This article was first posted by Benjamin Streckert on the State Bar of Wisconsin Business Law Section blog and is being used here with the permission of the State Bar of Wisconsin and its author.


Benjamin Streckert, Minnesota 2017, is an attorney with Ruder Ware in Wausau, where he concentrates his practice on various business transactional matters.


Did you know that the “full and equal enjoyment” requirement of the Americans with Disabilities Act also applies to websites maintained by places of public accommodation? Benjamin Streckert discusses the issue and provides tips for websites to become more accessible to those with disabilities.

Did you know that the Americans with Disabilities Act (ADA) applies to the websites as well as the physical facilities of places of public accommodation​?

A review of court dockets around the country shows that plaintiffs are filing an increasing number of lawsuits against companies alleging that their websites are not “accessible” to individuals with disabilities as required by the ADA.

In 2017, plaintiffs filed 814 website accessibility lawsuits in federal court alone, according to the ADA Title III website. This trend is not only a national one – these types of lawsuits are being threatened in Wisconsin as well. Businesses would be well advised to get out ahead of the potential threat.

The Americans with Disabilities Act

According to the ADA, a disability includes “a physical or mental impairment that substantially limits one or more major life activities.” Title III of the ADA prohibits discrimination by a “place of public accommodation” against individuals with disabilities.

Although business owners and managers may want to consult with an attorney to determine if their business qualifies, hotels, restaurants, theaters, grocery stores, pharmacies, offices of health care providers, museums, golf courses, banks, and many other areas open to the community generally qualify as places of public accommodation. These places are required to provide “full and equal enjoyment of [their] goods, services, privileges, advantages or accommodations” to people with disabilities.

Application to Websites

The ADA mandates that brick and mortar locations have certain ramps, counter heights, and other accommodations, so as to ensure that individuals with disabilities have access to full and equal enjoyment of the facilities and the services offered inside of them.

However, many people are not aware that the “full and equal enjoyment” requirement also applies to websites maintained by places of public accommodation. An individual with a disability must be able to equally access a website or mobile application with the aid of a commonly used assistive technology.

A good example of this is that a visually impaired person must be able to navigate a website using a screen reader. Screen readers are software programs that allow users to read the text displayed on a computer screen with a speech synthesizer or braille display. Not all websites are conducive to, or compatible with, screen readers, however.

In fact, websites must have very specific characteristics in order to be compatible with screen readers and other tools used by those with various disabilities.

Legal Standard for Accessibility

Currently, there is no definitive standard for accessibility. But the World Wide Web Consortium’s Web Content Accessibility Guidelines Version 2.0 with AA (intermediate) success criteria (WCAG 2.0 AA) has become the presumptive standard.

Websites that conform with WCAG 2.0 AA are generally deemed ADA compliant. Although not an exclusive list, in order to conform to WCAG 2.0 AA, websites must have capabilities that include:

  • captions for any videos;
  • certain levels of color contrast and minimum font sizes;
  • clear labels and section headings;
  • audio descriptions for video content;
  • allowing keyboard-only navigation (i.e., navigation without a mouse);
  • using icons and buttons consistently; and
  • automatically suggesting fixes when users make input errors.

Maintaining a website that conforms to WCAG 2.0 AA requires periodic updates.

Consequences of a Non-ADA Compliant Website

If a place of public accommodation’s website does not conform to the above standards, both the United States Department of Justice and private citizens can bring suit.

The Department of Justice can obtain monetary damages, attorneys’ fees and costs, monetary penalties, and a court order requiring an institution to bring its website into compliance. An individual may not obtain money damages, but he or she can obtain a court order requiring the institution to bring its website into compliance and recover attorneys’ fees and costs. The costs to a noncompliant organization can be significant.

Action Steps

Given recent ADA litigation trends, and so as not to be an easy target for an accessibility suit, places of public accommodation should consider:

  • Engaging a consultant with experience in WCAG 2.0 AA when building a new website or modifying an existing website;
  • Posting an accessibility statement offering technical assistance for disabled customers on the website home page;
  • Ensuring that customer complaints regarding accessibility issues are addressed promptly;
  • Hiring a vendor with extensive knowledge of WCAG 2.0 AA to conduct a compliance audit of the organization’s current website;
  • Building WCAG 2.0 AA compliance provisions into agreements with website designers and web service providers; and
  • Scheduling periodic updates to make sure websites keep up with ever-changing standards and technological specifications.

Proactively taking the above action steps can help mitigate the risk of an ADA suit.

 


This article was originally written for the Business Law Section blog of the State Bar of Wisconsin and appears here with the permission of the State Bar and the article’s authors.


THOMAS J. NICHOLS & JAMES DECLEENE

Thomas J. Nichols, Marquette 1979, is a shareholder with Meissner Tierney Fisher & Nichols S.C., Milwaukee, where he focuses his practice on business law and tax law.

James W. DeCleene,Marquette 2015, is an attorney with Meissner Tierney Fisher & Nichols S.C., Milwaukee, where he practices in business law, estate planning, health care law, and intellectual property law.

 

 


Investing in a qualified Wisconsin business may provide certain tax benefits to individuals. Thomas Nichols and James DeCleene discuss these benefits and some potential pitfalls.

 

Wisconsin law currently provides tax-favored status to certain investments made in qualified Wisconsin businesses.

First, where an individual realizes long-term capital gain from the sale of an investment in a qualified Wisconsin business made after 2010 and held for 5 or more years, that individual may be entitled to exclude all or a part of that gain in determining his or her Wisconsin taxable income.1

Second, where an individual realizes long-term capital gain from the sale of any capital asset, that individual may be entitled to defer that gain so long as he or she invests all of the gain in a qualified Wisconsin business within 180 days of the sale.2

Qualified Wisconsin Businesses

A business is treated as a qualified Wisconsin business for a given year only if it is registered with the Wisconsin Department of Revenue.3

Importantly, the registration filing must be made before the end of the calendar year when it takes effect.4 The sole exception to this deadline is that, for the first year in which an entity begins doing business in Wisconsin, that business must register in the following calendar year.5

Since each filing only covers one calendar year, businesses desiring continuous qualified status should file every year.6 These filing requirements create hard and fast deadlines. There are no procedures for retroactive filings.

Only certain businesses can register with the department as a qualified Wisconsin business. In particular, a business must, with respect to its taxable year ending immediately prior to its registration, meet the following requirements:

  1. The business must have had 2 or more full-time employees.
  2. 50 percent or more of the business’s payroll must have been paid in Wisconsin.
  3. 50 percent or more of the value of the business’s real and tangible personal property (owned or rented) must be located in Wisconsin.7

With respect to the year in which a business first starts doing business in Wisconsin, these requirements are deemed satisfied if the business registered for the following year.

For purposes of the two 50-percent requirements listed above, persons employed by a professional employer organization or group are considered as employed by the organization’s or group’s client, and property owned by the business is valued at its cost, while property rented by the business is valued by taking the annual rental paid by the business for such property, subtracting out the annual sub-rental received by the business for such property and multiplying by 8.8

Lists of the businesses that have requested to be classified as qualified Wisconsin businesses for calendar years 2011-18 can be found on the Department of Revenue website.

Businesses are automatically added to these lists as part of the registration process for a given year.9

Since a business’s registration for its first year is determined by reference to the following year, a business must request to be added to the list for the first year in which it does business in Wisconsin. This request is made by sending an email to DORISETechnicalServices@wisconsin.gov and providing the business’s legal name as well as the confirmation number for its registration for the following calendar year.

Be aware that these lists do not signal the department’s acknowledgement that a business is in fact a qualified Wisconsin business for a given year. Rather, it merely identifies those businesses that have self-identified as meeting the above requirements.

Accordingly, obtain representations, covenants, or other assurances as to a business’s qualified status when helping clients identify a qualified Wisconsin business in which to make an investment.

Exclusion on Sale of Investment

As noted above, one of the benefits of investing in a qualified Wisconsin business is that the long-term capital gain on the eventual sale of that investment may be wholly excluded.10

To qualify for this exclusion, the business must be a qualified Wisconsin business “for the year of investment” and “at least two of the four subsequent” calendar years, provided that the investment was made after 2010 and held for at least five uninterrupted years.11 To claim this exclusion, an individual must file a Schedule QI with his or her Wisconsin tax return.

There are a number of issues to be aware of in applying this provision. To start, this exclusion only applies after the sale of an “investment” in a qualified Wisconsin business.12 For these purposes, an investment is defined as an “amount[] paid to acquire stock or other ownership interest in a partnership, corporation, tax-option corporation, or limited liability company treated as a partnership or corporation.”13

While the statute requires an “amount[] [to be] paid” for such stock or ownership interest, we confirmed in a phone call with the Wisconsin Department of Revenue that this definition is broad enough to cover transactions involving noncash consideration. We also confirmed that the statute should also apply to cross-purchases where the ownership interest is being acquired from an owner of the entity, rather than from the entity itself. In order for an investment in a single member LLC to qualify, the LLC must have elected to be treated as an S or C corporation for Wisconsin purposes. 2017 Form I-177.

Be aware that late-year investments in entities that have not yet started doing business in Wisconsin may not be eligible for gain exclusion. For example, take the situation where an individual invested in an LLC in November 2017, but the LLC did not actually start doing business in Wisconsin until March 2018. Under those facts, the LLC would be prohibited from registering with the department as a qualified Wisconsin business for calendar year 2017 since it would not have started doing business in Wisconsin until 2018.14

Because of this, the business could not be qualified during the year of the investment, and no exclusion would apply on the eventual sale of the investment, even if the business registered as a qualified Wisconsin business for each calendar year in which it did business in Wisconsin.15 Thus, it’s good to advise clients whether to wait to invest in a business until the calendar year in which the entity starts doing business in Wisconsin.

Note that gain passed through to an individual from a partnership, limited liability company, limited liability partnership, tax-option corporation, trust or estate can qualify for the exclusion.16 As an example, an individual investing in a limited partnership that made an investment in an LLC would be able to exclude the gain passed through from the limited partnership’s sale of its interest in the LLC, provided that the limited partnership held the interest for five years and all other requirements are satisfied.

Deferral upon Rollover

Taxpayers may also be able to defer long-term capital gain so long as all of the gain is invested in a qualified Wisconsin business within 180 days of the sale of the capital asset.17 In addition to rolling the gain over into a qualified Wisconsin business, the individual must also file a Schedule CG with his or her tax return in order to claim this deferral.18 Note that this gain deferral provision is applicable to a large number of transactions, given that it could be used to defer any long-term capital gain.19

As with the gain exclusion provision above, there are a number of issues to be aware of when applying this deferral provision. For example, this deferral provision uses the same definition of “investment” noted above, so be aware that the investment in the qualified Wisconsin business for these purposes could also be made with noncash consideration or in a cross-purchase transaction.20

Additionally, the same problem with respect to late year investments in an entity that has not yet started doing business in Wisconsin is also applicable to this deferral provision. Further, gain passed through to an individual from a partnership, limited liability company, limited liability partnership, or tax-option corporation qualifies for deferral as well.21

For purposes of the deferral provision, however, it is unclear whether gain passed through from a trust or estate could be deferred since the instructions to Schedule CG are silent on this point. That being said, Form I-177, the instruction form for Schedule QI, allows for the exclusion of gain passed through from trusts and estates, and both the exclusion provision and the deferral provision have an identical definition of “claimant,” so it seems likely that an individual could defer gain passed through from such entities as well.22

On top of these overlapping issues, when advising a client with respect to the deferral provision, be careful to ensure that your client “invests all of the gain [from the sale] in a qualified Wisconsin business.”23 No partial deferral is allowed.

Also, given that this investment must be made within 180 days of the sale, apprise clients before the sale closing of this potential deferral opportunity and the relatively short deadline associated with it, in order to give clients time to make arrangements to acquire an interest in a qualified Wisconsin business.

Last, note that gain deferred under this provision will eventually be recognized. The statute accomplishes this by reducing the individual’s basis in the investment in the qualified Wisconsin business by the amount of gain deferred.24 Then, to prevent any slippage between the exclusion and deferral provisions, the statute prevents the deferred gain from being treated as qualifying gain for purposes of the gain exclusion provision.25

Note, however, that if the investment in the qualified Wisconsin business is held in a manner sufficient to qualify for the exclusion above, the gain on the eventual sale of the investment could qualify for exclusion to the extent it exceeds the gain previously deferred.

Conclusion

Investing in a qualified Wisconsin business provides clear benefits to individual taxpayers. If the investment is held long enough and all other requirements are met, the gain could be wholly excluded in determining the individual’s Wisconsin taxable income.

Additionally, if the investment closely follows the sale of a capital asset, the gain from that sale could be wholly deferred.

In either event, it’s good to bear these considerations in mind when navigating these provisions.

This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section web pages to learn more about the benefits of section membership.

Endnotes

1 Wis. Stat. § 71.05(25)(b).

2 Wis. Stat. § 71.05(26)(bm)(1).

3 Wis. Stat. §§ 71.05(25)(a)(1s), 73.03(69)(a).

4 Tax § 2.986(4)(a).

5 Tax § 2.986(4)(b).

6 Tax § 2.986(4)(a).

7 Wis. Stat. § 73.03(69)(b)(1)-(2).

8 Wis. Stat. § 73.03(69)(b)(1); Tax § 2.986(3).

9 Wis. Stat. § 73.03(69)(d).

10 Wis. Stat. § 71.05(25)(b).

11 Wis. Stat. § 71.05(25)(a)(2).

12 Wis. Stat. § 71.05(25)(a)(2).

13 Wis. Stat. § 71.05(25)(a)(1m).

14 Tax § 2.986(2), (4)(b); see Wis. Stat. § 71.22(1r) (defining “[d]oing business in this state” for this purpose).

15 Wis. Stat. § 71.05(25)(a)(2).

16 Wis. Stat. § 71.05(25)(a)(1); see 2017 Form I-177 (listing trusts and estates as well).

17 Wis. Stat. § 71.05(26)(bm)(1).

18 Wis. Stat. § 71.05(26)(bm)(2).

19 Wis. Stat. § 71.05(26)(bm).

20 Compare Wis. Stat. § 71.05(26)(a)(2m), with Wis. Stat. § 71.05(25)(a)(1m).

21 Wis. Stat. § 71.05(26)(a)(1).

22 Compare Wis. Stat. § 71.05(26)(a)(1), with Wis. Stat. § 71.05(25)(a)(1); see 2017 Form I-177.

23 Wis. Stat. § 71.05(26)(bm)(1) (emphasis added).

24 Wis. Stat. § 71.05(26)(c).

25 Wis. Stat. § 71.05(26)(f).​



We do a lot of non-profit work. Oftentimes, we are working with new startups that are driven by strong social motivation, but to form and survive need investment capital. This puts us at a crossroad: do we go non-profit and non-stock or conventional corporation? Now, Wisconsin, joining 33 other states, has another alternative: the Benefit Corporation.

Non-profit corporations must have certain characteristics in order to qualify as exempt entities under section 501(c) of the Internal Revenue Code. Charitable organizations qualify under 501(c)(3). Such qualification requires a charitable “purpose” and further requires that in no case may the corporation dissolve and distribute anything to its members or board, but instead, must go to another similarly organized entity. It also allow its donors to deduct contributions to the organization. Its income is not taxed.

If an entity is motivated to protect investor’s capital, make a return on such capital and distribute proceeds upon dissolution to its owners, then it is a “for profit” entity. As such, its income is taxed.

In the past, such entities could not “crossover.” They were one or the other. With the enactment of Chapter 204 of the Wisconsin Statures, on November 27, 2017, Wisconsin now allows corporations to be profit driven and to exist to promote one or more public purposes.

Why is this so important? Because, in the past, the directors of a non-profit had no owners to be responsible to. They promulgated the non-profit’s purpose, regardless of its impact upon the bottom line. Directors of profit corporations owed a fiduciary obligation to the owners to act in their best interests — which oftentimes meant they had to act primarily in consideration of what their actions would do to the bottom line. In addition, for-profit directors could consider three other factors in their decision making:

  • the effect upon employees
  • the impact upon customers
  • how their actions would be perceived by the communities within which they served

Under new Chapter 204, benefit corporation directors may now consider the following additional factors:

  • the effect upon subsidiaries and suppliers
  • any impact upon the local or global environment
  • the interests of customers as beneficiaries of the corporation’s benefit purposes
  • the short term and long term interests of the corporation
  • the ability and extent to which it may accomplish the corporation’s benefit purposes
  • other factors the directors or officers deem important

Note how the last item is a huge “catch all!”

So, what are these “public benefits” that the new benefit corporation must espouse? “A benefit corporation shall have a purpose of creating general public benefit.” Sec. 204.201(1) Wis. Stats. A “General public benefit” is “a material positive impact on society and the environment by the operation of a benefit corporation taken as a whole, through activities that promote some combination of specific public benefits.” Sec 204.120(5) Wis. Stats. Under that section’s subsection (7), “Specific public benefits” are:

  • (a) Providing low-income or under-served individuals or communities with beneficial products or services.
  • (b) Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business.
  • (c) Preserving the environment.
  • (d) Improving human health.
  • (e) Promoting the arts, sciences, or advancement of knowledge.
  • (f) Increasing the flow of capital to entities with a public benefit purpose.
  • (g) The accomplishment of any other particular benefit for society or the environment.

The owners may sue directors who fail to consider the corporation’s benefit purposes. Directors are broadly protected if they do. Sec. 204.301(3) Wis. Stats. There shall be a designated “benefit director” who shall have the powers to carry out the statute’s intent. Sec. 204.302 Wis. Stats. The law promotes transparency, inasmuch as the corporation has to provide its shareholders an annual statement that includes:

  • objectives to promote public benefits, as set by the board
  • standards the board adopted to measure progress
  • factual information regarding the success of meeting objectives
  • an assessment regarding the success of meeting objectives

The articles or bylaws may extend such transparency by making such statement available to the public. Sec. 204.401 Wis. Stats.

While the concept of a benefit corporation is quite new, it may be the right form to do business for owners who are motivated to solve social or environmental issues. It assures such owners continued control in order to achieve such goals. Such goals may be used to promote the corporation and may be seen by others dealing with the corporation as a consideration when doing so. Employees may be drawn by such purpose; customers may choose to buy from such a company; communities may be proud to bring such operations into their midst; and owners may benefit by improving the world and making a profit at the same time!

If you, or any group you work with is interested in exploring this new form within which you may do business, please contact our business law experts at Schober Schober & Mitchell, S.C. at (262)785-1820.

Other reading:

This article was originally posted on the “State Bar of Wisconsin’s Business Law Section Blog,” and was written by Attorney Lindsay M. Fedler.

Many people believe most capital is raised by companies (“Issuers”) making initial public offerings or trading on major exchanges such as the NYSE or NASDAQ. Notable 2017 examples include Snap! (parent company for social media app Snapchat) and real estate site Redfin. Generally, issuers must register publicly offered securities with the Securities and Exchange Commission (“SEC”) – a process involving extensive information reporting and expense.
However, most companies opt to raise capital from the private markets through private offerings exempt from registration if certain conditions are met, which reduces their regulatory burden, costs, and time required to raise new capital. Private offerings have increased substantially since the beginning of the Great Recession.[1] A large portion is raised through Regulation D, which is comprised of three rules: Rule 504, Rule 506(b) and Rule 506(c). Between 2009 and 2014, ten times as many private Regulation D offers were made (about 163,000) as there were public offerings (about 15,500).[2]
Today, over 90 % of issuers engaging in private offerings use the exemptions available under Rule 506. Two key terms applying to Rule 506 exemptions are “accredited investor” and “bad actor”.
An accredited investor[3] can be:
• Institutional, such as a bank, private business development company, or certain types of charitable organizations and trusts;
• A person associated with the issuer, such as a director, executive officer, or general partner;
• Individual investors meeting net worth or income requirements:
o Income: Individual or joint income must have exceeded $200,000 or $300,000 respectively in the previous two years (with no reasonable expectations of a change in the current year);
o Net Worth: the investor’s individual or joint net worth must exceed $1 million dollars (excluding the value of the investor’s primary residence); or
• An entity in which all equity owners are accredited investors.
If certain persons or entities involved in the offer and sale of the issuer’s securities engage in conduct which constitutes a disqualifying event under the definition of a “bad actor,” the issuer cannot use Regulation D exemptions.[4] “Covered persons” include:
• The issuer, its predecessors and affiliated issuers;
• The issuer’s directors, executive officers, general partners, managing members, and any other participating officers;
• Beneficial owners of 20% or more of the issuer’s voting securities;
• Promoters;
• Investment managers (if the issuer is a pooled investment fund); and
• Any person compensated for soliciting investors.
Disqualifying events[5] include:
• Criminal convictions, court injunctions and restraining orders involving the purchase or sale of securities, falsified SEC filings, or other securities related business.
• Final orders of certain state and federal regulators, certain SEC orders, and US Postal Service false representation orders.
• Suspensions or expulsions from memberships in a self-regulatory organization (SRO) such as FINRA, or from association with an SRO member.
Only events occurring after September 23, 2013 are disqualifying.[6] Disqualifying events occurring before September 23, 2013 must still disclosed to prospective investors.[7] A “look back” period of five to ten years may apply, measured from the date of the disqualifying event. For example, the date of the final order issued by a state securities regulator triggers the look-back period – not the date(s) of the underlying conduct.
There are some exceptions to bad actor disqualification. The issuer will not be disqualified if it shows it did not know and could not have reasonably known that a disqualified person participated in the offering, or the court or regulatory authority entering the relevant order, judgment, or decree advises in writing that disqualification under the rule should not result as a consequence.[8]
Rule 506(b) and (c)
In 2012, Title II of the JOBS Act amended Rule 506, directing the SEC to permit general solicitation and advertising in some Rule 506 offerings. As a result, the Rule 506(c) exemption allowing for general solicitation and advertising so long as all investors are accredited became effective on September 23, 2013. Rule 506(b) preserves Rule 506 as it existed before the adoption of Rule 506(c).
The exemptions under Rules 506(b) and (c) share several characteristics. Under both:
• Issuers may raise an unlimited amount of funds through the offer and sale of its securities to unlimited accredited investors;
• Prior to the sale of securities, issuers must decide what information should be provided to accredited investors, and ensure that it does not violate antifraud provisions of the securities laws; and
• The securities are not subject to the specific registration requirements of states where they are offered and sold, in contrast to Rule 504. While issuers must still file a notice form and pay a fee to the state(s) where the securities will be offered, there are no additional requirements above what is needed to complete Form D. Some states mandate electronic filing of Rule 506 document through the Electronic Filing Depository (“EFD”). For information on electronic filing procedures, check out https://efdnasaa.org, containing contact information for actual human regulators in each state to answer all questions related to Regulation D filings.
506(b)
In addition to raising unlimited funds from accredited investors, an issuer may sell its securities to up to 35 non-accredited investors under the 506(b) exemption. The issuer must reasonably believe each non-accredited investor has enough knowledge and experience in financial and business matters to properly evaluate the investment, otherwise known as the “sophistication” requirement, which is somewhat open to interpretation. Frequently, an issuer requires the prospective investor to complete a questionnaire certifying the investor as accredited or non-accredited, and if not, whether the investor has sufficient knowledge or experience in financial and business matters to make an informed decision about the investment.
Issuers must provide non-accredited investors with disclosure documents about the issuer and its securities depending on the offering size, and any information distributed to accredited investors.[9]
Advertising in connection with the offer or sale of 506(b) exempt securities is strictly prohibited. Issuers may approach investors if a substantive, pre-existing relationship exists.
506(c)
Unlike 506(b), under 506(c) an issuer may advertise the offer and sale of its securities under 506(c), through social media, email, and more traditional media (print and radio). No substantive pre-existing relationship with the prospective investor is required.
However, an issuer relying on 506(c) may only sell to accredited investors, with more stringent requirements for verifying the investor’s accredited than under 506(b).
Self-verification by a prospective investor of accredited status is insufficient – the onus is on the issuer to verify accredited status under 506(c). The SEC suggested several non-exhaustive ways to meet the verification requirement for accredited investors under 506(c)(2)(ii)(A)-(D):
• Income verification. Review investor’s two most recent years’ tax returns and obtain the investor’s written representation of a reasonable expectation of reaching the necessary income level in the current year.
• Net worth verification. Review bank and/or brokerage statements, tax assessments, or independent appraisal reports within the prior three months plus the investor’s written representation that all liabilities necessary for determining net worth were disclosed.
• Third party verification. Confirmation from a broker, investment adviser, attorney, or CPA verifying the investor met the accredited investor requirements in the past three months.
• Prior investor self-verification. If the investor purchased the same issuer’s securities as an accredited investor in a Rule 506(b) offering prior to September 23, 2013 and continues to hold the securities, the issuer can obtain the investor’s certification at the time of the sale of securities under Rule 506(c) that he or she qualifies as an accredited investor.
An accredited investor qualifying based on joint annual income or net worth requires the issuer to review documentation for and obtain a written representation from both spouses.
The stricter verification requirements result from the possibility that participation of non-accredited investors in a 506(c) offering using advertising makes the issuer ineligible under both 506(b) and (c). If an issuer using 506(c) does not advertise but inadvertently sells to a non-accredited investor, the filing can effectively be revised to a 506(b) exemption. However, once advertising is introduced, the offering will forever be a 506(c) offering and cannot be converted to a 506(b) offering allowing for sophisticated non-accredited investors.
Rule 506(c)’s Impact on Issuers
One big advantage of raising capital under Rule 506(c) is the ability to advertise to a far larger market than under Rule 506(b). However, issuers have been slow to embrace Rule 506(c), with the vast majority of Regulation D filings continuing to be made under Rule 506(b). Perhaps the field of private offerings has prohibited advertising for so long that issuers are wary of using it without more regulatory guidance, or maybe it’s the more stringent verification requirements for ensuring all investors are accredited, especially where advertising is used pursuant to Rule 506(c).
Some third party platforms are attempting to bridge the gap as a middleman for accredited investors and issuers. These platforms verify investors’ accredited status for the issuers advertised through the platform, in exchange for compensation or some portion of the proceeds raised. The platform also accepts some responsibility for “drawing the line” for advertising content of the issuer.
While Congress intended Rule 506(c) to expand investment opportunities and access to capital, time will tell if issuers take advantage.

[1] S. Bauguess et al., Securities and Exchange Commission, Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2014, 10 (2015). (https://www.sec.gov/dera/staff-papers/white-papers/30oct15_white_unregistered_offering.html)
[2] Id. at 7.
[3] 17 C.F.R. § 230.501(a)(1)-(8).
[4] 17 C.F.R. § 230.506(d)
[5] 17 C.F.R. §§ 230.506(d)(1)(i)-(viii)
[6] 17 C.F.R. § 230.506(d)(2)
[7] 17 C.F.R. § 230.506 (e)
[8] 17 C.F.R. § 230.506(d)(2)
[9] 17 C.F.R. § 230.502(b)(2)


Lindsay Fedler, University of Wisconsin Law School 2013, is an attorney with the Wisconsin Department of Financial Institutions in Madison, Wisconsin where she specializes in the areas of securities and franchise laws and regulations at the state and federal level, and prosecutes enforcement actions on behalf of the Division of Securities. She may be reached at lindsay.fedler@wisconsin.gov . The Department of Financial Institution’s website is www.wdfi.org .

If you’ve decided to create a startup business, one of the many decisions you face is the choice of what type of limited liability entity to form. In Wisconsin, the most typical choices are either the Limited Liability Company (“LLC”) or corporation. I frequently have people ask me whether I can help them set up an LLC for their business, and who often think, for whatever reason, that the LLC is their only option. My first response is always, “Is there a specific reason why you want to be an LLC?” and go on to explain that while there are some specific exceptions to this rule, a corporation is almost always the best type of limited liability entity for a startup small business compared to the LLC.

Why the Corporation is a Better Option

More Developed Law. In Wisconsin, the LLC has only been around since 1991, while the corporation has been around since 1848. Why is this relevant? There’s almost 160 years of law on corporations in Wisconsin, while there’s only 26 years of law on the LLC. This means there’s more settled law on issues with corporations and much more uncertainty within the law of LLCs. Where there are legal issues coming up in relation to your business, wouldn’t you rather have more certainty from years of developed corporate law than venture into the relatively undeveloped realm of LLC law?

Tax Considerations. Some argue that the LLC is preferable because it offers pass-through taxation to its members, meaning all income and loss the business has in a given year is spread according to the members’ equity stake in the business. You can easily elect for S-Corp status with the IRS to avoid the dreaded “double taxation” of C-Corporations and still get the same pass-through tax treatment given to LLCs. Corporations that elect S-Corporation treatment do have specific guidelines in regard to the number of owners, and the types of owners, but generally, those are irrelevant to most startups and small businesses. Since electing S-Corporation status allows for the same pass-through tax treatment for corporations, this puts the LLC and the Corporation on a level playing field.

Another huge tax benefit of the S-Corporation election is that, as an owner of the business, you only pay self-employment tax on the income that is attributable to the fair market value of your services provided to the business. If you are an LLC without a S-Corp election, you are taxed under Subchapter K of the Internal Revenue Code, and then must pay self-employment tax on all income allocated to you, no matter whether that income is attributable to your services as employee or not. For most small startup businesses, the owner also provides services as if she were an employee of the business, meaning that the employee/owner has to pay a self-employment tax on any income allocated to that individual in addition to income tax. In 2017, the self-employment tax is 15.3%.

In an LLC with no S-Corp election, no matter whether that allocated income is actually attributable to the services provided by the owner/employee, or whether that LLC level income is allocable to services provided by the employee owner and an employee non-owner, the owner pays all of the self-employment tax, AND income tax on top of that. For example, if an LLC had $100K of income that was allocated to the owner, the owner would pay the 15.3% self-employment tax as well as income tax on that amount, even if the owner only provided $50K worth of services as an employee of the LLC.

If the company had elected to be an S-Corporation, the employee/owner would only pay self-employment tax on the amount of income on the $50K attributable to her services as an employee/owner, and the remaining amount could be a tax-free “S-Corp” distribution that merely reduces the owner’s basis in corporation’s stock. This is a huge tax advantage, potentially saving thousands of dollars a year for S-Corp shareholders. Electing S-Corp is generally a good idea if your startup has employees or multiple owners, but you should always consult with a licensed CPA regarding whether this election would be beneficial to your particular business situation before doing so.

Investment Considerations. Finally, if you’re ever looking for equity investors like angel investors or venture capital groups, they generally prefer investing in corporations over LLCs. This is because, angels and VCs don’t want the extra income allocated to them for their share of profits from a pass-through tax structure at their higher tax rates, and prefer that their return on investment is paid through dividends (currently taxed at lower tax rates than ordinary income). When your business gets to the stage of looking for outside investment, depending on what your investors want, if you’ve elected S-Corp, you may want to revoke that S-Corp election to allow your investors to get the lower dividend rate, which is much easier than converting from an LLC to Corporation. Hopefully though, by that point in your business, you’re successful enough that the corporate level tax won’t be detrimental!

The Bottom Line

While there are situations where the LLC may be preferable for your particular business situation (which I’ll discuss in my next post), the corporate form is often still the better choice for most startups and small businesses . Choosing the type of entity now may seem like an insignificant decision now, but it may have a large impact on your business down the road. It’s best to consult with your legal professional to help you make the right choices when setting up a limited liability entity for your business. If you’re a startup that has already formed a limited liability entity or are thinking about starting a business and have questions about which type of entity to choose, email me at jmk@schoberlaw.com or call me at 262-569-8300 to set up an appointment to discuss your options.

A Federal Appeals Court ruled earlier this month that an S-Corporation’s rental income from a leairs[1]se agreement with a C-Corporation with entirely common ownership with the S-Corp, could not be classified as passive activity income, and therefore could not offset the individual’s passive activity losses.

Internal Revenue Code section 469 was passed in the 1980s to close a tax code loophole that allowed investors to invest in real estate ventures that were likely to incur heavy losses in order to offset an individual’s income. The section requires that for trades or businesses in which an individual does not materially participate, the income or loss from that activity must be classified as “passive” and therefore can only be offset against income or loss from other “passive activities.” The section specifically lists individuals, estates, trusts, closely held C corporations, and personal service corporations as taxpayers that are subject to the passive activity re-characterization rule. The section does not, however, list S-Corporations as a taxpayer that is subject to this rule.

Where an individual has losses from passive activities in a particular year, the individual can only offset that against passive income, or else be forced to roll over the losses into future years in which the individual has passive income. Some individuals had attempted to “create” passive income by engaging in what is known as “self-renting.” Self-renting occurs where a business owner creates another legal entity that the owner also owns, transfers title of business real estate to that entity, and then leases back the business real estate to the originally owned business. This way, there is rental income, (which is always classified as passive) that passes through to the individual, who can then offset her passive losses with that passive income. The IRS prohibited this practice in one of its regulations, stating that where this type of arrangement is present, the rents are then changed back from passive income, to non-passive income, thereby disallowing the offset against passive losses.

While the self-renting practice has been prohibited in the IRS regulations since the enactment of section 469, there has been no binding judicial authority that has ruled that the rule applies where an S-Corporation is the taxpayer receiving the rental income. The IRS has released some memos on the subject, which only evidence the opinion of the IRS, and not the binding interpretation of a neutral judge. In Williams v. CIR, the taxpayers were owners of both a C-Corporation, the lessee, and an S-Corporation, the lessor. They argued that because S-Corporations are not listed as taxpayers subject to section 469, and because S-Corporations do not pay taxes as an entity, the self-renting rule did not apply. The Fifth Circuit Court of Appeals rejected that argument and upheld an additional IRS regulation that stated that S-Corporations are subject to all section 469 rules (including the self-renting rule). This rule gives significant weight to the self-rental rule as it relates to S-Corporations, and all other pass-through entities (LLC and Partnerships).

Schober Schober and Mitchell stays apprised of updates and changes in tax laws as they relate to you and your business. Please contact us for advice on the tax status of your business or structure and for any of your other business needs.

This article was contributed by Jeremy Klang, a third year law student at Marquette University Law School and law clerk for Thomas Schober.

The SEC released its long awaited Final Crowdfunding regulations in late 2015. We wrote on this topic in the Summer of 2014, when Wisconsin had adopted crowdfunding rules that governed only the State of Wisconsin. Under those state laws, while Wisconsin businesses could rely on the SEC’s intrastate exemption from filing with the SEC when engaging in crowdfunding, a Wisconsin business wishing to crowdfund could not do so outside of the state. Now, however, the SEC has made its regulations final, allowing small businesses everywhere to crowdfund not only within their individual state, but also outside of their state. The SEC’s rule also overrules Wisconsin’s crowdfunding rules, so that Wisconsin law can no longer be relied on for crowdfunding offerings.

To be eligible for a crowdfunding public offering under the new SEC rules, your business must satisfy a few conditions:

  • Your business must be a what is called a “non-reporting company”; that is that your company cannot currently be required to file any financial statements with the Securities and Exchange Commission;
  • must be looking to raise less than $1 million over a 12-month period; and
  • must be willing and able to ensure that anyone who purchases equity in your company does not sell their stock in the company for more than one year.

All crowdfunding transactions must also be done through an internet portal intermediary that is registered with the SEC (such as gofundme.com). For those of you who are not only interested in crowdfunding for your business but also interested in investing yourself, the SEC’s rules also regulate how much investors can invest in a company depending on the individual’s income and/or net worth. All individual investors must verify their income and net worth through the intermediary site, so the site must have sufficient mechanisms to ensure that investors are honestly stating their income and/or net worth. The limits are as follows:

If an individual has an income or net worth of under $100,000, the individual can only invest a maximum of the greater of $2,000 or 5% of their annual income or net worth.

If an investor’s net worth and annual income is greater than $100,000, then the maximum an individual can invest is 10% of the lower number between the individual’s net worth and their annual income. For taking into account net worth, the value of one’s personal residence in not taken into account. Additionally, during a 12 month period, no individual investor can invest in more than $100,000 of crowdfunding offerings.

Companies must also disclose certain information to the internet portal so that the portal can provide investors with sufficient information for them to make an intelligent investment. A company offering a crowdfunding opportunity must disclose the following:

  • The price to the public of securities or the method for determining the price of the securities;
  • The target amount your business wishes to raise from the offering;
  • A discussion of the company’s financial condition;
  • If the offering seeks to raise $100,000 or less, the company is only required to provide a financial statement certified to be true and accurate by the principal officer of the company. If the offering seeks to raise more than $100,000, but not more than $500,000, financial statements must be reviewed by an independent accountant. If the offering seeks to raise more than $500,000, but not more than the $1 million cap, the company’s financial statements must be audited by an independent auditor.
  • A description of the business and what the business will use the proceeds for;
  • Information about officers and directors, and also owners of 20% or more of the company;
  • Certain related-party transactions;
  • Companies relying on the crowdfunding exemption are also required to file an annual report with the SEC and provide it to investors.

The crowdfunding exemption offers small businesses an opportunity to raise capital that many small businesses could otherwise not afford due to the complex and costly initial public offering process required by the SEC. However, if your business is interested in crowdfunding, there are still necessary documents and preparation required before you can do so. If you or your business are interested in taking advantage of this new and exciting crowdfunding opportunity, contact Schober Schober & Mitchell, so we can assist you in properly structuring your offering!

[This article is being provided by Jeremy Klang, senior Law Student at Marquette University Law School and Clerk at Schober Schober & Mitchell, S.C.]

We learned this morning about another data breach, this time relating to the widely used Cloud Service called Dropbox.

Steve Kovach, of BusinessInsider.com reported yesterday that over 7 million Dropbox passwords have been compromised.

After the Target, Home Depot and other recent breaches, this isn’t a big surprise. However, since many lawyers use dropbox to share confidential information with their clients, it may certainly startle many.

If you haven’t considered encrypting the messages you send, now may be the time.

We thank our friends at Abacus Data Systems, Inc. for getting us word of the above news!

Wisconsin’s equity crowdfunding law, which was unanimously passed by the legislature and signed by Gov. Walker last November, officially took effect on June 1, 2014.  Wisconsin is one of 11 states that has “taken matters into its own hands” by passing its own crowdfunding laws while the federal rules are still pending.

President Obama signed the JOBS Act back in April of 2012, which was intended to make it easier for small businesses to raise capital.  One provision required the SEC to implement rules for a new crowdfunding exemption from the SEC requirements by the end of 2012.  Despite this requirement, no federal rules have been issued yet.

While securities law is normally a federal issue, the SEC has a longstanding “intrastate offering exemption” that allows companies to sell securities within their home state without registering the offering with the SEC.  States, like Wisconsin, have used this exemption to make their own crowdfunding laws ahead of the federal rules.  However, these state crowdfunding laws apply only to intrastate offerings.  This means that Wisconsin’s crowdfunding law can only permit companies formed in Wisconsin to solicit Wisconsin investors.  Interstate investments, such as an Illinois resident investing in a Wisconsin company, are still governed by federal law and thus are impermissible until the federal rules are released.

The SEC’s Compliance and Disclosure Interpretations from April 11, 2014 (“CDIs”) highlights some of the challenges of intrastate offerings.  For one, the intrastate exemption requires that securities are only offered and sold to in-state residents.  The CDIs note that it would likely be a violation of the intrastate exemption to use the company’s home website or social media sites, such as Facebook and Twitter, to advertise the offering, since these mediums will almost certainly reach residents of other states, and thus be an “offer” to an out-of-state resident.  Eliminating free modes of advertising such as Twitter and Facebook for intrastate offerings could lessen the appeal of crowdfunding until the federal rules are released (and thus interstate investments are permissible) since the primary purpose of crowdfunding is to eliminate the expense of raising capital.

So, at present, crowdfunding puts those who use it at high risk of violating laws until the SEC issues some additional rules.

This article was prepared with the help of Kelsey O’Gorman.

Good news for those of you starting new exempt organizations: the IRS just released a new form, called the 1023-EZ, which will make applying for tax-exempt status for some smaller organizations much easier.  The new form is only three pages long, compared to the lengthy 26 page standard 1023 form.  The simplified form will substantially reduce the legal expense of starting a 501(c)(3) and hopefully speed up the IRS approval process.

The IRS hopes that simplifying the approval process for smaller organizations will also reduce delays for larger organizations by freeing up more resources to review the lengthier applications.  Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months or longer.

The IRS estimates that as many as 70 percent of all applicants will qualify to use the new 1023-EZ.  Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

However, the new application processes is still not without complications.  For example, you will still have to decide whether your organization will be a public charity or private foundation.  Further, certain types of organizations, such as churches, are categorically excluded from using the new form, even if they are small in size.

Therefore, it is still important that you confer with an attorney who can help determine if you qualify to use the 1023-EZ and to help you make other important decisions related to your non-profit organization.  If you need assistance in this area, one of our business attorneys would be happy to assist you.

Thanks to our law clerk, Kelsey O’Gorman, who assisted in the post.