Getting to the Bottom of “Do Not Track”
Do Not Track is a policy proposal turned technical mechanism that enables users to opt out of tracking from websites they do not directly visit, including analytics services, advertising networks, and social platforms. It is different from the “Do Not Call” list as it is not a list, but rather works though a signal sent from a user’s browser.
Implementation
For the basic implementation of Do Not Track, the browser signals to websites a “Do Not Track” HTTP header every time a user’s data is requested from the website. The website is then supposed to follow the command and not deliver targeted advertisements based on the information. In addition to the simple browser signal, the Digital Advertising Alliance (DAA), an industry coalition of media and marketing associations, has developed a mechanism that places an imbedded icon in behaviorally targeted online ads. When a user click the icon, he or she is shown how the ad was targeted and delivered and then given an opportunity to opt out of such advertising. The DAA approach would allow consumers to opt out of ads either 1) through the icon or 2) through settings on their web browser. Mozilla, Microsoft, and Apple have already implemented some of these ideas into their browsers and Google is slated to incorporate some form of Chrome by the end of 2012.
Importantly, with Do Not Track protections turned on, consumers will still see advertisements and their information will still be tracked and used by websites they visit directly. For instance, when a consumer shops on Amazon, the consumer’s page history will still be tracked by Amazon, leading to targeted advertising on the Amazon site. However with Do Not Track in place, third-party advertisement providers will not be able to use that information for more targeted advertising.
Website Compliance
A major problem with the current implementation of Do Not Track is that currently websites are not required to comply with the requests, neither by law nor by any broad social consensus. Therefore very few websites recognize and respect this privacy signal. However, Yahoo recently announced that it would be implementing a Do Not Track protocol to its websites. In addition, as the major browser providers are adopting this approach and with some very vocal entities such as the Electronic Frontier Foundation and Federal Trade Commission supporting implementation, the push for legislation regarding Do Not Track is heating up. There was a Senate bill introduced in May of 2011, however we expect to see further push for this type of legislation in the near future.
Contentions
Of course with any issue regarding privacy, there is contention over the both the merits and implementation of legislation. Representative Mary Bono Mack, a California Republican and subcommittee chairwoman, doubts the necessity for Do Not Track and stated, “Where is the public outcry for legislation? Today, I’m simply not hearing it. I haven’t gotten a single letter from anyone back home urging me to pass a privacy bill.” Meanwhile, the Stanford University Laboratory, a vocal supporter of Do Not Track, and entity that runs the donottrack.us website argued in a comment to the FTC that consumers overwhelmingly desire more privacy protections on the internet. They also state that Do Not Track would affect only a small amount of the online advertising market, funds that they suggest would just be funneled in a different direction.
While the Do Not Track protocol and implementation is still being worked out and will likely require legislative intervention to force compliance from websites and advertisement services, with the further call for legislation by the FTC it is likely that the Do Not Track movement will continue to pick up steam and will soon lead to a major legislative push.
What This Means for Business
For most startups and other companies, Do Not Track legislation should not have too much effect on day-to-day operations. For companies that are actually in the business of online advertising that uses non-visitor tracking, then such companies will of course need to closely conform their conduct to the language of any passed legislation. Additionally, it may be smart for these companies to implement Do Not Track mechanisms now as the public will likely soon become more informed about the Do Not Track push. Companies that currently pay for online advertising using non-visitor tracking might want to consider other forms of online advertising because with the passage of Do Not Track legislation and with many consumers likely choosing the Do Not Track option, such ads will been seen by far fewer eyes and thus be less lucrative.
The JOBS Act and Crowd Funding — What it Means for Startups.
On Thursday, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act). This Act, comprised of several bipartisan-supported bills designed to ease capital-raising for small businesses, will undoubtedly be a major game-changer for capital raising and the business of investing in startups. What follows is an analysis of the most important sections and what these changes will mean for startups.
Crowd Funding
“Crowd funding” typically connotes a way of financing a project or business, usually through online means of bringing investors and capital-raisers together. Congress in its ever-clever acronymous legislative action gave Title III a short title of “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012″ — or the CROWDFUND Act.
The CROWDFUND Act allows companies to raise startup capital from a large number of investors each investing just a small amount. Investors are limited in the amounts they can invest: if the investor’s annual earnings or net worth is less than $100,000,they can invest the greater of $2,000 or 5% of their annual income; if their net worth and annual earnings is greater than $100,000, they can invest 10% of annual income or net worth, not to exceed $100,000.
On the issuer’s side, the aggregate amount of stock sold to all investors cannot exceed $1 million per year. The Act also imposes other disclosure requirements on the issuer such as providing investors with certain company information and a stated purpose describing the uses for which the capital raised will be used. Most notably, the Act requires the issuer to sell its stock through an intermediary “broker or funding portal,” who must register with the SEC.
The usefulness of this is still unclear and we’ll have to wait until the final regulations are released (due in 270 days) to really know. There is cause for doubt, though, in the act itself. First, the Act requires a great deal of information to be provided about the company, its issuers, the founders, and the securities being offered. In most cases, to get this right is going to require a lot of time by lawyers and accountants (who, by the way, still bill by the hour). Second, the bill provides a pretty broad cause of action against the issuer, AND its officers and directors, for material misstatements or omissions. Given that most startups fail, the real winners here may be plaintiffs attorneys, who will undoubtedly be reviewing with a fine-tooth comb the offering materials of every failed crowd-funded startup looking for some technical misstatement.
General Solicitations in Regulation D Offerings
Regulation D of The Securities Act of 1933 allows companies to avoid costly SEC registration for certain securities offerings. Before the JOBS Act, companies could only offer Reg D securities to persons with whom they had a pre-existing relationship, what is termed a “private offering”. Now, the Act expands this exemption to allow for general solicitations, whereby companies and their brokers can advertise the offering to the general public, although importantly, only accredited investors can purchase.
Every entrepreneur who has ever tried to raise capital (according to the rules) has experienced the frustration stemming from the inability to tell people about the opportunity. This will indeed make it easier for startups to get the word out. Critics though, worry that this allows brokers too much freedom to aggressively advertise stocks to unsuspecting investors — for example, the elderly. I also worry about the noise investment scheme advertisements will generate and the likelihood that it may actually drown out the voices of entrepreneurs seeking capital.
“IPO On Ramp” and “Emerging Growth Companies”
In what has been dubbed the “IPO on Ramp,” the Act designates a new category of “emerging growth” companies and outlines a streamlined IPO process for those companies. The classification for an “emerging growth company” is simple: businesses earning under $1 billion in gross revenue fall within this category’s scope. This classification allows companies to publicly issue stock while exempting them from burdensome disclosure and governance requirements to which larger public companies are subject. It also exempts these companies from Dodd-Frank rules giving shareholders a non-binding vote on executive compensation. The real winners here are VC’s and angel investors as this will create an opportunity for earlier liquidity events. In theory, this should “trickle down” in the form of more active angels and VC’s and perhaps better valuations for the startups.
Private Company Flexibility and Growth
Title V of the Act raises the threshold level on the number of shareholders before a company must go public from 500 to 2,000, thus encouraging a company’s marginal growth without it facing the prospect of filing costly disclosure documents. The need for this stems largely from startups using equity compensation for their employees. Think Facebook.
Regulation A Offerings
Companies who raise under $5 million through an IPO could file under Regulation A to avoid filing periodic reports to shareholders, which conventional publicly-held companies must do. The JOBS Act raises the $5 million ceiling to $50 million, thus easing one burden in issuing an IPO. Regulation A was originally designed as a simplified way to go public in a small way. It has been used rarely in the last decade, however, as the $5 million limit was seen as too low given the costs of compliance with the still someone onerous rules, both before and after the offering. There hasn’t been much attention to this, but we suspect this could generate a new cottage industry of service providers promoting direct private offerings (DPO’s) as again a viable option to raising capital from the public without going through an investment banker.
Implications
Should the startup community be happy that legislation permitting crowd funding has finally passed? The bottom line is that it is too soon to tell what kinds of regulations the SEC or state regulators will impose and how the markets will react to these new freedoms. But it is certainly is going to be an exciting couple years watching this play out.
Pull Your Head Out of the Clouds: Risks and Liabilities in Cloud Computing
With the growing trend in cloud computing, chances are you use “the cloud” in at least some aspect of your business. ”Cloud computing” refers to remotely accessing services or information from third party data centers. It essentially stores your data on a distant server, allowing you to access it from any location, assuming a device with internet capabilities is available. By outsourcing data storage needs, companies can achieve greater efficiency and cost-savings. However, these benefits are not without risks.
Potential Pitfalls
A host of issues can arise when third parties have control over your data, especially when a lack of certainty exists regarding the location of data storage facilities and the ways in which that data is protected. Among the factors contributing to risks:
- vulnerability to hackers and data breaches, resulting in lost, destroyed or improperly disseminated data;
- storing various parties’ data on common servers; and
- varying laws governing privacy and data protection across different jurisdictions and geographic locations.
Cloud computing risks can all lead to business disruptions, privacy law violations and disclosure of confidential information, which can mean significant financial consequences for both the cloud provider and you, the customer.
You might think that since you transferred your data to the third party, you also transferred financial liabilities for data loss or other business interruption–it is up to the third party to protect your data, and it should be liable for any losses resulting from data breaches. But this is rarely the default position.
Allocating Risk: Read the Contract
Most cloud service providers contractually place the responsibility of security on their customers. However, companies are becoming increasingly aware that their service contracts with cloud vendors leave them little recourse in the event of a problem. It is crucial to read the fine print and negotiate with your vendor to define its responsibilities and liabilities for damaged, lost or stolen data. The negotiation could be difficult, as the potential liability is usually much greater than the value of the contract–some vendors take a hard line and say their contracts are non-negotiable; others are open to discussion and might take on a portion of the liability.
Insurance
Since it is unlikely you’ll be fully protected by the cloud providers’ service agreement, considering an insurance policy to limit risk is worthwhile. While some observers say that cloud computing is generally covered under a business’s existing cyber risk policy, it is important to pay close attention to specific terms in the policy. For example, “computer system” or “computer network” can be defined terms in a policy and you should ensure that these cover cloud computing. In the end, the key is to square up your insurance policy with gaps in your cloud service contract.
As individuals and businesses increasingly become dependent on cloud technology for daily needs, learning about the associated risks and ways to protect yourself are also important. Since this is a developing technology, the law governing it is new and disjointed: different jurisdictions have different requirements and standards. Staying informed will help protect you and your business from potentially significant financial losses due to mishaps in the cloud.
Incubators for Ohio Startups: UPDATED
We’ve updated our compilation of startup incubators in Ohio. One notable addition, specifically for Cleveland-based startups, is Dan Gilbert’s Bizdom U, which launched in May 2011. Our goal is to have this resource be as complete and accurate as possible, so if you have any recommended additions or changes, please let us know.
The chart is embedded below, but you can access it directly by clicking here.
A Free and Potentially Valuable Startup Resource: Startup America Partnership
Last year, in conjunction with the Obama Administration’s efforts to spur economic growth and job creation, it announced the launching of the Startup America Partnership, an independent nonprofit NGO whose goal is to help young companies with high growth potential. A year into the project, we looked to see what it offers and the ways in which it will help your company grow.
It’s free and easy to join. The requirement is that you are a for-profit startup with at least two people founded since 2006, or a for-profit rampup or speedup with at least six people founded since 2001. You also must provide your EIN or SSN, basic revenue information, company website, and your company and personal LinkedIn profiles.
What do you get in return? Startup America provides unique member-only offers, such as discounts on HP business products like desktops, notebooks, ink and toner; the opportunity to apply for capital investment from Intel, which pledged $200 million to invest in Startup America companies; or a 50% discount on all campaign fees raised (up to $30 million) on IndieGoGo. It also provides numerous educational opportunities in the form of workshops and seminars from Cisco, Ernst & Young, and Microsoft, among others. Finally, it provides a grassroots forum to support regional startup ecosystems – Ohio is not yet listed.
With over 3700 unique deals for members, and other networking opportunities, it may be worthwhile to check out the full list of offers and determine whether your company will benefit by joining.
Don’t Be Evil: The Lowdown on Google’s New Privacy Policy
When Google filed an S-1 for its 2004 IPO, one of the sections in Larry Page and Sergey Brin’s letter to shareholders was titled “Don’t Be Evil.” According to the prospectus, the founders’ belief was that Google’s long-run interests would be better served if it “does good things for the world even if we forgo some short term gains.” Since Google’s 1998 founding and its 2004 public offering, it has evolved from a powerful search engine provider to a company whose diverse set of products are used daily by millions. With growth came speculation and criticism that Google did not live up to its “Don’t Be Evil” standard.
Its latest privacy policy change has brought more criticism that Google has broken its oft-cited, unofficial motto. A privacy policy is a disclosure document, whose purpose is to inform consumers on how a website deals with consumer information i.e. the type of information a website collects from its users, the ways it will use that information, and with whom it will share it.
So is Google now going to use your personal information for world domination? It’s tough to say, but here’s what the new privacy policy actually does: it consolidates multiple privacy policies for various services into one, and explicitly states that it will now use information about a user from one of its services in all of its other services. So, if you use Gmail, Google will now be able to use the information it gathers about you from your emails and use this for targeted ads in, say, YouTube. Keep in mind, it will only do this if you’re using Google services while logged-in to your account; and it won’t sell your data to third parties. On the other hand, the only way to opt-out of the new policy is if you stop using Google services — so, you basically can’t opt-out of the new policy.
One thing is certain: Google is being very vocal about informing its users of this policy change. Since announcing the change, it has barraged its users with notifications, such as the now-familiar “This stuff matters” pop-up. This follows some recent court decisions questioning the common practice of simply relying on users to stumble upon your changes, providing more transparency to users; if the change is important and you expect it to be binding on users, steps must be taken to ensure users actually see the change. Google’s aggressive tactics in informing users of its changed policy could set a new internet standard for dealing with such issues.
Legislative Update for January, 2012
Filed under: Corporations, Funding, Internet Law, Securities, Startups
Each month the Gillespie Law Group compiles the most recent legislative and regulatory developments that could affect startups, tech companies, and website owners.
“Crowdfunding” Update: As we reported last month, the House approved the Entrepreneur Access to Capital Act, H.R. 2930, known to many as the “crowdfunding” bill. This bill would allow businesses to raise money selling unregistered securities using “crowdfunding,” which is the raising of money through mass aggregation of small investments. Although the bill is strongly supported by the Obama administration, the Senate corollary bill, the Democratizing Access to Capital Act, S.1791.IS, is having a hard time getting out of the Senate because of efforts by the North American Securities Administers Association (NASAA) who has been lobbying heavily against the bill because it would infringe on state regulatory power. Additionally, the bill has been slowed because of two Senate hearings that highlighted the potential for increased fraud under the bill.
The House version of the bill would allow issuers, in any 12-month period, to raise up to $2 million if the issuer provides potential investors with audited financial statements, which is not always cheap. Crowdfunders then must comply with a variety of protective measures including warning investors that certain risks are associated with the issuer and that resales are restricted, as well as by providing the SEC with certain other information. Importantly for crowdfunders wanting to avoid SEC registration, investors who purchase securities under the crowdfunding exemption would not count toward the 500-shareholder threshold for SEC registration in Section 12(g) of the Securities Exchange Act of 1934. The Senate version of the bill does have some significant differences from the House version:
- Securities could only be issued through a “crowdfunding intermediary,” which would exclude raising funds through websites like Facebook and Twitter
- Each investor would be limited to investing only $1,000 in any 12-month period
- While the House bill preempted State registration law, the Senate bill would allow for some State registration requirements
A second Senate bill over this issue is also in the Senate, S.R. 1970, painfully entitled “CROWDFUND,” for “the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act.” The CROWDFUND bill even more narrowly defines what intermediaries investments can be sold through as “funding portals” and investors are limited to the greater of $500 or a 1-2 percentage of his or her annual income, per company to invest in.
General Solicitation. In addition to the the Access to Capital for Job Creators Act, H.R. 2940, the House bill we reported on last month, the SEC’s Advisory Committee on Small and Emerging Companies had made formal recommendations that the SEC should permit general solicitation and advertising in private offerings under Rule 506 where the securities are only sold to accredited investors.
The Access to Capital of Job Creators Act, which passed in the House, would amend Section 4(2) of the Securities Act of 1933 by exempting from SEC securities regulation “transactions by an issuer not involving any public offering, whether or not such transactions involve general solicitation or general advertising.” Importantly, both this bill and the SEC Advisory Committee’s recommendations would generally go against the long-held goal of the securities exemption rules of prohibiting general solicitation of investors by general and open advertising. Instead, both would actually permit general solicitation or advertising provided that all purchasers of the securities are accredited investors and that the issuer has taken reasonable steps to verify that purchasers of the securities are accredited investors.
Internet Law. SOPA and its detractors became major news in the past month with websites such as Google and Reddit actually removing their services from the web for 24 hours on January 18. Recently SOPA and PIPA, a similar bill in the Senate, have been opposed by President Obama and have seemingly been shelved for the time being, however it is likely that new legislation or changes to these proposed bill are coming. For an in-depth look at SOPA, please read our analysis of the bill: SOPA – Cutting Through the Hype.
SOPA – Cutting Through the Hype
This article was published on January 18, 2012 and the information contained within may become inaccurate as the bill, its support, and opposition continue to rapidly evolve. This article is longer than our typical blog post and continues after the jump.
Much has been written about the Stop Internet Piracy Act (SOPA) in recent months – most of it important, all of it passionate, but through all the fervent positioning, the actual contents of the proposed bill can easily be missed. The purpose of the bill is to expand intellectual property protections on the internet by making it easier for content owners to stop the spread of infringing materials on foreign-based websites. However, the bill has received pushback by vehement detractors who believe that SOPA will lead to abuse of websites by copyright holders, infringe on free speech rights, and possibly even disrupt the functionality and security of the internet. The purpose of this article is to wade through the hype of what the bill does and does not do and to discuss what will actually happen to website owners if SOPA passes in its current form. SOPA has a corollary bill in the U.S. Senate entitled the PROTECT IP Act, also known as PIPA, which has many of the same purposes as SOPA. This article focuses on SOPA because, as it currently stands, most of the effort and emphasis in Congress and the media is on SOPA. If SOPA fails, PIPA may become the more important bill.
SOPA was introduced in October of 2011 by Representative Lamar Smith and quietly gained widespread support from both sides of the aisle as well as from many businesses and arts organization. Because of the huge initial push, SOPA seemed destined to fly through House. Because this bill would primarily benefit very few (mostly large media corporations) to the detriment of many (most internet users), quick and quiet passage was likely its best chance for making its way out of the House and into the Senate. However, opposition for the bill built quickly after a widely publicized committee hearing where supporters of the bill and members of the House failed to show a strong understanding of the implications of the bill. Since then, SOPA has been hotly debated and will likely not see a full House vote until March 2012.
What is perhaps most important to understand, and can be easily lost in the push and pull of the debate is that SOPA is intended to block infringement only of foreign-based websites and has actually been amended to make this more clear. While there are certainly legitimate complaints about SOPA, the idea that SOPA can be used to shutdown U.S. sites like Google and YouTube is now no longer a reality. Read more
Entrepreneurs Shouldn’t Wait to Think About Intellectual Property
Filed under: Copyright, Intellectual Property, Startups, Trademark
This post originally appeared as guest blog post on The Metropreneur Columbus.
There are a million and one things to think about when launching a new business − from employees, partners, suppliers, lenders and investors to just making a product that works and that people want to use. It can be tempting to let many legal issues slide. However, for several reasons, properly identifying and protecting your intellectual property assets should be viewed as a priority from the very beginning.
Protecting Value
Protecting your intellectual property preserves the value you create in your company in two main ways.
First, there is value in the brand you are creating and developing, i.e. your name and even your look and feel. Apple’s brand itself is estimated to be worth $153 billion− almost half of its market capitalization. Trademark protection is the primary method by which you will protect your brand. However, not all brands can be protected by trademark. You should not invest time and money in a brand until you know that it qualifies for trademark protection.
Second, you are creating value in the original aspects of your products or services, original content you create for marketing or other purposes, original processes you design that create efficiencies or otherwise give you a competitive advantage, or other aspects of your “secret sauce.” Intellectual property tools, such as copyright, patent and trade secrets, allow you to protect your “secret sauce” from misappropriation by others. It is important to understand when you are creating intellectual property assets in your business and takes the necessary steps to protect them.
Monetizing Value
Intellectual property tools are not just defensive mechanisms, however. They are also the means by which you identify value so you can “monetize” it, i.e. sell it, license it, or even use it as collateral for a loan.
A useful analogy is the tools used by ranchers (branding irons, fences, etc.) to identify and separate their cattle from both wild cattle and cattle owned by others. If you can’t point to it and prove you own it, lenders, investors, and potential buyers are unlikely to attribute any value to it.
Trademarks, patents, copyrights, and trade secrets are the tools that enable you to point to and prove you own the intellectual property assets you’ve created in your business. A properly maintained intellectual property portfolio can generate much more favorable terms for a bank loan or investment, additional revenue streams via licensing deals, or even a significantly higher price paid for your business should you sell it in the future.
Experienced entrepreneurs know that planning for a new business, right from the beginning, should include careful consideration of how you can create valuable intellectual property assets and the steps you need to take to protect and monetize them.
Trying to Raise Money? Pre-Plan for a Smooth Transaction
Filed under: Corporations, Funding, Intellectual Property, Startups
Prior to entering into negotiations with an angel investor or venture capitalist there are multiple due diligence-related items the VC will want evaluate in order to make the decision whether to invest in your company, and if so, how much they want to invest. Failing to properly plan for these issues can at best slow down the process and at worst completely derail the deal. However, the good news is that with some forethought and preplanning, you can have many these issues squared away from the beginning.
Register Your Company
First, regardless of whatever entity type you have chosen (Delaware C-Corp is the most typical for venture capital investment), you need to make sure that you have properly registered with the formation state and that all of your formation documents are in place and organized in a way that can easily be shared with an investor. These documents should clearly state the ownership, include vesting provisions for the founders, and be structured in a way that will allow for future investment from outside parties without too much procedural difficulty. Additionally, it is important to keep detailed corporate records. The lawyer who helps you with your initial formation can help you understand and plan these details.
Intellectual Property
When it comes to intellectual property, an investor is going to want assurances that no one outside the company will have any claim to the IP the company claims to own. To do this, somewhere in the company’s formation agreements should be language that assigns all IP to the company and if not, it should explicitly outline what is owned by whom and under what arrangement the Company is using those rights. Additionally, you may want to have started registering any trademarks, copyrights, or patents your company has created.
Contractual Agreements
Similar to IP ownership, you should make sure to have all of your contractual agreements solidified. This includes everything from referral agreements to perhaps the most important, employment agreements. You should be able to identify who is an employee and who is an independent contractor and have the documentation to back it up. Not only will documentation suggest to the investor that you are highly organized and a good investment, but these agreements will ensure no surprises down the line with employees and independent contractors, regardless of whether there is impending investment or not. Employment issues, especially when dealing with intellectual property ownership, can be a particularly difficult problem if not dealt with early.
Having these issues dealt with before engaging with an investor will help to ensure smoother negotiations and possibly more company-friendly terms once V.C. or angel investment becomes a reality. While you may be able to handle some of these issues on your own, your lawyer can help to ensure that some of the trickier issues like vesting provisions and intellectual property assignment are completed properly.
Stay Informed
