Varnum Represents Cannabis Farm to Resolve Wetlands Dispute with EGLE

A Varnum client purchased a blueberry farm in southwest Michigan with the intention of growing cannabis and began preparing the property to do so. After completing initial preparations, the Michigan Department of Environment, Natural Resources, and Energy (EGLE) alleged the client had illegally filled regulated wetlands in violation of Part 303 of the Natural Resources and Environmental Protection Act. As a result, EGLE sent the client a Notice of Violation (NOV). Due to EGLE’s NOV, the local township — which issues local marijuana business licenses — halted the client’s marijuana licensing and ultimately delayed the client’s ability to farm cannabis until the wetland issues with EGLE were resolved. 

The client engaged Varnum to help resolve its wetland dispute with EGLE and secure marijuana licensing from the township. Time was of the essence, as the client needed to plant its crop by a specific date in order to achieve a harvest. Varnum negotiated with EGLE and achieved a workable plan, which restored the regulated wetlands while also allowing the client to farm its entire 15,000 cannabis plants under its marijuana license. In addition, Varnum was able to negotiate the client’s civil penalties, leaving the client in a position to fully resolve its dispute with EGLE while moving forward with its business plan. 

If you’ve been served with a Notice of Violation from EGLE or if you have questions regarding Part 303 wetland violations and compliance, please contact Kyle Konwinski or Seth Arthur from Varnum’s environmental team.

Sorting Through the NCAA, State and Institutional Guidelines for Name, Image and Likeness

In June of 2021, the Supreme Court held that the NCAA cannot restrict education-related benefits, effectively making it legal for student-athletes to earn compensation and commercialize their name, image and likeness (NIL). Following the Court’s decision, the NCAA announced interim policies related to NILs. In addition to the NCAA’s policies, various state legislatures and universities have enacted their own NIL policies. Without a uniform federal response by Congress, student-athletes and other interested parties must ensure they are acting in compliance with all relevant NIL guidelines (i.e., NCAA, institution regulation(s) and state legislation.)

NCAA: Interim Policy and Updated Guidance Regarding Third-Party Booster Involvement

Days after the Supreme Court’s decision, the NCAA announced its interim NIL guidelines. These guidelines took effect July 1, 2021 and will remain in effect until either the federal government enacts uniform legislation or the NCAA adopts new rules. The interim guidelines outlined three overarching policies that member institutions and student-athletes must adhere to:

  1. The NCAA Bylaws, including prohibitions on pay-for-play and improper recruiting inducements, remain in effect subject to three additional stipulations:
    • First, for institutions in states without NIL laws or executive actions, or institutions in states where these laws or executive actions have not yet taken effect, a student-athlete that partakes in NIL activity is still eligible for intercollegiate athletics.
    • Second, institutions in states with fully implemented NIL laws or executive actions may engage in NIL activity protected under the relevant law and/or executive order.
    • Third, the use of professional service providers is permitted so long as the state law or executive order does not prohibit such activity.
  2. The NCAA will continue its normal regulatory operations but will not monitor compliance with state law.
  3. Individuals should report NIL activities as required by state law and institutional requirements.

On May 9, 2022, the NCAA issued an update to its NIL guidelines, which pertained specifically to third-party “booster” involvement in the recruiting process. The update clarified that the NCAA’s broad definition of “booster” remains in effect and includes NIL collectives (i.e., those organizations formed by an institution’s alumni that funnels NIL deals to prospective student-athletes and/or those in the transfer portal). As it pertains to third-party “booster” involvement, the update lists prohibited conduct for prospective and current student-athletes.

State Legislation: Summary of Michigan Law

On December 30, 2020, Governor Gretchen Whitmer signed HB 5217, which outlines the state’s NIL guidelines. However, HB 5217 does not take effect until December 31, 2022. This legislation is similar to the University of Michigan’s policy outlined below, but can be summarized as follows:

Covered Institutions: A post-secondary educational institution may not prevent student-athletes from participating in college athletics based on their NIL activities.

Regulatory Organization: Any group or organization with authority over intercollegiate athletics may not:

  • Prevent a student-athlete from fully participating in athletics based upon their NIL compensation;
  • Prevent an institution from fully participating in intercollegiate athletics based upon student-athletes engaging in NIL activities;
  • Prevent or interfere with a student-athlete’s decision to obtain professional representation (i.e., agent, financial advisor or legal representation) in relation to their NIL contract or legal matters; or
  • Provide NIL compensation to prospective college athletes.

Compensation: An institution is prohibited from revoking or reducing a student-athlete’s grant-in aid or stipend scholarship based upon their NIL compensation. There is no requirement that a group or organization with authority over intercollegiate athletics identify, create, facilitate, negotiate or otherwise enable opportunities for a student-athlete to earn NIL compensation.

Professional Advisors: Any group or organization with authority over intercollegiate athletics is prohibited from interfering or preventing a student-athlete from fully participating in intercollegiate athletics based upon the student-athlete obtaining professional representation in relation to their NIL activities. Should a student-athlete obtain professional representation in relation to their NIL opportunities, an institution may not be prevented from full participation in intercollegiate athletics. Any professional representation must be licensed in the state in accordance with the applicable licensing requirements.

Restrictions: Certain NIL activities are prohibited, such as a student-athlete’s contract for NIL compensation, which requires the student-athlete to advertise during official team activities, if the provision conflicts with the institution’s team contract. It is important to note that institutions are not prohibited from establishing and enforcing their own standards, requirements, regulations, team rules or codes, disciplinary rules or other obligations for its student-athletes.

Disclosure Requirements: A student-athlete who enters into a verbal or written opportunity or contract for NIL compensation must disclose this opportunity or contract to the institution at least seven days prior to committing to the opportunity or contract. Further, the law also outlines the information that must be in the disclosures, the review procedure and timeline. Importantly, the disclosure requirements do not apply to contracts entered into, modified or renewed on or before December 31, 2022.

Legal Settlement: A legal settlement arising from HB 5217 does not permit non-compliance with the statute.

Nonprofit Trade Association: Any nonprofit trade association, which represented any institution in the state, must provide various members of Congress with specific information from years 2020 and 2021.

Licensing Requirements: Student-athletes do not have the right to use an institution’s intellectual property without the appropriate licensing approval.

Institutions: University of Michigan NIL Policy

The University of Michigan (U-M) released its own NIL policy for student-athletes in June 2021. Until the State of Michigan’s NIL legislation takes effect on December 31, 2022, U-M’s policy will govern the institution’s student-athletes. U-M’s policy is consistent with the NCAA’s guidelines; however, its policy is more extensive. Key provisions of the policy can be summarized as follows:

Permitted Activities: The policy provides a non-exhaustive list of permitted NIL activities that student-athletes may engage in. There are no limits on the amount of income a student-athlete may earn so long as the compensation is for work actually performed.

Compensation: Student-athletes may neither receive compensation conditioned on enrollment, or continued enrollment, at a specific collegiate institution nor may they receive compensation contingent upon a specific athletic performance or achievement.

Restrictions: Student-athletes may not miss any required educational or team activities for any NIL activities. A student-athlete’s participation in NIL activities must comply with all relevant standards and/or guidelines. Further, as student-athletes are considered public representatives of the university, U-M imposes certain restrictions on their NIL activities.

Disclosure Requirements: There are specific disclosure requirements for activities that took place between July 1, 2021 and July 15, 2021, activities that took place July 16, 2021 onward, and activities beginning February 9, 2022 onward. Further, the policy outlines the information that must be in the disclosures, U-M’s review procedure and timeline.

University of Michigan Liability: U-M is not responsible for:

  • Providing or procuring any NIL opportunities for any student-athlete(s); and
  • Any tax liabilities or other costs student-athletes may incur from their NIL activities.

Licensing Requirements: Student-athletes may not use any intellectual property without appropriate licensing approval. Further, U-M will not purchase any products or services from any student-athlete(s) unless it is through a bidding process overseen by U-M’s procurement office.

Professional Advisors: Student-athletes may utilize professional advisors (such as marketing agents, tax advisors, legal advisors, etc.) to assist them with their NIL activities but must pay the normal costs associated with such services. However, student-athletes are prohibited from using an agent to negotiate with professional athletic teams or organizations.

Varnum’s team of experienced practitioners continually monitors NIL activity at the federal, state and institutional levels. Contact a member of our team for additional insight.

This article was co-written by Lindsay Randolph, a summer associate at Varnum in 2022. Lindsay is currently a student at Wayne State University Law School.

Free Download

Cover of Varnum's State-by-State NIL Compliance Guide Playbook

To aid individuals, schools and collectives with the often inconsistent and rapidly developing legislative and executive actions of the states, Varnum’s dedicated team of NIL attorneys created an all-inclusive, state-by-state compliance playbook. Learn more and download your free copy: www.varnumlaw.com/state-by-state-nil-compliance-guide/

Is 5G Cell Service Impacting the Price of Cell Tower Lease Rents or Sales?

Cell Seminar Web Graphic 2022 09 20 1

Without a doubt, 5G cell service has been overhyped. Despite sales pitches to property owners, it is not affecting conventional cell lease rents, sales or renewals. We will briefly explore the reasoning below and examine each further during a telecommunications webinar, Cell Tower Lease Rates and Sales Prices, hosted by The International Municipal Lawyers Association on Tuesday, September 20. The complete collection of our cell tower lease advisories can be viewed here.

Recent cell phone publicity has been about high-speed 5G, such as for autonomous vehicles or downloading movies in seconds. Here’s why it doesn’t affect cell leases.

True high-speed 5G requires thousands of new, short-range antennas every 400 feet in the streets. To achieve such speeds, high-speed 5G must use very high radio frequencies. These frequencies, however, don’t go through walls. Conventional cell towers, on the other hand, utilize lower frequencies that do penetrate walls, so they and current cell leases will continue to provide cell service indoors (and outdoors to fill in the inevitable gaps created by the use of short-range antennas).

Although your phone might say it has some version of 5G, this is generally not genuine high-speed 5G. Instead, it’s 5G Lite — ordinary cell service with slight tweaks and a name change for marketing purposes. Old wine in new bottles. As a result, conventional cell towers and leases continue. Cell companies are offering 5G Lite because true high-speed 5G networks are very expensive. Four years ago, the FCC estimated they would cost $275 billion. In the few areas such networks have been deployed, they have not been profitable because customers are not willing to pay more for high-speed 5G.

While large, publicly traded “tower management companies” who own tens of thousands of towers and have decades in the cell tower business occasionally help build real high-speed 5G networks, their actions confirm their belief in the future of conventional cell towers. Such companies are the primary purchasers of cell tower leases and, since the advent of 5G, the prices they pay have not gone down. Were 5G a true threat to existing cell towers, these companies would know, and lease prices would reflect it.

Conventional cell towers and cell tower leases thus will continue for the foreseeable future. Property owners with a cell lease should reject requests for rent reductions or lease sales at low prices based upon claims about 5G service, as such claims have no basis in fact.

Varnum represents clients nationwide on cell tower leases, including on the sale of over 100 cell leases. If you would like to discuss an initial cell lease or retention, sale or renewal of an existing lease, please contact John Pestle or Peter Schmidt.

John Pestle is a telecommunications attorney who, for decades, has represented property owners, including municipalities, on cell tower leases and sales. He is a graduate of Harvard, Yale and the University of Michigan Law School and held an FCC license to work on radio, TV and ship radar transmitters.

Pete Schmidt is a real estate attorney who has represented clients on numerous cell lease sales, including the Detroit Public Schools on the sale of approximately 24 leases. He is a graduate of Albion College and the University of Wisconsin Law School.

IRS Pilot Program Allows Employers to Correct Retirement Plan Errors Pre-Exam

On June 3, 2022, the Internal Revenue Service (IRS) announced the launch of a pre-examination retirement plan compliance pilot program. Under this new pilot program, the IRS will notify plan sponsors by letter 90 days before examination that their retirement plan has been selected for an upcoming inspection.

The notice letter will serve to give the plan sponsor a 90-day window to review its retirement plan documents and operations to determine if they meet current tax law requirements. Should a recipient not respond to the IRS within the 90-day window, the IRS will contact the recipient to schedule an examination, just as they would before the pilot program.

If, during the 90-day window, a plan sponsor’s review finds errors in its retirement plan’s documents or operations, these errors may be eligible for self-correction through the principles in the IRS’s Employee Plan Compliance Resolution System (EPCRS). EPCRS allows an employer to fix certain errors regarding its retirement plan.

Before this pilot program, the ability to correct errors under EPCRS was typically unavailable to employers while a plan was under IRS audit. If an audit discovered an error, the fees for correction under the IRS’s Audit Closing Agreement Program (Audit CA”) were typically much higher and less predictable than they are under EPCRS. The availability of EPCRS during the pilot program’s 90-day notification window allows employers to come into compliance with tax law requirements prior to an audit, potentially avoiding legal costs associated with an audit and the higher Audit CAP correction fees. Even if the plan sponsor’s review uncovers errors that are not available for self-correction under EPCRS, the IRS has stated that under the pilot program, the IRS will use the Voluntary Correction Program fee structure rather than the higher Audit CAP fees to determine the sanction amount the plan sponsor must pay under a closing agreement.

If a plan sponsor takes the opportunity to self-correct errors during the 90-day window, the IRS will review a plan sponsor’s documentation and determine if it agrees with the sponsor’s conclusions and corrections. After review, the IRS will either issue a closing letter or conduct a limited or full-scope examination. The IRS has stated its intention with this pilot program is to reduce taxpayer burden and to reduce the amount of time spent on retirement plan examinations.

To take full advantage of this pilot program, plan sponsors who receive a 90-day pre-examination notice should immediately begin working with attorneys and advisors to conduct a self-audit to identify and address any potential issues. This action can help sponsors avoid unpredictable and costly fees that might arise during an IRS audit.

For more information on this pilot program, please contact your primary Varnum attorney or any member of the Employee Benefits Practice Team.

This article was co-written by Michael Puro, a summer associate at Varnum in 2022. Michael is currently a student at Wayne State University Law School.

The Rates and Rents of Cell Tower Leases for 2021 and 2022

In the world of telecommunications law, one question consistently rises to the top of the list: What is the going rate for lease or rent of a cell tower lease? Keep reading to learn the answer. You can also find answers to other common cell lease questions in our many cell tower lease advisories.

Market Rate

The answer comes from tower management companies, which own or have the leasing rights for up to half of all United States cell tower sites. Serving as middlemen, these companies lease the land or rooftop site from the property owner and rent it to cell companies or other providers. With expert staff and site ownership in the tens of thousands, these billion-dollar companies have bargaining power comparable to that of the cell companies they are renting to. This is in stark contrast to an ordinary property owner negotiating a lease with a cell company. 

Due to this equivalence in market power and the share of cell sites they control, the rents these companies negotiate are the best indicator of what the going or fair market rate is for a cell tower lease.

Because some of these companies are publicly held, they are required to file annual reports called 10-Ks with the Securities and Exchange Commission. When you examine filings for 2021 and divide income by the number of leases reported, it shows the average rents charged to cell companies range from $34,000 to $61,000 annually. While some cell lease rents may be higher or lower, this average range provides a good guide for rents in 2022.

These rates also correspond with what we’ve seen from clients whose lease terms entitle them to a percentage of the rent being charged to cell companies by tower management companies. Rent checks received by our clients confirm management companies are charging rates in the $34,000 to $61,000 per year range, although some came in as high as $80,000. It is important to note these rent figures are per lease and should help property owners in cell lease negotiations.

Multiple Antennas

Many sites have multiple leases due to two or more cell companies having antennas on the tower or rooftop in question. The annual reports note this, indicating that such companies may have an average of 1.5 to 2.5 leases per site. This means their actual revenues per site will be multiples of the preceding rents. Property owners should also take note of this and attempt to get corresponding multiples if there are multiple cell companies on their tower or rooftop.

Lease Renewals

Knowing average rents is particularly important for property owners whose cell lease is coming up for renewal. Why? Because once a tower is built, the cell company with antennas on it needs the tower right where it is. Should the tower go away, there would be a gap in coverage (or gaps if there are several cell companies on the tower). Even if companies try to relocate the tower, it costs well over a quarter-million dollars and can take a year or more to find a site very nearby that will fill the gap. Not to mention the time it will take to option and permit it, get zoning permission (which is not guaranteed for a duplicate tower), lease it and build it. Average rents are less relevant for a proposed new tower if the lessee can lease another site nearby for less.

Lease Terms

Please keep in mind that with any lease or lease renewal, price is only half the battle — terms are equally important. In a renewal, for example, the company will typically send a lease amendment with a page or two of fine print adding terms in their favor. This is your opportunity to review it carefully, strike harmful terms and change any terms in the original lease you don’t like. Above all, ensure the lease does not harm the use, development or sales price of the property with the lease. There are ways to accomplish this, but that’s for another advisory.

Varnum represents clients nationwide on cell tower leases, including on the sale of over 100 cell leases. If you would like to discuss an initial cell lease or retention, sale or renewal of an existing lease, please contact John Pestle or Peter Schmidt.

John Pestle is a telecommunications attorney who, for decades, has represented property owners, including municipalities, on cell tower leases and sales. He is a graduate of Harvard, Yale and the University of Michigan Law School and held an FCC license to work on radio, TV and ship radar transmitters.

Pete Schmidt is a real estate attorney who has represented clients on numerous cell lease sales, including the Detroit Public Schools on the sale of approximately 24 leases. He is a graduate of Albion College and the University of Wisconsin Law School.

Trends in Data Privacy Regulation: Dark Patterns

Featuring a high concentration of CIPP-certified privacy professionals, Varnum attorneys guide businesses through all aspects of data privacy and cybersecurity, from compliance and policy issues to breach preparedness and response.

Have you tried to unsubscribe from a recurring service and given up? Have you opted to “accept all” cookies on a website to access the content without an annoying banner covering half of the page? Nearly all web users have encountered some form of what is commonly known in the data privacy community as a “dark pattern”: an interface designed to nudge user behavior toward choices he or she might not normally make if the options were presented differently. Although businesses and their web or app designers may feel tempted to explore employing these methods, increased regulatory focus on dark patterns makes it more important than ever to consider the avoidance of dark patterns as a legal obligation, not just a best practice. This advisory will address the following: 

  • What is a dark pattern?
  • What are regulators doing about them?
  • Guidelines for avoiding enforcement issues.  

What is a dark pattern?

Dark patterns exploit human psychology to manipulate our decision-making on the internet. Often the choices we are “nudged” to make benefit the companies providing the website or application we are using but are contrary to our own interests. A September 2019 study identified and categorized 15 types of dark patterns encountered about 11% of the time across 11,000 popular shopping websites.[1] The researchers grouped these mechanisms into seven categories: sneaking, urgency, misdirection, social proof, scarcity, obstruction and forced action.[2] The same study noted that third-party developers were frequently the source of dark patterns embedded on e-commerce sites.[3]

What are regulators doing about them?

Undeniably, there is a clear trend of increased attention, regulation and enforcement regarding dark patterns. In general, U.S. law prohibits “unfair or deceptive acts or practices in or affecting commerce.”[4] Although this law – Section 5 of the FTC Act – does not expressly reference dark patterns,[5] the regulators in charge of enforcing it have repeatedly signaled an increased focus on dark patterns and have acted accordingly with related enforcement actions.[6] Just last month (April 2022), the Consumer Financial Protection Bureau sued Transunion for allegedly using “an array of dark patterns to trick people into recurring payments and to make it difficult to cancel them.”[7] Some of the emerging comprehensive data privacy state laws also address dark patterns, either expressly prohibiting them in certain circumstances or deeming behavior resulting from dark patterns insufficient to constitute consent.[8] Notably, in April 2022 the Network Advertising Initiative (NAI) – a self-regulatory organization for adtech – directly addressed dark patterns in newly-released guidance.[9]

While the issue of whether using dark patterns undermines a data subject’s actual consent to process his or her data under Europe’s General Data Protection Regulation (GDPR) is far from new, on April 23, 2022, the European Commission took a more concrete step toward regulating them in its preliminary agreement to the structure of the new Digital Services Act (DSA).[10] In describing the framework of this probable forthcoming law that will regulate content made available on online platforms,[11] the European Parliament voiced the same concerns described above: “[o]nline platforms and marketplaces should not nudge people into using their services, for example by giving more prominence to a particular choice or urging the recipient to change their choice via interfering pop-ups. Moreover, cancelling a subscription for a service should become as easy as subscribing to it.”[12] Echoing these concerns, the preliminary DSA terms state: “[p]roviders of online platforms shall not design, organize or operate their online interfaces in a way that deceives, manipulates or otherwise materially distorts or impairs the ability of recipients of their service to make free and informed decisions.”[13] While U.S. data privacy regulations are nowhere close to being in lockstep with those of the European Union, this development is notable because in a global digital economy, European data privacy regulations influence business – and sometimes legislation – in the U.S. as well.   

Guidelines for avoiding enforcement issues.

Although the issues presented by dark patterns are not new, the frequency with which new laws and those who enforce them expressly address dark patterns is a new and notable global trend. Although dark patterns have generally been subject to challenge in the U.S. as deceptive business practice under Section 5 of the FTC Act,[14] the rapid emergence of more targeted data privacy regulations has brought a new spotlight to these practices. This growing regulatory framework guarantees that overlapping layers of domestic and international regulators will be attuned to the issue over the coming years. Regulators are also likely to increasingly have improved mechanisms and resources to enforce these laws. Further, since data privacy laws are generally extraterritorial, international developments on the matter cannot be ignored by businesses that offer e-commerce abroad. 

Avoiding dark patterns in web design, particularly relating to e-commerce, should be considered more than a best practice: regulators have clearly signaled it is a legal obligation. Beyond e-commerce, as data privacy laws increasingly mandate businesses to consider and comply with consumers’ data processing preferences, businesses with a digital presence must be conscious of – for starters – the manner in which they obtain consent to cookie placement or other data collection mechanisms, data sharing, direct marketing or any number of forms of processing which may be subject to a number of current and future laws. 

If you have questions about dark patterns or the patchwork of potentially applicable laws referenced here that govern them, please contact a member of Varnum’s Data Privacy Team. We will continue to monitor and advise regarding the ongoing developments in this area. 

[1]See https://webtransparency.cs.princeton.edu/dark-patterns/.
[2] Id. at 12. 
[3] Id. at 22 et seq. 
[4] Section 5 of the Federal Trade Commission Act (15 U.S.C. § 45(a)(1)).
[5] See Rolecki, J., Yan, Y., Data Security in 2021: Unfairness, Deception, and Reasonable Measures, American Bar Association, (“The Brief”; Spring 2021) available here, for an in-depth discussion on Section 5 and its application to data security practices. 
[6] Statement of Chair Lina M. Khan Regarding the Report to Congress on Privacy and Security Commission, File No. P065401 (October 1, 2021), available at https://www.ftc.gov/system/files/documents/public_statements/1597024/statement_of_chair_lina_m_khan_regarding_the_report_to_congress_on_privacy_and_security_-_final.pdf (“The use of dark patterns and other conduct that seeks to manipulate users only underscores the limits of treating present market outcomes as reflecting what users desire or value.”); see also Stipulated Order for Permanent Injunction and Monetary Judgement, Federal Trade Commission v. Age of Learning, Inc., No. 2:20-cv-7996 (C.D. Cal Sept. 8, 2020), available at https://www.ftc.gov/legal-library/browse/cases-proceedings/172-3186-age-learning-inc-abcmouse (fining the respondent $10 million due to the online children’s education company’s alleged concealment of the fact that users that signed up for “special offer” memberships would be automatically charged a renewal fee at the end of the 6 or 12 month period and obfuscation of the cancellation process). An FTC commissioner’s extremely strong statement regarding dark patterns, issued in connection with the Age of Learning matter, is available here.
[7] The CFPB’s April 12, 2022 press release can be found here, and the formal complaint is found here. 
[8] California’s current comprehensive data privacy law, the California Consumer Privacy Act (CCPA), does not expressly address dark patterns. The California Privacy Rights Act (CPRA), which will supersede the CCPA on January 1, 2023, defines dark patterns, establishes that an “agreement obtained through use of dark patterns does not constitute consent,” and prohibits businesses from employing dark patterns to obtain a user’s consent to resume data processing once a user chooses to opt-out. The forthcoming Colorado Privacy Act (CPA) (effective July 1, 2023) takes a similar approach. The forthcoming Virginia Consumer Data Protection Act (VCDPA) (effective Jan. 1, 2023) and Utah Consumer Privacy Act (UCPA) (effective Dec. 31, 2023) do not expressly reference dark patterns.
[9] Network Advertising Initiative, “Best Practices for User Choice and Transparency” (Apr. 2020), available at https://thenai.org/wp-content/uploads/2022/04/NAI-Dark-Patterns-Final-1.pdf.
[10] See https://www.consilium.europa.eu/en/press/press-releases/2022/04/23/digital-services-act-council-and-european-parliament-reach-deal-on-a-safer-online-space/.
[11] The European Commission has described “online platforms” to include “online marketplaces, social networks, content-sharing platforms, app stores, and online travel and accommodation platforms.” See https://digital-strategy.ec.europa.eu/en/policies/digital-services-act-package.
[12] See https://www.europarl.europa.eu/news/de/press-room/20220412IPR27111/digital-services-act-agreement-for-a-transparent-and-safe-online-environment.
[13] Available at https://ec.europa.eu/info/sites/default/files/proposal_for_a_regulation_on_a_single_market_for_digital_services.pdf. 
[14] See, e.g., Federal Trade Commission v. Age of Learning, Inc., No. 2:20-cv-7996 (C.D. Cal Sept. 8, 2020), referenced above. 

How Can Startups Avoid General Solicitation in Private Offerings?

You are the founder of a startup. After working in “stealth mode” for months and bootstrapping (i.e., self-funding) along the way, you finally launch your new company. Shortly thereafter, a handful of customers sign up for beta tests and pilots. There’s market fit, customer adoption and your company is poised for significant growth. You are ready to tell your compelling story and start raising seed capital to grow your business. So, why wait? You compose a tweet announcing your startup to the world and inviting interested investors to reach out to you.

Not so fast.

By sending that tweet, you are engaging in a public solicitation for investments. Whether you intend to sell convertible notes, Simple Agreement for Future Equity (SAFEs) or preferred stock to raise capital (collectively known as “securities” in legal parlance), any offer of such securities must either be (a) registered with the Securities and Exchange Commission (SEC) or (b) exempt from registration based on one or more statutory exemptions. While the SEC has made it easier for companies to raise capital through public solicitation in the last few years, either by modifying existing exemptions or adopting new ones, it can be more expensive and time-consuming to use such exemptions. Moreover, once you select an exemption that allows public solicitation and you publicly solicit investments, you are automatically excluded from other private exemptions that might be far cheaper and easier to comply with. To avoid locking yourself into a costly public solicitation exemption, begin your fundraising by relying on a private exemption. (You can always change to a public solicitation later.)

To raise funds under a private offering exemption, SEC rules prohibit the use of “general solicitation” or “general advertising” in connection with such offerings. The terms “general solicitation” and “general advertising” are not defined in the rules, but guidance can be found in court cases and case-by-case “no-action” letters from the SEC. Subsequently, here are four steps you can take now to avoid a general solicitation on your private offering.

1. Refrain from Advertising

Avoid any kind of traditional advertising such as announcements in newspapers, magazines or “similar media”, or broadcasts over television or radio. Today, the term “similar media” would certainly include Twitter, Facebook or any other social media platforms, as well as podcasts and mass emails.

2. Keep It Off Your Website

You might not think your company website would constitute a form of “advertising,” but that’s how the SEC sees it when it comes to the private exemption. Avoid any kind of announcements or posts that would include any solicitations for “interested investors” to “contact management for more information”, “ask us about our offering” and similar enticements.

3. Choose Your Meetings Carefully

While you’re undoubtedly excited to tell the world about your offering, it’s best to avoid doing so in a meeting where the attendees have been invited by general solicitation or general advertising. For example, if you are pitching your company at a demo day, seminar or other public event, you should drop the last slide on your pitch deck regarding your fundraising round. However, the SEC has specifically recognized the long-standing practice whereby groups of experienced, sophisticated investors, such as “angel investors”, share information about offerings through their network and that introductions to the group are not general advertising. On this basis, if you have a relationship with a member of a private, selective, invite-only angel group and you are introduced to this group and/or invited to pitch, this is typically not considered general solicitation.

4. Limit Fundraising to a Small Circle

Perhaps the best way to avoid general solicitation or general advertising in connection with your offering is to limit your fundraising activities to discussions with investors whom you have a so-called “preexisting” and “substantive” relationship. A relationship with a potential investor is “preexisting” if it was formed prior to discussing your offering and is “substantive” if you have enough knowledge to evaluate the potential investor’s status as an accredited investor. Investors with whom you have a preexisting, substantive relationship may include your existing or prior investors, investors in your prior companies or your friends and family.

Seeking a lawyer for your startup? Varnum’s Venture Capital and Emerging Companies Team provides critical guidance and support to entrepreneurs and venture capital professionals throughout all stages of financing and growth. Let us add value to your team as you work to bring your new offering to market.

Preventing Lender Liability: A Cautionary Case Study

In lending, the importance of full, transparent and accurate communications with a borrower cannot be overstated. In times of trouble, a lender must closely monitor a borrower’s activities and ensure not only that the lender takes any actions necessary and permissible under its loan documents but also that its borrower is taking the steps necessary to preserve the lender’s collateral.

While a distressed borrower (and sometimes its other creditors) may feel the lender is “giving the borrower advice” or even “taking over”, a lender must remain focused on strictly adhering to the terms of its loan documents, preserving its collateral and ensuring the borrower remains completely independent and in full control of its operations. Rather than taking a “do-it-yourself” approach and risking a result similar to the lender in In re Bailey Tool & Mfg. Co. (discussed below), if a borrower’s control over a business is unacceptable due to mismanagement, fraud or any other reason, the lender should engage with outside counsel to protect its collateral, including a possible receivership or bankruptcy case.

Recent Case Study

The recent opinion issued on December 23, 2021 in In re Bailey Tool & Mfg. Co. (Bankruptcy Court, Northern District of Texas) serves as a textbook example of lender overreach and reminds us of the critical importance of maintaining transparency and independence in lending. To set the stage, in 2014, the borrower asked to exit its existing lender, Comerica Bank. At that time, the borrower had several new business lines, valuable contracts and an enterprise value of approximately $6 million. To accomplish the exit from Comerica Bank, the borrower then entered into discussions with Regions Bank for a new lending arrangement. As part of the move, Regions Bank suggested the borrower utilize a factoring and inventory financing lender for a few months as a “bridge” to get from Comerica Bank over to Regions Bank. One of the companies Regions Bank recommended for factoring was Republic Business Credit, LLC (“Republic”). In March 2015, the borrower ultimately entered into factoring and inventory financing agreements with Republic pursuant to agreements that the Bankruptcy Court described as “not a model of clarity.”

After receiving its first draw request from the borrower, Republic sent over a Borrowing Base Certificate showing ineligible accounts had jumped from $17,000 shown on the pre-closing pro forma Borrowing Base Certificate to $142,310.87 and further showed negative availability of $342,978.27 for purposes of account receivable factoring! By July 2015, Republic caused the borrower to close by refusing to release funds for payroll, causing its employees to walk off the job. In the aftermath, Republic then “became involved in trying to get management of its choosing in the Company and otherwise micromanaging the Company” and began putting pressure on the borrower’s owner to give a lien on his exempt homestead. On one phone call, a Republic loan officer told the principal of the borrower and its financial advisor that he “shut down” the borrower because he was “tired of it” and attempted to convince the financial advisor to assume complete control. The borrower ultimately filed for Chapter 11 bankruptcy in February 2016 in the hopes of salvaging its business and effectuating a sale or reorganization.

The Cost of Lender Liability

Post-petition, Republic seems to have doubled down on its misbehavior by violating the automatic stay in bankruptcy, refusing to turn over approximately $584,250 of monies that it over-collected from the borrower after completely paying off its loan unless the borrower agreed to give them a release from potential lender liability claims. The delays caused by the refusal to turn over the funds sabotaged the borrower’s efforts to facilitate a sale or reorganization process and caused the bankruptcy cases to convert to Chapter 7. The Chapter 7 Trustee then commenced an investigation into the pre-petition activities and filed a lender liability lawsuit against Republic.  

The Bankruptcy Court ultimately ruled that Republic, among other things, (i) misrepresented the amount of funds available to the borrower, (ii) charged excessive, undisclosed fees and penalties, and (iii) refused to turn over funds and took complete control of the borrower’s finances, causing the Company to completely shut down. Republic was held liable for $17 million in damages as well as over $700,000 in Chapter 11 and Chapter 7 administrative expenses, i.e. it was forced to pay for the entire cost of the bankruptcy proceedings.

Lender Negligence in Other Cases

While an extreme lender liability case like In re Bailey is rare, adverse lender liability rulings do happen with some frequency. Before In re Bailey, there were a number of other cases that resulted in lawsuits against lenders:

These cases serve as additional reminders to lenders to steer clear of the kind of behavior shown in the Bailey case. Or, in the words of one veteran workout counsel: “If it feels good… don’t do it!”  

Varnum’s Banking, Finance and Restructuring Practice Team provides critical guidance and support to its lender clients throughout all stages of the lending relationship, including working with troubled borrowers, not only in workouts but also in litigation and bankruptcy when necessary. Let us add value to your lending teams as you work to provide competitive solutions to your borrowers while managing portfolio risk.