A Change in Consumer Preferences – A Time for Businesses to Increase Transparency

by Sarah Donley

Consumers Care!

Today, many consumers, especially young ones, care about the environment and sustainability. Consumers strongly consider ingredients when deciding whether to purchase products. NielsenIQ, a global information services company, recognized consumers’ concerns about the ingredients in their food and personal care products and whether the products comply with sustainability practices. Specifically, the company found 60 percent of consumers have been making more “environmentally friendly, sustainable, or ethical purchases” since the beginning of the pandemic. Customers engaged in this “mindful consumption” are demanding transparency from companies. NielsenIQ reported 81 percent of shoppers surveyed said transparency is “important or extremely important” when shopping in-store and online. NielsenIQ also explained that products focusing on health and wellness will be assets for the growth of companies. Thus, these consumer preferences are essential when preparing to open or continue operating your small business.

The Yuka App

With the power of social media, as well as apps, consumers are able to expand their knowledge of the ingredients that are in the products they purchase. Yuka, a French app developed in 2017, has become increasingly popular thanks to social media. The app simplifies the long and confusing list of ingredients on product labels. Consumers simply scan the barcode of the food or personal care product, and the app will then develop a score out of 100 to reflect whether the product is healthful for consumers or harmful to the environment. Once a score is developed, Yuka provides explanations and risks of the ingredients found in the product. The app further provides alternative, “healthier” recommendations. Even if Yuka does not recognize the barcode of a product, the app allows users to take a picture of the ingredients, then Yuka will develop a score in approximately two hours and email the users the results. Currently, the app has approximately 36 million users in 12 countries, including the United States.

Should Businesses Care About Yuka?

Yuka has received mixed responses from entrepreneurs. The app has sparked some entrepreneurs selling beauty products, including Mathilde Thomas, the founder of Caudalie, to remove harmful ingredients in their products, such as silicones and polyethylene glycols. However, some business owners disagree with Yuka’s explanations of the risks that certain ingredients pose. In 2021, the French Meat Industry, specifically Les Entreprises Françaises de Charcuterie Traiteur (FICT), sued Yuka for defamation and unfair commercial practices, arguing that Yuka disparaged its members by giving their products low scores because of nitrites and nitrates. The administrative court of Paris found in favor of the FICT; however, the appellate court reversed the lower court’s decision because Yuka is a “tool” designed “to help consumers make better choices for their health.”

The question then remains, how can businesses respond to consumer preferences and the Yuka app? As mentioned in the first section of this blog post, Yuka and its 36 million users prove consumers are concerned about the ingredients in their products. Specifically, consumers are concerned about whether the ingredients are harmful to their health or the environment. One user stated, “I was alarmed to find the handwash I regularly purchase got a 0/100 score from Yuka because of the presence of benzophenone-1, an endocrine disruptor ‘that easily crosses the skin barrier and then behaves like female hormones.’ As I began to read about this and the many other potentially hazardous chemicals that Yuka flagged in almost all of our family cosmetics, I felt increasingly anxious.”

If entrepreneurs do not wish to change the ingredients in their products as Thomas did, increasing transparency may pose significant benefits. For example, Heineken has been advertising the sustainability of the apples that go into its cider. If global companies like Heineken can increase transparency, so can small businesses. In fact, small businesses have the advantage of shorter supply chains and local sourcing, which makes transparency regarding product ingredients easier.

Potential Legal Claims Against Small Businesses

Yuka may result in consumers taking businesses to court. As Yuka provides transparency and knowledge to consumers, businesses should be cognizant of how they advertise their products. Specifically, entrepreneurs should be cautious when labeling their products as “all-natural” or “organic” when the ingredients say otherwise. Companies in the cosmetic industry have faced settlements because they marketed their products as “all-natural” or “100% natural” when their products really contained synthetic ingredients. It is also important that businesses understand state law on false advertising. For example, California prohibits spreading information about products or services that is “untrue and misleading,” with civil and criminal enforcement.

Businesses also need to be aware of the Federal, Food, Drug, and Cosmetic Act’s (FFDCA) labeling rules. One may think, “I own a small business, and I am, therefore, exempt from the FFDCA, right?” Wrong! The U.S. Food and Drug Administration provided guidance to small businesses stating, “If any nutrient content claim (e.g., “sugar free”), health claim, or other nutrition information is provided on the label, or in labeling or advertising, the small business exemption is not applicable for a product.” Regarding cosmetics, the FFDCA requires that cosmetics not be adulterated or misbranded, meaning they must be safe for consumers and properly labeled. Further, if small businesses market cosmetics on a retail basis, such as in stores, online, or by personal sales representatives, they must also comply with the ingredient labeling requirements under the Fair Packaging and Labeling Act.

So, what should entrepreneurs take from all this? It is better to be safe than sorry. Consumers care about what goes into products, and so should you!

This post has been reproduced and updated with the author’s permission. It was originally authored on February 2, 2023 and can be found here.


Sarah Donley, at the time of this post, is a recent graduate of Penn State Dickinson Law. She has a BBA in Economics & Finance with minors in Entrepreneurship and Psychology from Shenandoah University. Sarah served as an Articles Editor for the Dickinson Law Review. Sarah has also earned her LL.M. in European Business Law from Radboud University.

 

 

Sources:

https://www.ft.com/content/850d9f5c-b4ab-42d5-a53d-d25b3ae99c77

https://www.wired.com/story/yuka-app/

https://yuka.io/en/

https://nielseniq.com/global/en/insights/analysis/2022/brandbank-how-is-health-and-wellness-reshaping-new-product-development/

https://nielseniq.com/global/en/insights/education/2022/socially-conscious-shoppers-expect-new-levels-of-transparency-from-brands/

https://nielseniq.com/global/en/insights/report/2022/transparency-in-an-evolving-omnichannel-world/

https://www.ftc.gov/business-guidance/blog/2016/04/are-your-all-natural-claims-all-accurate

https://www.fda.gov/food/labeling-nutrition-guidance-documents-regulatory-information/small-business-nutrition-labeling-exemption-guide

https://www.fda.gov/cosmetics/resources-industry-cosmetics/small-businesses-homemade-cosmetics-fact-sheet

https://newsinfrance.com/the-yuka-application-cleared-on-appeal-in-aix-en-provence/

https://www.forbes.com/sites/forbesbusinesscouncil/2021/05/04/transparency-is-no-longer-an-option-its-a-must/?sh=40e551b875fe

CA Bus. & Prof. Code § 17500.

Choosing a Business Entity for Your HUD Insured Real Estate Investment

By: Emily Ameel

Investing in affordable housing is a necessary step in community development and advancement. The Federal Housing Administration’s (“FHA”) Multifamily Mortgage Insurance program is one of many programs facilitated by the Department of Housing and Urban Development (“HUD”) to secure the advancement of affordable rental housing in the United States. Under the FHA loan program, HUD provides mortgage insurance for loans issued by FHA-approved lenders for the construction, rehabilitation, acquisition, and refinancing of affordable and market-rate multifamily housing. A property must contain five or more rental units to be eligible for the FHA Multifamily Mortgage Insurance Program. FHA Insured properties are not subject to income limits unless the property is operating under an additional state or federal affordable housing program, such as receiving Section 8 subsidies or Low -Income Housing Tax Credits (“LIHTC”).

Under the FHA Multifamily guidelines, the mortgagor (also referred to as the borrower) of any FHA-insured project must be a single asset entity (also referred to as a single purpose entity or “SPE”), meaning that the subject property must be the sole asset of the mortgagor entity. HUD has established entity types that are acceptable forms of SPEs for participation in the FHA Multifamily Mortgage Insurance program, some of which are more popular than others. An investor must weigh the benefits and drawbacks of each entity type to determine which will be best for their real estate investment.

Popular Entity Types for the fha multifamily mortgage insurance program:

The General Partnership (“GP”) 

A real estate investor may form a general partnership as the mortgagor for their FHA Insured Multifamily project. A general partnership is composed of two or more general partners who share in the management of the company. General partnerships are known as the “default” business entity, as they can be formed with subjective intent by the partners and do not require formal state filing for formation. General partnerships enjoy the benefits (and sometimes drawbacks) of pass-through taxation, meaning that the income of the entity is “passed through” to the general partners, who must report the income on their individual tax returns.

Drawbacks of the general partnership include the lack of liability protection. All general partners of a general partnership can be held personally liable for the debts of the business. As stated above, general partners share in the management of the business but can also bind each other, making it so that each general partner shares in liability.

The Limited Partnership (“LP”)

The limited partnership is similar to the general partnership. Limited partnerships consist of one or more general partners and one or more limited partners. General partners in a limited partnership control the management and operation of the business and are personally liable for the debts of the business. Limited partners act as investors in the business, have no control over management, and are only liable for business debts up to the amount of their investment. Limited Partnerships are also pass-through taxation entities. The limited partnership is a popular entity for affordable housing developments that receive LIHTC funding, as 99.99% of the interest is typically held for a limited partner tax credit investor.

The Limited Liability Company (“LLC”)

Another popular option for investors is the Limited Liability Company. The LLC is composed of managers and members. Managers have management rights in the LLC, and members are like investors. In a typical HUD transaction, an LLC will have either a manager who is not a member and owns 0% interest in the entity or a “managing member” who is both an interest-holding member and a manager of the LLC. Additionally, LLCs provide liability protections for managers and members. LLCs are popular options for new real estate investors because they can be owned and managed by a single “managing member” individual and provide that individual with liability protection. LLCs are easy to form, with most states requiring only a few documents for formation and registration. Like general partnerships and limited partnerships, the LLC is subject to pass-through taxation. Some states do require annual reporting and fees to maintain active status.

The Corporation (“S-Corp” or “C-Corp”)

HUD also allows corporations to act as the SPE mortgagor. Corporations are composed of corporate officers and owners called shareholders. Corporate officers may also be shareholders of the corporation. Like LLCs and LPs, corporations enjoy liability protections for their officers and shareholders. For taxation purposes, C-Corps and S-Corps are treated differently. S-Corps enjoy pass-through taxation like LLCs and partnerships. C-Corps are faced with “double taxation,” where both the corporation and shareholders are taxed on the business income. Corporations must follow corporate formalities, such as holding regular meetings, recording meeting minutes, and maintaining corporate governance documents.

Other Approved Entities:

Although less popular, HUD also allows the following entity types to act as SPE mortgagors:

        • Trust with beneficiaries and one or more trustees (where the duration of the trust is greater than or equal to the FHA Note);
        • Nonprofit corporations;
        • Joint ventures

Choosing (and forming) a mortgagor entity for your multifamily investment property is one of the many steps required to participate in the FHA Multifamily program. Consulting with an attorney to make an informed decision as to which entity type is suitable for your investment is imperative, as the mortgagor’s entity structure and organizational documents will be subject to lengthy due diligence review in the approval process.

 

This post has been reproduced and updated with the author’s permission. It was originally authored on February 2, 2023 and can be found here.


Emily Ameel, at the time of this post, is a second-year law student at Penn State Dickinson Law. She has a B.S. in Psychology and a B.A. in Women’s Studies from the University of Georgia. Prior to attending law school, Emily worked on Department of Housing and Urban Development (“HUD”) transactions as a third party consultant. She intends to pursue a career in affordable housing upon graduation. In her free time, she enjoys distance running.

 

Sources:

https://www.hud.gov/program_offices/housing/mfh/progdesc/rentcoophsg221d3n4

https://www.hud.gov/program_offices/housing/mfh/progdesc/purchrefi223f

HUD Handbook 4350.1 – FHA Multifamily Housing Policy

 

Entrepreneur from History | Walt Disney – America’s Pioneer of Animation

by Cassidy Eckrote

  There are very few pop culture interests shared among people all over the world and of all ages. Whether you live in Hong Kong or America, are two years-old or ninety-two years old, you would be hard-pressed to find someone who hasn’t heard of Disney. If you ask five different people the first thing they think of when they hear the word “Disney,” you’d likely hear five different answers: movies, amusement parks, streaming services, Mickey Mouse, or maybe even the Happiest Place on Earth. However, none of these experiences would have been possible without the person behind the magic—Walter Elias Disney.

Early life 

Walt Disney was born on December 5, 1901, in Chicago, Illinois. Despite the empire he left behind, Disney came from humble beginnings. He was one of five children and had his first job at eight years old as a paperboy. Disney dropped out of school at age 16 and joined the American Red Cross where he drove an ambulance in France during World War I.

Once the war was over, Disney returned home and began taking classes at the Kansas Art Institute. His talent and passion for animation continued to grow. In 1922, Disney started his first business—a film studio called Laugh-O-Gram. However, Disney was an inexperienced businessman and the studio faced financial troubles. After just one year, Laugh-O-Gram Studios went bankrupt and closed.

persistence

In 1924, Disney partnered up with his brother Roy to open the Disney Brothers Studio, now known as The Walt Disney Company. There, he created a short series called Oswald the Lucky Rabbit. Despite the series’ success, the character was not copyrighted under Disney’s name, and he lost the rights to his work. His distributor, who owned the rights to Oswald, opened his own studio and recruited Disney’s animators to work for him.

Having just lost his team of animators and first successful character, Disney continued to persist and created the iconic Mickey Mouse. After Mickey’s debut in a couple of silent cartoons, Disney decided to do something that hadn’t been done before. He created one of the first cartoons with synchronized sound, a short film titled Steamboat Willie. It was then that Mickey Mouse rose to stardom. Not only did Disney create Mickey Mouse, but he was the voice of the character until 1947.

“If you can dream it, you can do it.” Walt Disney

Expanding the empire

As Mickey Mouse’s popularity grew, so did the Disney brand. Disney expanded his character base, creating Donald Duck, Pluto, and Goofy to coincide in Mickey’s world. But he didn’t stop there. In 1937, amid the Great Depression, Disney created his first full-length animated film, Snow White and the Seven Dwarfs. He then went on to create more classic movies, such as Dumbo and Bambi.

To fund the company’s rapid growth, Disney began selling over-the-counter stock in 1940 for $5 per share. On November 12, 1957, Walt Disney Productions undertook its initial public offering on the New York Stock Exchange. At that time, investors could purchase a share of the company for $13.88. Today, a share of The Walt Disney Company sells for $109.54.

Walt Disney didn’t limit himself to creating movies about flying elephants and singing birds. During World War II, the federal government retained Disney to create films that would educate the public about the war. One of those short films, The New Spirit, starred Donald Duck and encouraged people to pay their income taxes as a way to fund the war.

Walt Disney was a man who wore many hats. He was not only a businessman and entrepreneur, but he was a husband and father. Disney and his family would often visit amusement parks and were unsatisfied with the cleanliness of the parks and the unfriendly staff. He knew he could make it better. The first Disneyland theme park opened in California in 1955, and it was unlike any other amusement park. Disney’s attention to detail set him apart from competitors—even the trash cans were designed to match the theme of the park.

In 1965, Walt Disney began designing Disney World, a theme park located in Orlando, Florida. However, Disney died in 1966 prior to the opening of the new park. Disney’s business partner and brother, Roy, carried out his plans, and Magic Kingdom opened in 1971. To date, there are twelve Disney parks in six locations worldwide.

“It’s kind of fun to do the impossible.” Walt Disney

What started out as a man with a dream turned into a company worth $200.10 billion. The Walt Disney Company has become one of the most well-known and respected entertainment moguls in the 21st century. The Disney phenomenon is so prevalent in today’s culture that adult members of the fandom are widely referred to as “Disney Adults.” Next time you visit the Happiest Place on Earth, don’t forget to snap a photo by the statue of the men who started it all—Walt Disney and Mickey Mouse.


Cassidy Eckrote, at the time of this post, is a third-year law student at Penn State Dickinson Law. She has a B.S. in Business from Penn State University. Cassidy currently serves as a Comments Editor on the Dickinson Law Review. Upon graduation, Cassidy will work as a law clerk in the Southern District of Florida.

 

 

 

 Sources:

https://www.goldmansachs.com/our-firm/history/moments/1957-disney-ipo.html#:~:text=Although%20Disney%20issued%20over%2Dthe,the%20New%20York%20Stock%20Exchange.

https://www.britannica.com/biography/Walt-Disney/Legacy

https://www.history.com/news/7-things-you-might-not-know-about-walt-disney

https://www.entrepreneur.com/growing-a-business/walter-elias-disney/197528

https://www.imdb.com/name/nm0000370/bio

https://web.archive.org/web/20160421084237/https://d23.com/about-walt-disney/

 

How to Start Up: Picking the Perfect Name for Your Business

By: Julia Martinez

Let’s talk about naming your business. As you would expect, branding can make or break a project. 82% of investors say name recognition is an important factor guiding them in their investment decisions, and brands with poor company branding pay 10% higher salaries. A name is a long-term commitment, and can be a daunting task – it took Warby Parker six months and over 2,000 options to find their brand’s perfect name.

You’ve probably seen ads online for business-name generators or “brand identity toolkits.” There are both free and paid tools all over the internet that can suggest names, domains, and URLs. In addition to the branding criteria, try the free tools available at the end of the article for inspiration in choosing the perfect name.

three important criteria for a brand name 

1. Memorable

A 2010 study found that consumers have a more positive reaction to brands with repetitively structured names, like Kit-Kat and Coca-Cola. You want something that reflects who you are, what you’re trying to achieve, and what sets you apart.

2. Accessible 

One of the reasons why picking a name can be so difficult! There really is a sweet spot between unique and bizarre. If your brand name is too hard to interpret or pronounce (or more importantly, Google) you’re going to run into problems with brand recognition.

3. Evolvable

Ask yourself these two questions: Is the name something you can eventually trademark and own? And is it a name that can grow with your company and stay relevant to your offered products or services?

vetting your name 

Once you get a short list of names together, you will want to determine whether or not any of the names are taken. You don’t have to trademark your business name to run business activity under it, but you do need to register a business if you start any sort of commercial activity, like promoting goods or services. If that’s the case, your business needs to be registered and you’ll need to receive a Tax ID before you can legally operate business activity.

It should be noted that the registered business name chosen doesn’t have to be the same as your business it just needs to be an available name. In other words, you can have your registered name be completely different from your public name – just make sure that your public name isn’t trademarked by someone else! Technically, you can use the same business name as someone else if the name isn’t protected by a trademark. However, if both businesses are in the same geographical location or sell similar goods and services, it is not recommended.

checking trademarks

The U.S. Patent and Trademark Office (USPTO)’s Trademark Electronic Search System is the best way to search for all applied-for and registered trademarks. If the name is available, filing a trademark for a business name with the USPTO costs between $50 and $600, depending on if you’re registering the trademark in one state, multiple states, and the type of trademark being registered. Note that if you’re a foreign-domiciled applicant, you are required to hire a U.S.-licensed attorney to represent you at the USPTO.

do i need a trademark?

As mentioned earlier, you can legally run a business without any registered trademarks. But going without a trademark is operating without legal protection – you risk potential lawsuits from other companies of similar names in the future, and you risk your name being copied by others. Trademarks won’t only protect the brand name, but they can protect your logo, slogan, or other related intellectual property.

what can’t i trademark?

You can’t trademark descriptive terms, so any generic words, slogans, colors, smells, and sounds cannot be registered with the USPTO. If it’s a non-generic word, you could register it, but you would need to demonstrate how it represents the business.

Inventions and works of authorship (like writings, reports, drawings, sculptures, illustrations, video recordings, audio recordings, computer programs, and charts) cannot be trademarked and need to be protected with either copyrights or patents instead.

online naming tools

Now that you know some of the basic rules around naming your brand, it’s time to get brainstorming! The links below are some great examples of online tools that can help you to come up with the perfect brand name, domain name, and URL. Just remember – your brand name should be memorable, accessible, and evolvable.

For Names: Shopify, Wordoid

For URLS: Brand Bucket

For Domains: Bust a Name, Panabee

 

This post has been reproduced with the author’s permission. It was originally authored on February 9, 2022.


Julia Martinez, at the time of this post, is a third-year law student at Penn State Dickinson Law. She has a B.A. in Criminal Justice and Political Science from Temple University, and has interests in criminal, civil, and administrative law. Julia is President of the Latinx Law Student Association, a 3L Class Representative, and Treasurer of Phi Alpha Delta.

 

Sources:

https://www.smallbizgenius.net/by-the-numbers/branding-statistics/#gref

https://www.quora.com/How-was-the-name-Warby-Parker-chosen

https://businessnamegenerator.com/how-to-find-out-if-a-business-name-is-taken-available/

https://www.uspto.gov/trademarks/basics/why-hire-private-trademark-attorney

Gifts That Keep On Giving – The Tax Liabilities of Employees Gifts and Perks

By: Matts Batryn
Getty Images

Like most business owners, you appreciate your hard-working employees.

Without them, you wouldn’t be the business savant you are today. You want to show a little extra bit of appreciation toward your employees where you can, as showing people respect and gratitude pays dividends in the long run. Unfortunately, what you may see as a typical cost of doing business may have severe tax consequences for your employees. Let’s walk through three typical scenarios many businesses see on a day-to-day basis:

You buy several $100 Amazon gift cards for your team of employees to show them love. Innocent enough, right? Wrong. The police roll up and your employees are now all going to jail for failing to declare taxable income. Try again.

Ok, instead of gift cards you decide to give your top performing sales team an award consisting of individualized gold rings. Whoops. Jail time for everyone. That’s taxable income.

Fine, no more gifts. You decide to create a 95% product discount for all your employees to keep them happy. Employee discounts are allowed, right? Well, yes…but no. Do not pass go. Go directly to jail. 

While the above scenarios may embellish the severity of the offense, they highlight the fact that these innocuous, everyday gifts or transactions have real-world tax implications for business owners and their employees. 

gifts are not gifts

The relationship between a business owner and employee is a sacred one – especially in the eyes of the Internal Revenue Service.

As a general rule for business owners, ALWAYS presume that anything you give to an employee is an exchange for services. Therefore it is taxable income to the employee. Even if you fully believe it to be an innocent gift at Christmas or as a summer treat, the IRS presumes it to be income subject to taxation. Yes, you could make sure your employee declares their $40 iTunes gift card on their tax return, but this isn’t the Price Is Right. Nobody wants to receive a gift they must pay for.  

not all “gifts” are created equal 

It is vital that business owners and entrepreneurs are aware of what they can and cannot bequeath to their employees free of repercussions. The IRS may see these employer-to-employee exchanges as non-gifts, but they also categorize many common exchanges as benefits of the job not subject to taxation.

To be regarded as a mere benefit of a job and not compensation for services, you need to see if your job benefits fall into one of these common categories:

De Minimis Benefits

These are the most common in a workplace and what most employees consider regular “perks of the job.” A de minimis benefit is something given that is so small it really makes no sense to account for it. Examples include employees utilizing office supplies for allowed personal use, a coffee maker or doughnuts in the break room, and fun trinkets or stationery given to employees. The general rule of thumb is to keep all tangible gifts to $75 or less per taxable year. This means no $100 Walmart gift cards or a new set of fancy headphones.

Many business owners confuse job “perks” to include prizes or rewards for a job well done. This often includes cash prizes for meeting goals, achievement awards, or performance bonuses like vacations or paid outings. These are ALL taxable income to the employee, as they are viewed as compensation for services rendered.

Meals of Convenience 

Do free meals and snacks at work every day sound too good to be true? Well, it should. Because it usually is. The new employee cafeteria or daily luncheons may be a great idea to boost morale, but it is taxable to the employee in most cases.

The IRS looks to see if the employee meals are provided as a convenience to the business owner. Are the meals provided because the working conditions do not allow for other food choices nearby? (Think mine workers, oil fields, etc.). Would the employees need to spend extensive time changing outfits and moving between locations? The IRS wants to see that providing meals is a regarded custom of the job and a near requirement of the work being done. If it’s a sales team working 9-5 in a cushy downtown office, then the meals provided are likely to be seen as extraneous and therefore taxable.
Discounts

Many business owners view discounts as their “get-out-of-jail-free” card when it comes to making their employees feel recognized and wanting to remain with the business. However, discounted products and discounted services for employees are heavily scrutinized by the IRS, which can result in more of a “get-in-jail” scenario for those who dodge tax liability. 

Employee discounts are when employees get products or services for less than the sale price to regular customers. For services, the rule is that it may not exceed 20% off the regular price. For product discounts, the discounted price cannot exceed the gross profit percentage of the item being sold. For example, if you buy widgets for $70 and sell them for $100, you have a gross profit percentage of 30%. This means the discounts to your widget employees may not exceed 30%. If employees are getting more than the maximum discount, up to the maximum is tax-free. The extra discount is considered pure income to the employee and subject to Uncle Sam. 

Only when services are at no additional cost to the business owner may they be completely tax-free to the employee. No additional cost services are only allowed when they are in the regular course of business and are first available to the general public. For example, a plane ticket is free to airline employees if the ticket is standby and doesn’t impede profit or take up resources of the business. 

the main take-away for business owners

Business owners must evaluate many moving parts when providing employees with gifts, benefits, or services. The first question to ask is if everyone within the business can receive it. Job perks are seldom part of a hierarchy, so if your senior staff are the only ones who get free food and parking, then the IRS will likely see that as pure compensation. Of course, many other considerations include how often employees receive the perk, is it a required part of operating vs. extra, and how extravagant it is.

The only way to know what must be declared as taxable income (or what you as a business owner are entitled to deduct), is to consult with a reputable business tax attorney in your area. Although you may have many questions with many potential answers, the only accurate answer your business will ever receive without meeting an actual attorney is “it depends.”       

This post has been reproduced and updated with the author’s permission. It was originally authored on February 9, 2022 and can be found here.


Matts Batryn, at the time of this post, is a third-year law student at Penn State Dickinson Law. He has interned with The Honorable Judge Marsico in Harrisburg and Civil Litigation Division of the Pennsylvania Office of Attorney General. Matts also worked as a Summer Associate at Stradley Ronon Stevens & Young in Philadelphia and will be joining their 2023 class of First-Year Associates in the Business division.

 

Sources:

https://www.law.cornell.edu/uscode/text/26/102

https://www.law.cornell.edu/uscode/text/26/61

https://answerconnect.cch.com/document/arp109ce9ded07c571000a8b390b11c18c90202f/federal/irc/explanation/what-is-a-qualified-employee-discount#:~:text=A%20qualified%20employee%20discount%2C%20the,on%20qualified%20property%20or%20services.&text=An%20employee%20discount%20is%20the,customers%20who%20are%20not%20employees.

 

Robert Anderson | Entrepreneur of the Month | July 2021

By: Lauren Stahl

Do you ever wonder how you will manage it all? It all might look different for each of us. Studying law. Teaching law. Practicing law. Having a family. Living a healthy life. Engaging in activities that fulfill you. Keeping your sanity. Just add being an entrepreneur to the mix.

Juggling all of the responsibilities that life brings can be stressful. But at the same time, juggling is simply a part of life. A daunting task, sure. But one that Professor Anderson manages to do as an entrepreneur, law professor, and family man.

A Traditional Path

Professor Anderson was a 2000 graduate of the New York School of Law. After graduation, Professor Anderson took a stroll down “traditional” law student lane and was associated with Sullivan & Cromwell LLP until 2003.  His practice focused on mergers and acquisitions and financial institutions regulation, which is not exactly where he saw himself. Professor Anderson went on to receive his PhD in Political Science at Stanford University in 2008. Since then, his thirst for knowledge and innovation has continued as a Professor of Law at Pepperdine University Caruso School of Law, researcher, and entrepreneur.

Entrepreneurship as a Side Hustle

Professor by day and entrepreneur by night. Well, not exactly. Professor Anderson does not have a set schedule for creativity. Professorship is not your typical 9-5 job that only leaves time for entrepreneurial endeavors in the evening hours. Flexibility is key because there is no telling when an entrepreneur will have an innovative idea.

Academia creates the flexibility Professor Anderson needs as an entrepreneur and family man. There are days when he works 24 hours a day and days where he does not work at all. There are days where he is grading exams or preparing for class. And there are days when he is focused on ScholarSift—analyzing data, engaging in customer service, or connecting with clientele. There are also days where he has the flexibility to attend a mid-morning school meeting for his children. Creating, teaching, and family. All important. All his worlds. And he knows, most importantly, how to prioritize in the face of life’s demands.

You Sift, We Sift – ScholarSift

Legal technology is his arena. Alongside business partner, Trent Wenzel, Professor Anderson co-founded an analytics technology for transactional drafting. They sold this technological tool—now known as Draft Analyzer—to Bloomberg Law. This tool is now a prominent analytics feature of Bloomberg Law. But they did not stop there.

The duo continued to explore and create technological tools that address the needs of the legal field. Their current endeavor, ScholarSift, is designed for law students, professors and scholars. Though the customer base may be small, Professor Anderson created ScholarSift to solve problems specifically in the realm of legal research.

For authors, ScholarSift provides an analysis of a draft with strengths and weaknesses, automatic search for the most on-point literature, and automated citation formatting. For law reviews, ScholarSift automatically sorts through hundreds of thousands of papers to find the most promising submissions, instantly identifies possible preemption, and automates citation formatting. What more could we want?

Professor Anderson explained why he created this platform. He noted that there are legal information systems designed for lawyers with paying clients. There are technology solutions designed around learning (e.g., studying for the bar exam). But there is not much designed for legal research. This is where ScholarSift steps in to assist authors (such as professors, legal scholars, and law students writing seminar papers) and law reviews, among others.

separate but Equal Worlds

Professor Anderson is not one to impose his entrepreneurial interests on his students. Even though his entrepreneurial work is an obvious source of interesting material for exam fact patterns, his worlds often remain separate.

He lives to create. Finding creative solutions to problems motivates him. He seizes every opportunity to learn new things. This even includes things like reforesting. Professor Anderson is currently reforesting his property in northern California after the Creek Fire destroyed his land. As we speak, he is waiting for the trees to grow. He even has a small timber business that sells Christmas trees. His entrepreneurial mind never sleeps. While his worlds often remain separate, his passion for creating connects them all.

success: Having a Choice

As an entrepreneur, Professor Anderson makes sacrifices. His mind often drifts into entrepreneurial mode, which can be hard to turn off. At the same time, he feels privileged to have the flexibility in his schedule to pursue his interests. All of them. The work he engages in is not forced upon him; he chooses his work. He can spend his time creating and focusing on projects that are rewarding to him and that is what he appreciates most.

Observe First, Create Second

Professor Anderson provided a piece of advice to budding entrepreneurs that I was not expecting. His advice stems from his personal experience with entrepreneurship. He encourages students to pursue traditional paths after law school, or at least not to fear a legal career. He spoke about how the practice of law is extremely inefficient. He believes there is an extreme gap in access to justice that technology has the potential to solve.

Thus, Professor Anderson believes that there are huge opportunities to create businesses around the law. He encourages students to take those traditional jobs where they will have the opportunity to observe what lawyers do and the problems that lawyers face. This observation may lead to a host of innovative entrepreneurial ideas. Those ideas may be related to law or adjacent to law but students will only see these problems by first being lawyers. Be observant, intentional, and take time to step back and survey the efficiency (or lack thereof) in the legal field. You never know what you might come up with.

Social Media

Professor Anderson’s Twitter: @ProfRobAnderson

ScholarSift’s Twitter: @ScholarSift


Lauren Stahl, at the time of this post, is a rising 2L at Penn State Dickinson Law. Formerly a medical researcher at the National Institutes of Health and Penn State College of Medicine, Lauren has interests in health care law and business transactional law. Lauren currently serves as Secretary of the Health Law Society, Philanthropy Chair of the Women’s Law Caucus, and a Research Assistant for Professor Prince.

Entrepreneur from History | Sally Ride – STEM Outreach Extraordinaire & First Lesbian Astronaut

By: Shila Bayor

Sally Ride was born on May 26, 1951, in Los Angeles, California. After graduating high school, she went to Stanford University where she would ultimately earn her doctorate in physics. On June 18th, 1983, Ride became the first U.S. woman in space.  Apart from being an astronaut, Ride has inspired countless people, as she lived a life committed to science, education, and inclusion. Among those that she inspired is Penn State Dickinson Law’s very own Dean Dodge. Ride was Dean Dodge’s physics and astronomy professor at UC San Diego.

“As a young person on campus in the LGBT community, she was so inspirational to us. She was incredible and such a memorable professor.”

The impact of Ride’s work extends far beyond her time on campus and in space as she was an absolute trailblazer who was unafraid of growth. She founded multiple companies and was involved in many initiatives to introduce STEM to young boys and girls. Ride founded Sally Ride Science alongside a small group of her colleagues. The company, which is now a nonprofit organization, works to promote literacy and diversity in science, technology, engineering, and math (STEM). The organization continues in Ride’s name to inspire young people of all backgrounds. 

The Trailblazer

NASA began looking for women astronauts in 1977. Ride was a student at the time and responded to an ad she saw in the school newspaper inviting women to apply to the astronaut program.  She was one of six women selected!

On June 18, 1983, Ride became the first American woman to fly in space. She was an astronaut on the STS-7 space shuttle mission where her job was to use a robotic arm to help put satellites into space. Ride flew on the space shuttle again in 1984. While Ride had a remarkable career at NASA,  she also encountered a number of obstacles in her career, including gender-biased questions from reporters. 

Ride stopped working for NASA in 1987 and started teaching at the University of California in San Diego. During this period, Ride started looking for ways to help women and girls who wanted to study science and mathematics. This desire to help increase the participation of women in STEM would turn her to entrepreneurship.

Inspiring Women to pursue careers in STEM through entrepreneurship

During her life, Ride found herself drawn to entrepreneurship. In the 1990s, Ride, along with a group of astronomy and business professionals, came together to develop a website dedicated to covering news related to space and astronomy, www.space.com. With the explosion of the internet and the public’s appetite for space exploration, Ride and her colleagues knew that a website dedicated to all things space would satiate this need. Ride worked on crafting a strategic plan for developing partnerships in the areas of education and science, in an effort to make the website as far-reaching as it could be. Her hard work paid off when Discover gave Space.com ad space in their print publications. Ride was then named the first president of Space.com. From that position, Ride created a separate channel within the Space.com site, called SpaceKids. Ride created SpaceKids to curate kid-specific content related to space and to help inspire kids to take up careers in STEM. Ride’s focus on inspiring kids to take up careers in science served her well in her next business venture, Sally Ride Science.

 To address the lack of girls in STEM, Ride helped to create a program that would increase participation. She felt that a business would be the best approach to solving the problem so she organized, managed and assumed the risk of this enterprise. Ride recognized a need and decided to fill it. 

In the late 1990s, Ride convened the leading minds in STEM education from across the country to understand the problems facing women in science. At the same time, Ride also started writing children’s science books and began to work on the EarthKAM project with NASA, a project that enabled middle school children to learn about space from a camera on the space shuttle.

These events served to convince Ride, her life partner–Tam O’Shaughnessy, and three academics from EarthKAM – Terry McEntee, Alann Lopes and Karen Flammer – to create a company that would address young girls, science, and gender stereotypes.

When Ride and her colleagues first established the business, they named it “Imaginary Lines” as a tribute to both the lines on a map and Ride’s oft-quoted description of seeing the atmosphere from space as the “thin blue hazy line” and the fragile nature of the earth. “Imaginary Lines” was to be a science education company.

Raising money and finding investors for their project was challenging. Ride and the other founders sought funding in 2001 and were successful in raising just under $1 million, an amount that was short of their expectations. Finally, several business advisors pointed out that by branding Imaginary Lines with the ‘Sally Ride’ name they would have an easier path forward, and so, Sally Ride Science, Inc. was born. From the time they tied Ride’s name to the venture, she and her co-founders were able to get sponsorships for their science programs for young women from such diverse organizations as Exxon Mobil and Hasbro.

As an entrepreneur, Ride was unafraid of growth. Although Ride was an introvert, she had to step out of her comfort zone and develop sales skills to get doors to open for her company. She generated multiple streams of income by selling books online and getting corporate sponsorship for teacher training. The business pushed her and other founders to step out of their comfort zone and do things they had never done before.

After Ride passed away in 2012, Tam O’Shaughnessy became CEO of Sally Ride Science, Inc. and negotiated the acquisition of the organization by UC San Diego. Sally Ride Science at UC San Diego is now a nonprofit and continues its mission to inspire girls and boys of all backgrounds to study science and imagine themselves in science and technology careers.

Her relationship with her partner of 27 years

Ride and O’Shaughnessy met in the 1960s when they were just kids playing tennis. Instead of paying attention to the tennis match when they were sitting on the bench, they would chat and get to know each other. Later, when they were both in their early 30s they started spending more time together. Their romantic relationship grew in bits and pieces over a long period of time until they both finally realized that the romantic feelings were there. While O’Shaughnessy was openly gay to her friends and family, Ride was not and so their romantic relationship was a secret. When Ride left NASA and moved to California, they thought that was when they would finally start to be open with everyone. But then they started working on Sally Ride Science, which they needed corporate sponsorships for. Because of the fear of discrimination, they felt that they still could not be publicly open about their romantic relationship. They were together for 27 years and they kept their relationship a secret from the public the entire time. In Ride’s last days, while she was battling pancreatic cancer, she left the decision to make her sexuality public up to O’Shaughnessy. It was then that Ride came out as a member of the  LGBTQ+ community. Ride is still the first and only acknowledged LGBTQ astronaut.

Remembering Her

In 2003, Ride was added to the Astronaut Hall of Fame, which honors astronauts for their hard work. Until her death on July 23, 2012, Ride continued to help students study science and mathematics. Ride’s legacy lives on and she is still remembered for her work, contribution to science and commitment to inclusion. In 2013, Ride received the Presidential Medal of Freedom from President Barack Obama. Tam O’Shaughnessy accepted the medal on behalf of Ride. 

Ride was a phenomenal entrepreneur who fought for inclusion and diversity in STEM. Ride famously said,

“You can’t be what you can’t see.”

Ride’s life and legacy show the power of representation. This Pride, we should all be inspired by Ride’s legacy and her fight for inclusion.


Shila Bayor, at the time of this post, is a rising second-year student at Penn State Dickinson Law. She is from New York City and is a graduate of Bard College. Shila is currently the president of the Business Law Society and secretary for the Black Law Student Union.

 

 

Sources:

https://airandspace.si.edu/stories/editorial/sally-ride-entrepreneur-space-science-and-inclusion

https://www.space.com/40916-sally-ride-pride-inspiration-legacy.html

https://www.earthkam.org/about

https://www.npr.org/2021/06/22/1009098412/loving-sally-ride

The EEOC, Pride Month, and the Anniversary of the Bostock case

By: Adrianna Dunn

In observance of LGBTQ+ Pride Month and the anniversary of the Supreme Court’s landmark decision in Bostock v. Clayton County, the U.S. Equal Employment Opportunity Commission (EEOC) released new resources to help educate employees, applicants, and employers. One of the resources is a page on the EEOC website with information regarding sexual orientation and gender identity discrimination. The other resource is a new technical assistance document that aims to help the public understand what the Bostock decision means and the established EEOC positions on the laws it enforces. Below are some key takeaways from the technical assistance document.

What is Title VII and Who Does it Apply to?

The technical assistance document first gives a summary and explanation of the Bostock case. In this case, the Supreme Court recognized that discriminating against someone on the basis of sexual orientation or transgender status is discriminating against someone on the basis of sex, which is prohibited under Title VII of the Civil Rights Act of 1964. Title VII is a federal law that prohibits employers from discriminating as to any term, condition, or privilege of employment based on a person’s race, color, national origin, sex, and religion. Some specific areas where an employer cannot discriminate based on sexual orientation or gender identity are hiring, firing, furloughs, reductions in force, promotions, demotions, discipline, training, work assignments, pay, overtime, other compensation, and fringe benefits. Title VII applies to the federal government, employment agencies, labor organizations, and both the private and public sectors that have 15 or more employees. It applies regardless of citizenship or immigration status; however, it does not typically apply to independent contractors. Finally, because Title VII is a federal law, it applies nationwide regardless of state or local laws. Even if not required by law, it makes sense for all businesses to comply with Title VII.

What are some of the specific prohibitions regarding sexual orientation and gender identity?

The technical assistance document notes that because Title VII prohibits harassment and other forms of discrimination based on sexual orientation or gender identity, this includes those that are, for example, straight or cisgender.

The document further notes that an employer’s discriminatory action cannot be justified by customer or client preference. Discrimination is not allowed because customers or clients would rather work with those that have a different sexual orientation or gender identity. Also, employers cannot segregate employees because of actual or perceived customer preferences.

An employer cannot discriminate against an employee because that employee does not conform to society’s stereotypes about feminine or masculine behavior, whether or not the employer knows an employee’s sexual orientation or gender identity. This includes the way an employee decides to dress. An employer cannot require a transgender employee to dress in accordance with the sex the employee was assigned at birth. Also, using names or pronouns that are not in accordance with an individual’s gender identity can be considered harassment. The EEOC recognized that accidentally misusing a transgender employee’s preferred name and pronouns is not a violation of Title VII. However, intentional and repeated use of the wrong name and pronouns could contribute to an unlawful hostile work environment. For the conduct to be considered unlawful, it must be severe or pervasive when taking into consideration all other unwelcome conduct based on the employee’s gender identity, leading to a work environment that a reasonable person would consider intimidating, hostile, or offensive.

An employer may have separate, sex-segregated bathrooms, locker rooms, and showers for men and women. Of course, they can also choose to have unisex bathrooms, locker rooms, and showers. However, the EEOC takes the position that employers cannot deny an employee equal access to a bathroom, locker room, or shower that corresponds to the employee’s gender identity.

What can an individual do if their Title VII rights have been violated?

An applicant or employee in the private sector or state and local government can contact the EEOC for help in deciding what to do in these situations. If the individual decides that they want to file a charge of discrimination, the EEOC will investigate to decide if applicable Equal Employment Opportunity (EEO) laws have been violated. It is important to note that an individual must file within 180 days of the alleged violation, or 300 days if the employer is covered by a state or local employment discrimination law, in order to take further legal action. For more information on filing a charge, visit this site. To start the process of filing a charge of discrimination against a private company or a state or local government employer, visit the EEOC Online Public Portal or visit your local EEOC office.

Those in the federal government must contact the EEO Office at the federal agency they believe committed the unlawful employment discrimination. A federal applicant or employee has to request EEO counseling within 45 days of the incident. For more information on the federal sector process for alleging employment discrimination, visit the EEOC’s website.

Finally, an employer cannot retaliate against, harass, or otherwise punish an employee when the employee opposes employment discrimination that they reasonably believed was unlawful, when an employee files an EEOC charge or complaint, or when an employee participates in an investigation, hearing, or other proceeding connected to Title VII enforcement.


Adrianna Dunn, at the time of this post, is a rising third-year law student at Penn State Dickinson Law. She is from Wheeling, West Virginia, and is a graduate of West Virginia University. Adrianna is a Research and Teaching Assistant for Professor Prince.

 

 

Sources

https://www.justia.com/employment/employment-discrimination/title-vii/

https://us10.campaign-archive.com/?e=13a33fc926&u=41fab58a900ff039c399dedb8&id=d76b8bb4c0

https://www.eeoc.gov/laws/guidance/protections-against-employment-discrimination-based-sexual-orientation-or-gender

https://www.eeoc.gov/sexual-orientation-and-gender-identity-sogi-discrimination

https://publicportal.eeoc.gov

https://www.eeoc.gov/how-file-charge-employment-discrimination

https://www.eeoc.gov/field-office

https://www.eeoc.gov/federal-sector/federal-employees-job-applicants

Photo Sources

https://images.app.goo.gl/6SPddt1wcR7VMJL47

https://images.app.goo.gl/pNrWLQBdRSJHGG329

https://images.app.goo.gl/WqFs5LJX8QSok28R8

Sean McDonald | Entrepreneur of the Month | June 2021

By: Mari Boyle

It is an honor to introduce Sean McDonald as Dickinson Law’s June Entrepreneur of the Month. Sean McDonald is the founder, President, and Chief Executive Officer of Ocugenix, a therapeutics company developing drugs to treat blindness. He has been described as one of Pittsburgh’s “best-known life sciences executives and serial entrepreneurs” by publications such as the Pittsburgh Business Times. He was recognized as CEO of the Year by the Pittsburgh Technology Council for the impact his innovation and creativity have on his community. McDonald has extensive experience building companies from the ground up and helming healthcare and biotechnology businesses, often leading them through successful capital raising rounds, clinical trials, regulatory compliance, and acquisitions. His passion for innovation within the healthcare industry is evident throughout his career and he possesses the envied ability of “idea execution” or bringing an idea to life. But, before he was a CEO, Sean McDonald was a college student at the University of Pennsylvania studying chemical engineering.

The “I Could do that” Moment

Admittedly, becoming an entrepreneur was not a lifelong dream for Mr. McDonald. In college, he didn’t envision himself as an entrepreneur.  His specialty was in computer engineering and robotics. Rather, McDonald’s light-bulb moment did not come until later, while he was working in robotics at Westinghouse Electric during the day and pursuing an MBA from Carnegie Mellon in the evening. As he put together his ideas of unique ways to apply robotics technologies coupled with his growing understanding of the business side of things, McDonald realized, “hey, I could do that!” And that is a grossly simplified version of how McDonald’s first company, Automated Healthcare was born. Automated Healthcare was a first of its kind company that, by applying robotics to healthcare, allowed for a robotic medication dispensing system for hospitals. Automated Healthcare’s customers include over 700 hospitals such as John Hopkins Hospitals and Sloan Kettering. McDonald would go on to sell his company to McKesson but remained intimately involved as Group President. McDonald later rejoined the start-up world as President and CEO of Precision Therapeutics, a cancer therapy company dedicated to improving outcomes of cancer patients through individualized treatments.

McDonald’s latest venture is as founder, President, and CEO of Ocugenix. McDonald, along with four others, founded Ocugenix to develop therapies for blindness in those over fifty (wet macular degeneration) or with diabetes (diabetic retinopathy).

Finding the right business

McDonald has experience in founding companies based off his own ideas as well as joining and leading new start-ups. But how does an entrepreneur decide what new idea to back? McDonald recognizes the multitude of ideas there are in the world with potentially more ideas today than ever before. In deciding whether to join, build, or lead a new business, McDonald looks for ideas that capture his imagination.

“You have to be personally excited about the opportunity, because it can take years to get off the ground and the founders may be the only true believers in the business.”

Raising capital in biotech

McDonald has extensive experience in raising significant amounts of venture capital for healthcare and biotechnology companies. McDonald finds that one of the challenges in raising capital, particularly for biotechnology companies, is the difficulty in valuing the company, particularly in its early stages. This is because if the drug the company is developing works, the company can be worth billions. But, if it doesn’t, then it’s worth nothing. McDonald believes that what makes for a successful capital raising round is understanding how an investor thinks and anticipating how they will view the business opportunity. This requires an understanding of the associated risk and the projected timeline, looking at other companies doing similar work, and communicating your vision effectively.

The Entrepreneurial Mindset

There are countless skills that could aid a potential entrepreneur in being successful. But if McDonald had to narrow it down to three, they would be:

      • Relentlessness
      • The ability to communicate complex ideas to people in a straightforward manner; and
      • A willingness to be honest with yourself. Self-reflection is key. A successful entrepreneur has honest, internal conversations about refining their idea or approach and potentially recognizing when something is just a bad idea.

McDonald’s advice to those with an entrepreneurial mindset is to learn something really well. The best ideas, McDonald believes, come from those with expertise in a small or specialized area because that is often the area that a big company will miss. Additionally, he advises, don’t be afraid to work for someone. Just because you want to be an entrepreneur does not mean you shouldn’t have the experience of working for someone else. This experience allows you to gain insight into how decisions are made, good and bad. It could potentially lead you to your “I could do that” moment as it did for Sean McDonald.


Mari Boyle, at the time of this post, is a recent graduate of Penn State Dickinson Law. She is interested in corporate and business litigation and graduated with a certificate in Entrepreneurship Law.  Mari served as president of the Business Law Society, Senior Editor to the Dickinson Law Review, and was a member of the Moot Court Appellate Advocacy team. After graduation, Mari will begin her legal career as a judicial law clerk at the Delaware Superior Court.

Photo Sources

https://www.bizjournals.com/pittsburgh/news/2017/06/21/personalities-of-pittsburgh-sean-mcdonald.html

https://ocugenix.com.

The Great SPAC Deluge

By: Jacob Jeifa

What do Bill Ackman, Serena Williams, and Paul Ryan have in common? Would it help if I added in Shaq, Ciara, and former astronaut Scott Kelly? No? Here’s the answer: each is a founder of a special purpose acquisition company, or SPAC.

A SPAC is a shell company that lists on a public stock exchange with the stated purpose of acquiring a private company, thus allowing them to go public without going through the traditional Initial Public Offering (IPO) process.

Recognizable companies like DraftKings, Virgin Galactic, and OpenDoor have embraced SPACs to access public markets. In fact, few trends in the financial markets have been more pronounced than the recent “SPAC boom.” As of mid-March 2021, 296 SPACs have raised $96.4 billion in the US, overtaking last year’s records of 248 SPACs raising $83.4 billion. For comparison, the seven years preceding 2020 saw all of 194 SPACs raise $45 billion.

For much of their decades-long history, SPACs were the exclusive province of financiers, lawyers, and academics. But a combination of political, social, and technological developments has made them more attractive to investors and entrepreneurs. Adding more fuel to their resurgence are the unprecedented levels of capital pursuing private companies and mounting frustrations with the traditional IPO.

How do SPACs work?

We can break this entire process down into three broad phases: (1) SPAC formation, (2) Target company search, and (3) de-SPACing. First, a “Sponsor” raises capital by taking an empty holding company (the SPAC) public through an IPO. The Sponsor is an individual or team that raises funds by trading on little more than its reputation and generalized plans.

Armed with money and SPAC stock, the Sponsor then searches for a real, “target” company to buy. But the clock is ticking. Not only are the gross proceeds from the IPO locked up “in trust” until the Sponsor identifies a target company, but they only have 18-24 months to consummate a merger or else the SPAC dissolves and returns the proceeds.

Finally, de-SPACing refers to the SPAC merging with the target company. This last leg comes when the Sponsor identifies a target company and negotiates an acquisition. Once completed, they present the deal to the SPAC’s shareholders for a vote. While rejection is possible, the shareholders have a powerful incentive to approve, regardless of their feelings on the combination itself. That’s because they can always redeem their shares for their pro-rata amount of the funds held in trust. Upon the deal’s approval, the de-SPACing occurs, whereby the target company merges into the SPAC and becomes public.

How do SPACs differ from traditional IPO?

Until 2020, traditional IPO’s enjoyed an uninterrupted run as the go-to route to the public markets. But recently, SPACs have been outpacing them at a rate of 4:1. Whether SPACs will persist as an alternative remains to be seen, but their recent proliferation has highlighted some key distinctions between the two models. Below are some of the most salient.

Speed

There is little comparison between the two where it comes to the time to go public. For a traditional IPO, the entire process–from pre-planning to public trading–can take about two years. Of this, they can expect to dedicate six to eight months to SEC engagement alone. A SPAC can get SEC approval and start listing in as little as two months. De-SPACing, which is the only part of the process that involves the private company, can take about five months.

Regulatory scrutiny

Before they allow a company to access public markets, regulators seek to ensure that all information needed to make an informed investment decision is available. For traditional IPOs, transparency is the name of the game.  Through this process, the SEC endeavors to ensure that the wannabe public company is disclosing all material information so that potential investors can decide whether or not to buy into it. The back and forth over revisions to the company’s initial registration form, the Form S-1—which details its business operations, financial condition, and use of proceeds, and alone can take as much as five months — takes time .

To the entrepreneur who sees this as more an exercise in tedium than one of earnest due diligence, the SPAC offers an abbreviated regulatory approval process. Being little more than an empty shell company at its outset, the SEC demands a much less detailed S-1. On the de-SPACing end, the SEC treats the combination more like a merger than an IPO. This substitutes certain audited disclosures for the time consuming back and forth discussed above.

Investor scrutiny

As the IPO approaches, the company’s attention shifts to courting investors. Through the “IPO roadshow,” the company pitches to the most desirable, well-resourced investors, and supplies them with the information they need in order to feel comfortable subscribing. While many view the roadshow as the regulatory component’s fun counterpart, motivated investors take this opportunity to dig in and offer candid, if not merciless, observations that directly influence the amount of money the company will ultimately be able to raise.

SPACs open at a uniform share price that seldom fluctuates before they announce a merger. Since you’re investing in a shell company with no operations to speak of, it wouldn’t make sense to wrangle over a share price. Instead, most SPACs open at $10/share, with each investor granted a proportional share of warrants. These warrants allow investors to buy additional shares of stock at a (hopefully favorable) price if certain future milestones occur. There is also a role reversal when it comes time to de-SPAC. The private company becomes the beneficiary of the SPAC’s self-imposed spending deadline, which gives them leverage to negotiate favorable terms.

Conclusion

The difference between the traditional IPO and SPAC lies in the journey and not the destination. However, regardless of where you choose to put your money, you would be wise to listen to the SEC when they say,

“It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment.”

This post has been reproduced with the author’s permission. It was originally authored on March 29, 2021, and can be found here.


Jacob Jeifa, at the time of this post, is a rising third-year law student at Penn State Dickinson Law. He is a graduate of the University of Delaware and is interested in corporate law. Prior to law school, Jacob ran a property management company and was a research assistant with the Weinberg Center for Corporate Governance.

 

 

Sources

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https://www.sec.gov/oiea/investor-alerts-and-bulletins/celebrity-involvement-spacs-investor-alert