by way of class and representative actions.

Should you have any questions about wage and hour issues such as rounding time or other employment-related matters, the employment lawyers at Michelman & Robinson, LLP are here to help.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

With the recent changing of the guard in Washington, D.C., and coinciding with annual reporting and proxy season, comes the need for public companies across industries to reassess their risk disclosures-whether included in their registration statements for selling securities or SEC periodic reporting requirements.

Now that President Biden is in the White House, many policies set in place by the Trump administration are subject to change. This political reality triggers the need for businesses to rethink their risk factors and amend associated disclosures accordingly.

Doing so is critical for a couple of reasons: (1) the SEC mandates that companies appropriately educate their investors, and (2) up-to-date risk disclosures provide cover in the event an entity’s market value dips or shareholders sue alleging they were not warned about potential hazards.

Certain industry sectors-including energy (most notably, fossil fuel), pharmaceuticals, medical devices, technology, banking and finance, real estate, and cannabis, to name a few-are reacting to the new administration by reworking risk disclosures. This is in response to several disparate changes likely to occur under President Biden and a Democratic-controlled Congress that will surely impact business as usual. Some examples of policies and circumstances that may bear upon a company’s risk factors (depending upon the industry) include:

  • Biden’s focus on renewable power and the U.S. rejoining the Paris climate accord
  • Potential changes that may be made to the Affordable Care Act
  • The foreseeability of stricter regulations on drug pricing
  • The possibility of higher corporate taxes (which affects all industry sectors)
  • Fallout from the COVID-19 pandemic
  • Increasingly prevalent cybersecurity risks
  • More aggressive consumer protection enforcement
  • Steps to be taken to address climate change
  • A new approach to marijuana enforcement policy (and possible return to the Cole Memorandum that limits criminal charges related to cannabis)
  • Net neutrality rules and other laws governing Internet companies

Regarding potential changes to required climate change disclosures, Acting SEC Chair Allison Herren Lee announced this past week that the SEC is reviewing how companies have been complying with previous guidelines concerning disclosure of climate change risks. To date, companies have been required to disclose the material effects and costs of complying with federal, state and local environmental laws (which disclosure must be included in a company’s business description, management discussion and analysis section, as well as in its risk factor disclosures). The Acting SEC Chair stated the effects of climate change have become increasingly important to investors and, as such, the SEC intends to move swiftly in updating its climate-related disclosure guidelines and will likely expand the amount of information companies are required to disclose regarding risks that climate change poses to their business.

In addition, the SEC also enacted new risk factor rules last summer, requiring companies to present a summary of no more than two pages previewing their risks if the full risk factor section of their SEC filings exceeds 15 pages.

As a matter of practice, it is best for businesses to be as specific as possible in their risk factor disclosures, focusing on “material” risks as opposed to generalities that could apply to any public company. Of course, the Corporate & Securities attorneys at Michelman & Robinson, LLP stand ready to assist should you have any questions about your SEC filing obligations, risk disclosures included.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.

Despite veto drama during the waning days of the Trump administration, the William (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (NDAA) was enacted into law, and deep within its 1480 pages is a title-coined the Corporate Transparency Act (CTA)-that establishes new and more stringent reporting requirements. This represents but a small set of robust changes to U.S. anti-money laundering legislation that is part of the NDAA.

At its core, the CTA aims to eliminate anonymity of certain beneficial owners of entities (read: corporations, limited liability companies, financial institutions, and funds) formed in any U.S. state or territory or otherwise registered to do business in this country. It does so by commanding that beneficial ownership information be reported, all in an effort to eliminate (or at least minimize) the use of U.S.-incorporated shell companies for purposes of money laundering or terrorist financing schemes. .

Given this rather precise objective, the list of entities exempt from the CTA is a long one, and not every domestic company will need to comply. More on that below.

Reporting Requirements Under the CTA

The CTA mandates so-called “reporting companies,” defined broadly to encompass corporations, limited liability companies, and other similar entities created or registered to do business in the U.S., to submit a report to the Financial Crimes Enforcement Network of the Department of the Treasury. These reports must include the full legal name, date of birth and address (residential or business) of each entity’s beneficial owner, as well as a unique identifying number or identifier to be provided by FinCEN.

In terms of timing, entities formed before the effective date of the CTA have two years to submit their reports to FinCEN, while new companies must make their submissions at the time of formation or registration. Then, going forward, entities are obliged to report any change in beneficial ownership within one year of occurrence.

Information reported pursuant to the CTA is considered nonpublic and must be kept confidential by FinCEN, unless release is necessary under certain circumstances as enumerated in the statute. For example, the Department of the Treasury will have access to beneficial ownership data “for inspection or disclosure to officers and employees … whose official duties require such inspection or disclosure subject to procedures and safeguards” and for tax administration purposes. Likewise, federal agencies along with state, local, or tribal law enforcement agencies may request such information in furtherance of national security, intelligence, or law enforcement activity and for use in criminal or civil investigations.

There is more. So long as they are compliant with certain limited use requirements, requests for beneficial ownership information can be made on behalf of foreign authorities to assist with ongoing investigations. Financial institutions can make similar requests, but only with consent of the reporting company and subject to customer due diligence requirements. And finally, federal regulatory agencies, including federal functional regulators, are entitled to seek beneficial ownership information stored by FinCEN, subject to scope and use limitations contained in the CTA.

Rest assured, within a year FinCEN is expected to promulgate regulations implementing the CTA that should shed more light on these reporting requirements, among other things.

Beneficial Owners

The reporting requirements of the CTA beg the question: who can be deemed an entity’s beneficial owner? The answer as set forth in the law is not entirely straightforward: “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interests of the entity.” Interestingly, not mentioned are people receiving substantial economic benefits from the assets of the entity, which language was found in an earlier draft of the CTA.

It is anticipated that FinCEN will include further clarifying information expanding on this somewhat vague definition when it implements its regulations. In the meantime, earlier codified FinCEN regulations (31 C.F.R. § 1010.230(d)) provide a bit of insight to the extent they characterize a beneficial owner as “[a] single individual with significant responsibility to control, manage, or direct a legal entity… including” an executive officer or senior manager or other individual performing similar functions. Of note, expressly carved out of this definition are (1) minor children; (2) individuals acting as nominees, custodians, or agents of another individual; (3) those acting solely as employees of the entity in question and whose control is derived solely from that employment status; (4) individuals whose only interest in the entity is through a right of inheritance; and (5) creditors of the entity, unless such creditor meets certain enumerated criteria.

Exempt Entities

On paper, every business formed or operating in the U.S. is subject to the CTA. However, there are two very important exceptions: (1) foreign establishments not registered to do business here, and (2) certain specified exempted entities-spoiler alert: there are a lot of them, 24 to be exact.

Those specifically exempt from the CTA include, but are not limited to:

  • Entities that are already regulated (including public companies; financial services companies, such as public accounting firms; and public utilities)
  • Entities exercising governmental authority on behalf of the U.S. or any Native American tribe, state, or political subdivision
  • Certain banks, bank holding companies, and federal and state credit unions
  • Investment advisers and their operational investment vehicles
  • Insurance companies and producers authorized by a state
  • Tax exempt political organizations
  • Any entity with a physical office within the U.S. that employs more than 20 employees full-time and has filed federal income tax returns demonstrating more than $5 million in gross receipts or sales in the aggregate
  • Any entity that has been in existence for over one year, is not engaged in active business, not owned directly or indirectly by a foreign person, that has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds greater than $1,000, and does not otherwise hold any kind of asset, including ownership interests in any other corporation, limited liability company, or similar entity
  • Brokers or dealers as defined in the Securities Exchange Act
  • Financial market utilities designated by the Financial Stability Oversight Council
  • Any pooled investment vehicles
  • Any entity or class of entities that the Secretary of the Treasury has determined, by regulation, should be exempt from the reporting requirements of the CTA

Bottom line, a wide swath of companies created or registered to do business in the U.S will not be impacted by the CTA’s reporting mandates.

Violations and Penalties

For entities not exempt from the CTA, the consequences of failing to abide by its requirements are significant. Individuals who willfully provide or attempt to provide false or fraudulent beneficial ownership information or who fail to report information to FinCEN at all will be liable for civil penalties up to $500 per day that the violation continues (up to $10,000), and/or imprisonment for not more than two years. Persons who participate in an unauthorized disclosure or use of the beneficial ownership information are subject to even harsher penalties-$250,000 and not more than five years imprisonment.

Impact of the CTA

Prior to the enactment of the NDAA-and with it the CTA-the U.S. had become the anonymous shell company capital of the world. In response, Congress has sought to flip the switch on these shell companies and add an unprecedented level of corporate transparency by overwhelmingly passing the NDAA in a bipartisan manner. Indeed, so strong was the support of the legislation from both sides of the aisle that then-President Trump’s veto was quickly overridden by both the House of Representatives and Senate.

Now that the CTA is the law, the beneficial ownership reporting requirements imposed on non-exempt entities should go a long way toward cracking down on those who rely on shell companies to launder money and fund criminality, including terrorism, nationwide. That being said and given the broad exemptions, the number of companies actually impacted by the new statute may prove to be far and few between.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.