Look Ma No Privacy!

As the Y generation increasingly externalizes their lives, splashing intimate details on search engines, Blogs, vlogs, myspace, forums, chat rooms, and every other instant gratification "look Ma’ I’m on TV" Net outlet, they are strangely unaware that the net has a memory...and it's flawless. This has been so even before Google maintained the world's most non biodegradable searches, stubbornly keeping sensitive personal information even on dead links with slavish accuracy.

Even more curious is the serious anger over the NSA’s wiretapping program in light of the new look at me culture. I'm not taking a side on the legality of the program. However, while the public seems to be incensed with others invading their privacy, they have no qualms about invading their own. What they may not know is that privacy rights are and have been based on prevailing cultural norms.

For example the supreme court has used normative analysis to determine a variety of privacy thresholds. As per the Supremes, the fourth amendment does not recognize privacy rights in a car. Warrantless searches based on legitimate stops and impounding of vehicles is lawful. Similarly in 1976 the Supremes determined that the Constitution offers no guarantee of privacy for bank records (ultimately coaxing Congress to pass Right to Financial Privacy Act legislation). These decisions were based on the Court's analysis of the majority cultural perspective on the information, location, and nature of the information appropriation. Where the Court believed that there was no inherent expectation of privacy, they declined to extend protection.

Today despite what appears to be a hiccup in the general privacy landscape, there seems to be a real slide towards complete transparency. As privacy debates arise in the future this new privacy norm may well guide the courts' decisions. And in a future where I can lookup your address, your occupation, your occupational address, your sexual escapades, your library of photographs taken under questionable circumstances, and all of the above for your friends, where will the court draw the privacy line?

For a Good Take on the Privacy Fallacy Click Here

A Security by Any Other Name is Still a Secuirty

Often clients walk in with a brilliant idea for using equity in their company as payment for services or to raise capital. The plan has all the glitter of big business thinking: leverage the promise of a concept and future performance for cash in hand. Even better, the money will come without the mouth--there will be no partnership and there will be no exchange for managerial control. It's a plan worthy of the venture gods.

However there's one fundamental fly in the ointment: the party giving the money or services has a name that could seriously come back to haunt you, "investor." Yes, it's true; the party that tenders money and/or services can and often is legally treated as an investor with their interest being treated as a "security." When I mention this, the client is stunned that anyone would make such a suggestion. Moreover the client is blindsided by the notion a security was offered at all:

Me: You know this arrangement might be considered a security.

Client: No, it’s a “silent partner” agreement.

Me: There’s no such thing under the law as a “silent partner” agreement, that’s the same thing as a “security.”

Client: Yeah yeah, there’s no stock certificate or nothing, so it’s all good.

Me: Whether or not there’s a certificate, it’s still potentially a security.

Client: No it’s not.

Me: Yes it is.

-Long Pause-

Client: Sometimes you can really push that “truth” thing too much, you know that?

The typical test for a security does not put form (or a form contract) over substance. (The Supreme Court has further instructed that, in defining the term "security," form should be disregarded in favor of substance and the emphasis should be on economic reality. Tcherepnin v. Knight, 389 U.S. 332, 336, 19 L. Ed. 2d 564, 88 S. Ct. 548 (1967)) Securities law is usually difficult to penetrate and is rarely intuitive except on this point. Whether or not the applicable arrangement was for a purchase of stock, if the investor receives equity and/or profit as a quid pro quo without a managerial or partnership role, a security might have been issued. (The definition of a security is "flexible," designed to adapt to the "countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." SEC v. W.J. Howey Co., 328 U.S. 293, 299, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946).) In the law's eyes that person really is no different from your Grandma who bought stock in Google. If Google does well she does well, but Google's performance is entirely out of your Grandma's Control. This is despite the fact Google is required to make frequent public disclosures as a publicly traded company.

When viewed from the perspective that securities laws are designed to protect people from being victimized by sham operations, the above approach makes sense. One way a person can avoid being taken for a ride is for that person to have meaningful control over company operations. It would be significantly more difficult to commit a fraud upon a "partner" than an arms length party such as the Google Grandma. (If an investment scheme gives rise to a "reasonable expectation . . . of significant investor control, a reasonable purchaser could be expected to make his own investigation of the new business he planned to undertake and the protection of the [Exchange Act] would be unnecessary." SEC v. Aqua Sonic Products Corp., 687 F.2d 577, 585 (2d Cir. 1982).) When a party invests into a small unregistered business and is kept at arms length, the law can become quite concerned about what information was furnished to that party. Hence the entrepreneur who loses an investor's money and didn't take sufficient precaution may be accused of securities fraud.

This is not to say that the entrepreneur should just give up and call the neighborhood loan shark. Rather, the entrepreneur should be mindful of the possible securities trap. Moreover, forward planning is also recommended to keep you from having to satisfy a patchwork of investors.

Often, the most insulation short of registration for an IPO is to setup a private offering under SEC Regulation D. However this can prove to be an expensive proposition for many operations. Careful consideration should be given to your operation's cash needs and where it is along your business plan's timeline before considering this route. Also private offerings tend to be more effective with larger groups of people who are actively being solicited. In other words, private offerings become more cost efficient with greater numbers of investors and multiple rounds of financing.

Where an investor is an angel or one of a few isolated start up fund contributors, other more practical stopgap measures can be taken to address the issue. First and foremost, try to deal with “accredited Investors” only. In layman’s terms these are “really rich people” with net worth or income that suggests sophistication and/or higher risk tolerance. Under the Securities Act of 1933, section 4(6) provides a specific registration exception for accredited investors, if they are the only type of investors solicited and the offering is less than five million dollars (various states may or may not offer a similar exception). Also, any investment contracts should make clear that the investment stake was not registered with the SEC and/or the applicable state agency and that the investor was not provided with any form of prospectus. While not guaranteed to protect you from a securities fraud suit such statements do frame the transaction and undermine the investor's claims that he or she was a victim.

Handling other people’s money is a serious responsibility that can and should be mutually beneficial, but be wary of the securities trap. If you need to raise capital for your company, do not treat the process lightly and plan accordingly.

Definition: Statute of Repose

A client recently asked about the difference between a statue of limitations of and a "statute of repose." Most are familiar with the former, but not the latter. A statute of limitations bars a particluar type of claim following a certain time period after an injury was sustained. So for example, if you wanted to sue another party for breach of contract in New York state, you would have to file your complaint within six years of the breach or forego your claim. Simple enough.

However, with a "statute of repose" a claim is barred after a certain time frame set by statute after the defendant manufactures a product or has otherwise acted (regardless of when the plaintiff's injury occurred.) Classic examples of items covered by such statutes are manufactured parts in the aviation industry or materials used in building construction. For example, if a defect in an avionics part caused injury to someone today, but the statute of repose limits claims to 10 years and the part was manufactured in 1990, the injured party is out of luck.

Must See Irony TV--WGA Wants Ethics in Reality TV Product Placement

Who can forget that fateful moment when Elliot lures E.T. out of hiding and into his living room with a handful of Reese’s Pieces? Well that and other Product Placements are here to stay, let there be no doubt. Ad creep has dictated that there shall be no last bastion of commercial free speech. However that does not mean that the writers of this stuff are taking it lying down.

Battle lines are being drawn to shape the recent usurpation of films and television for advertisements. By recent I mean the obligatory use of advertising messages. Product placement has been around for almost thirty years as the ET example above demonstrates. However the current model demands extremely visible integration of the product into the storyline. The classic example is the hero driving an automobile such as the electro magnetic Audi in I Robot. More egregious is the manipulation of the story to bring the product into the plot such as extolling the product's virtues as a "natural" part of the story.

But can you blame them? The primary motivation for product placement is to offset ballooning production costs not out of an outward animosity towards art (at least in film production). If the public continues to crave King Kong sized movies (each with a real risk chance of not breaking even) then the funds will have to come from somewhere.

Indeed even Indie films have and are resorting to this tactic. The trend is international too. Bollywood films have for years blatantly featured product placements. A production company that I represented negotiated with an Indian bank for months to create a superfluous scene where the heroine visited one of the bank branches to receive stellar service. And for anyone with lots of free time you may want to check out one of George Clooney's early roles in Return the Killer Tomatoes. One of the movie's premises is that its own production runs out of money forcing it to nakedly feature product placements to keep the cameras rolling.

So where is the line to be drawn? The Writer's Guild of America (WGA) has an answer and an agenda. In particular they take issue with the rampant proliferation of product placement in reality television rather than in film. The WGA blames reality TV for being non union operations that run roughshod over writers and focuses all the profits in the hands of the producers.

The guild has taken a far more proactive stance in the last year pushing for major policies including its proposed code for product placement. The code essentially regulates the manner and circumstances in which a product placement is made. The goal? Apparently, to protect the integrity of its member writers and society as a whole.

The code at this stage is merely four basic elements.

1. Full and clear disclosure for both the visual and aural disclosure of product integration deals at the beginning of each program so the program's audience knows ahead of time that it will be subject to hidden or stealth advertising.

2. Strict limits on the usage of product integration in children's programming

3. A voice for storytellers, actors, and directors, arrived at through collective bargaining, about how a product or brand is to be integrated into content.

4. Extension of all regulation of product integration to cable television, where some of the most egregious abuse is found.

However the WGA is pushing for the FCC to intervene and establish more formal regulations that embody the elements. The WGA's white paper can be read here. It is written in plain English and has some colorful examples of writer travails in the world of product placement.

We will have to wait till the third Act to see what Kind of Hollywood ending the WGA can write against this round of super villainy.