10 Key Legal Issues to Consider When Moving Stateside
August 31, 2016
10 Key Legal Issues to Consider When Moving Stateside
Even before the uncertainties following the Brexit referendum result, a move to the U.S. was an attractive proposition for high growth UK businesses. Common language, similar culture, access to capital and a familiar business approach are appealing to those seeking growth. However, the regulatory and legal complexities in the U.S. market can pose significant challenges for new entrants. Here we take a look at the top 10 legal issues that companies that are making the move stateside need to consider.
- Corporate Structure- The best corporate structure for your U.S. operations will depend on your business strategy and tax considerations. If you plan to raise venture capital in the U.S. you might consider reorganising as a Delaware corporation. A ‘flip transaction’ (i.e. making your existing UK company a subsidiary of a new U.S. company) is one way of achieving this. Or, if you plan to launch operations in the U.S., you may choose to form a U.S. subsidiary. Reorganising in the U.S. or establishing operations can be complicated and at the very least you will need to appoint directors, develop a tax strategy and meet all U.S. corporate duties.
- Tax– Although there are a number of tax rules to consider, IP rich companies should review IP ownership and distribution tax implications. To reduce U.S taxable income, an earnings repatriation strategy from the U.S. should be implemented, especially if in the form of royalties and interest. Also, consider matters relating to the remuneration of executives, particularly when deferred or equity-based compensation is involved. Remunerated individuals may need to consider whether so-called “Section 83(b) elections” are appropriate. Finally, a review of the activities undertaken in each jurisdiction ensures that executives and employees are not unwittingly subjecting the company to tax in jurisdictions where it does not file tax returns.
- Initial Investment- If you plan to raise money in the U.S. you will probably need to reorganise as a Delaware corporation (see point 1). Seed financings in the U.S. take the form of a convertible note, SAFE or equity investments. Early stage companies generally favour convertible notes and SAFEs when raising seed financing to avoid establishing an enterprise valuation and are a simpler document. Variables that will affect the structure of your seed round include the amount of money you are raising, the investors you are working with and willingness to negotiate valuation. More start-ups are leaning towards SAFEs because they do not accrue interest or contain maturity dates, which separates them from convertible notes.
- Protecting Your Assets (IP)– The U.S. has comprehensive intellectual property laws governing trade secret, copyright, trademark, and patent rights.
Trademark – although you can enforce a trademark in the U.S. even if it has not been registered, best practice is to seek registered trademarks with the U.S. Patent and Trademark Office.
Copyright – unlike trademarks, you must register your copyright before enforcing it.
Patent – consider seeking patent protection and, depending on the technology, consider patent landscape searching/IP due diligence.
Trade Secret/Employment – for your employees and contractors, put in place appropriate confidentiality and IP agreements. Ensure that all IP developed by any third party contractors is transferred to your company.
- Regulation- You will need to identify any applicable industry law and regulation (federal and state) relevant to your business. Certain sectors are more heavily regulated than others and multiple regulators may oversee your business. For example, FinTech players in the payments vertical often overlook laws addressing prepaid payments or stored value products. These laws apply to any pre-funding of an account or money that will be stored for a period of time, no matter how short. A patchwork of federal and state laws that address disclosure requirements need to be considered. As U.S. regulations are sector-specific, you will need to draw on advice from legal experts that have particular knowledge of your area of business.
- Product Liability- If your business involves selling consumer products be mindful of U.S. federal and state laws on product safety, warnings, marketing, and advertising. Given the risk of class actions, excessive jury verdicts, and governmental oversight of safety, this isn’t an area that you want to get wrong nor to take shortcuts in getting the right advice for your business and product.
- Employment – Hire, Motivate, Retain- Federal, state and local laws regulate employment matters and non-compliance can result in stiff penalties and litigation. You will need to put in place proper procedures for hiring, compensating, and terminating your U.S.-based employees, as well as related compliance policies and employee agreements. You will also need to ensure that all employees working in the U.S. are authorized to work in the U.S., and obtain any necessary work visas. It’s important to note that U.S. law strictly limits the use of independent contractors and you should ensure that your labour practices take this into account.
- Securities Law Filings– U.S. securities laws require all securities offerings to be registered from the SEC or exempt from registration. Generally a start-up will not register its securities until its public offering so you need to ensure you are relying on a proper exemption from the federal registration requirements. In addition to federal regulation, each state has its own securities laws you will need to consider before offering securities to residents of a particular state. Failure to comply with securities law could give rise to your investors’ a rescission right, meaning the ability to unwind an investment transaction.
A STATESIDE VIEW – WATCH OUT FOR LITIGATION!
A significant difference between Europe and the U.S. is the litigious nature of the U.S.
In the U.S., parties usually bear their own costs of the litigation regardless of the result of the dispute. Compare this to the UK’s general adverse costs rule (where the losing party pays the successful party’s costs) which acts as a significant disincentive against frivolous claims. Further, claimants in the U.S. can demand that their civil disputes are decided by juries rather than a single judge – often seen as an advantage for small or consumer claimants against corporate defendants. Those juries are also able to award punitive damages in a large number of actions.
Also, the U.S. system encourages court action for claims that in the UK would be addressed through other routes. For example, employees aren’t required to take their employment claims to employment tribunals; instead, they can file a lawsuit in civil court and seek all types of damages. Plus, there are many class action lawsuits against employers for seemingly technical violations of wage and hour laws, etc. In sum, it’s easy for employees to sue employers.
It’s also fairly easy for consumers to sue companies: many privacy laws give a private right of action to consumers, so they can go to civil court and sue directly, rather than having to go through a regulator.
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