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Illinois Cannabis Lottery – How to calculate the odds of winning multiple licenses.

Illinois Cannabis Lottery – How to calculate the odds of winning multiple licenses.

Illinois Cannabis Lottery

Illinois Cannabis Lottery - How to calculate the odds of winning multiple licenses

Illinois Cannabis Lottery – How to calculate the odds of winning multiple licenses.

Starting 2020, Illinois became the 11th state to legalize recreational cannabis, letting adults 21 years or older buy cannabis from medical dispensaries while applicants prepared their applications to obtain an adult-use cannabis license.

In this sense, the state established a system in which qualified applicants would participate in a lottery, which was supposed to be a measure to equalize the chances and distribute the license in a fair manner. Under this system, high scoring companies would get a chance at the lottery.

The state law that legalized recreational cannabis last year, also gave a 20% scoring bonus to social equity applicants. They were defined as people from areas disproportionately impacted by the war on drugs, such as the South and West sides of Chicago; those who had been arrested or convicted of minor cannabis offenses, or had family members with such a record; or those who hired 10 or more people from those areas.

In this small post we will be discussing briefly, how can you calculate the odds of your company winning a cannabis license in the state of Illinois, under the established system.

How to calculate the odds of winning a license.

To calculate the chances of getting a license in any of the three dispensary lotteries under the Illinois adult-use cannabis program established in the CRTA, we would have to first determine the applicant chances of not getting any license by using the following equation:

(pf/nt)nd

Where pf is the possible failure scenarios, nt is the total number of remaining tickets in the lottery and nd is the number of draws remaining. 

Based on this, if we take as an example any given company, and say that in the first round it had 47 tickets in the Region #5, managing to draw the 11th license of that region – which had a total of 36 licenses. The equation to determine the chances of that company of not getting a license in that specific round would be as follow:

(1875/1922)26 

As the Region #5 had 1933 total tickets, at the 11th draw, the total number of remaining tickets for that specific draw was 1922, and the number of draws remaining was 26. Given the Company had 47 tickets in that region for that round, if we subtract 47 from the 1922 remaining tickets, we would get as a result that there were 1875 tickets from other applicants competing in the lottery for a license simultaneously. Hence, that Company, with that number of tickets remaining, had a probability of 0.5253456094 (52.53%) of not getting a license in their 26 remaining attempts. 

After this, if you subtract that probability to 1 (100%) you would get the chances of that company getting at least one license in their remaining attempts. In this case, they had ​​a probability of 0.4746543906 (47.47%) of getting at least one license in their remaining attempts. 

Once you have the probabilities of drawing each particular license, to determine the probabilities of getting the total number of licenses you would need to multiply all the individual probabilities among them.

RELATED: Cannabis Licenses and Due Process Protection

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Thomas Howard

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Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

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Cannabis Licenses and Due Process Protection

Cannabis Licenses and Due Process Protection

Cannabis Licenses and Due Process Protection

Cannabis Licensing and Due Process

Cannabis Licenses and Due Process Protection

A cannabis license is a legal document that allows the licensee to engage in business in the legal cannabis industry of the state for which the license was granted.

Nowadays, such licenses are a highly valued commodity, with application fees costing tens of thousands of dollars, and in some cases, being able to sell them for millions of dollars.

In this sense, it is important to make a question about the type of rights that people have over these licenses. Specifically, the aim of this post is to answer whether a cannabis license can be considered a property interest, and thus, whether it can receive procedural due process protection.

What can be defined as property interest.

Property interest can be defined as the extent of a person’s or entity’s rights in property. The word “property” signifies a legal relationship between a person and an object.

To put it in even simpler terms, property interest is the right that a person has to control, sell, and/or transfer a property. 

Further, according to the U.S. Supreme Court, property interests are “created and defined by existing rules or understandings that stem from an independent source such as state law rules or understandings that secure certain benefits and support claims of entitlement to those benefits.” A constitutionally protected property interest must be an interest that is securely held, so that it is more than a mere expectation of an interest.

Attributes of property

Generally speaking, we can narrow down the attributes of property to three:

  1. Exclusive rights to determine the use of a resource.
  2. Exclusive rights to the services of the resource.
  3. Rights to exchange the resource at mutually agreeable terms.

However, determining whether a cannabis license can be considered property can be difficult. Like a tobacco or a liquor license, a cannabis license can’t be considered property right away, like a car or a house would be.

And, as mentioned above, property interests are defined by “existing rules or understandings that stem from an independent source such as state law rules or understandings that secure certain benefits and support claims of entitlement to those benefits.”

In other words, whether a license is a property interest or not, will depend solely on the characteristics of the interest granted by a license in a particular state. 

For this, we will focus on a slightly different set of attributes using the same model other authors have used to characterize an analogous commodity: liquor licenses. In this sense, liquor license has four attributes which delineate its property characteristics:

  1. Right to obtain
  2. Right to alienate
  3. Right to renew
  4. State’s right to revoke

These attributes will guide us on whether a cannabis license constitutes a property interest for purposes of procedural due process or takings challenges.

The right to obtain

The substantive conditions established in a state’s statutory framework for issuing licenses give birth to the right to obtain them. A license is not a property interest when a legislation lacks substantive criteria for determining when a license must be given. When the legislative framework establishes specific standards for choosing whether to issue a license, leaving the issuing authority with limited discretion, it establishes a constitutionally protected property interest.

When it comes to awarding licenses, states typically adopt one of four methods:

  1. The state issues a license to any applicant who meets the statutory qualifications. The statute clearly specifies that the license must be granted whenever the qualifications are met. In this case, the applicant’s expectations of receiving a license may create property interest. However, the mere application for a license does not create a property interest if the statute specifies that the license may be denied if certain qualifications are not met.
  2. The state has discretion determining how many licenses should be issued. Due to the limitations on the issuance, the licenses under this scheme have more property characteristics.
  3. The state limits the number of new licenses to a fixed statutory quantity. The numerical limits placed, tend to have more property characteristics than the two mentioned before.
  4. The state operates and/or does not license the private sector. 

The right to alienate

This right is manifested when a state licensing legislation enables licensees to transfer licenses, and license holders can enter the market and earn fair market value for the property interest.

Federal courts have looked at the transferability and market value of licenses in determining whether state-created interests constitute property to which a federal tax lien attaches:

“[A] liquor license will constitute property, within the meaning of federal law [for I.R.S. purposes], if the license has beneficial value for its holder, and is sufficiently transferable.”

A transferable license possesses “intrinsic worth that is subject to bargaining and sale in the marketplace.” As a result, federal courts have considered transferable liquor licenses to be personal property in the past.

Different jurisdictions interpret the element of alienability and the related property interest in the license differently. This variation exists because a license might be deemed an asset for a variety of reasons. Some courts, for example, consider the license as a privilege in cases concerning the licensee’s connection with the government and as property in cases involving the licensee’s relationship with other parties such as creditors or heirs.

However, the monetary value created when a state allows the transfer of a license for compensation does not necessarily justify treating the license as property for all purposes.

The right to renew

The third attribute, the right to renew, may also create a property interest in the license.

The renewal process varies by state, and most licenses are only good for one year. Some states enable licensees to renew without submitting a formal reapplication.

These types of legislation provide strict standards for renewal and allow for renewal rejection only for “good cause.” In these jurisdictions, the licensee comes to assume that his or her license will be renewed automatically. The perpetual renewal procedures allow for shortened and accelerated review processes, as opposed to the strict procedures necessary for initial license granting.

In this sense, a perpetual license may be characterized as property due to the licensee’s entitlement to renewal.

Other states have a renewal system that requires holders to reapply for renewal each year. These statutes forbid the licensee from expecting automatic renewal. As a result, the licensee is denied the claim of entitlement required to elevate the license to the level of constitutionally protected property.

In jurisdictions that use a provisional renewal process, license holders have no reasonable expectation that their license would be recognized as property.

The state’s right to revoke

The fourth and final characteristic, the state’s authority to revoke, is derived from the limitations imposed by legislation on government activities in revocation proceedings.

Some states apply different due process standards for the issuance procedure and the revocation procedure. To cancel or suspend a license in Illinois, for example, due process requirements such as proper notice and an opportunity to be heard are required.

However, in this situation, no property right exists prior to the issue of a license in Illinois, and the application procedure should not be subject to any procedural due process protection.

In contrast, several jurisdictions apply the same due process criteria to both the issuing and revocation procedures. This amount of procedural protection afforded to the licensee during a revocation hearing is a strong indicator of whether the state views the interest as a vested property right or just an expectation of ongoing entitlement.

Although none of the aforementioned characteristics are required for a court to conclude that the license is a property right, their presence helps courts to conclude that the licensee’s interest in the license has reached to the level of a constitutionally protected property interest. These qualities may also have an impact on the due process protection necessary for any state action. The level of constitutional protection afforded to the applicant or licensee grows as the degree of property-like features increases.

RELATED: How to add a new member to an LLC

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Types of due process

Due process under the Fifth and Fourteenth Amendments can be broken down into two categories: procedural due process and substantive due process. Procedural due process, based on principles of fundamental fairness, addresses which legal procedures are required to be followed in state proceedings.

Relevant issues, as discussed in detail below, include notice, opportunity for hearing, confrontation and cross-examination, discovery, basis of decision, and availability of counsel.

Substantive due process, although also based on principles of fundamental fairness, is used to evaluate whether a law can be applied by states at all, regardless of the procedure followed.

Substantive due process has generally dealt with specific subject areas, such as liberty of contract or privacy, and over time has alternately emphasized the importance of economic and noneconomic matters. In theory, the issues of procedural and substantive due process are closely related. In reality, substantive due process has had greater political import, as significant portions of a state legislature’s substantive jurisdiction can be restricted by its application.

Procedural Due Process Protection

According to the Fourteenth Amendment, no state may “deprive any person of life, liberty, or property without due process of law.” The Due Process Clause entails procedural due process, which ensures proper notice, hearing, and an unbiased decision maker before the government deprives a person of certain protected interests.

Because licensing is regulated under statutory or constitutional provisions, a state or local agency’s refusal to issue licenses, or decisions to revoke or to transfer a license, is a state action which may trigger a claim that the licensee has been deprived of procedural due process.

However, due process protection against state action requires that the action impair a constitutionally protected “liberty” or “property” interest.

For those states which have not yet determined the level of due process required for licenses, an examination of the four property attributes discussed above will help determine the due process protection the state should provide the licensee, or potential licensee, either by judicial decision or legislative action.

There are three circumstances we need to have in mind regarding the extent of the procedural due process protection, namely:

1. Procedural Due Process Required Because the License is a Property Interest

If the licenses are considered property, then the states must offer complete constitutional protection. In this sense, a pre-deprivation hearing and chance to be heard must be provided whenever a licensee’s interest in the license is jeopardized.

To establish whether the license is a property interest, we must consider the four property interest attributes listed above. 

2. Procedural Due Process Required by Type of Licensing Action at Issue and By Legislative Mandate

The majority of states give some due process protection by enacting legislation outlining the procedures that licensees must follow and distinguishing between various licensing acts such as issuance, renewal, and revocation.

Licenses may not reach to the degree of property necessary for the purposes of due process rights to be given. Many jurisdictions, however, provide limited due process protection for some license acts, such as renewal or revocation, by legislation or decision.

In the liquor industry, Georgia and Alabama are examples of states that provide due process protection by legislation. The legislature in Georgia established due process rules for the granting, rejection, suspension, or revocation of a liquor license, but declined to acknowledge the existence of a property interest in the license.

States may also grant limited due process protection through judicial decision. This protection may extend to some, but not all licensing actions.

A liquor license, for example, is not considered property under New Jersey law. This legislative declaration is supported by New Jersey case law, which holds that a liquor license is neither a contract or a property right, but rather a licence or privilege to engage in an otherwise illegal profession. Nonetheless, due process has been required in judicial judgments addressing federal matters. 

3. Procedural Due Process Not Required Because License is Not a Property Interest

When a governmental action impacts a licensing interest, most states require licensees to be given some due process consideration. However, a state that refuses to offer such constitutional protection typically will do so because it refuses to recognize the license as a constitutionally protected property interest for the activity in question.

Determining when procedural due process rights are violated

Procedural due process is breached when a legislative procedure describing the process necessary for a licensing action is not followed, or when a court decides that appropriate notice and hearing have not been provided for an action affecting a protected property interest. Challenges to referendum procedures or local-option elections may likewise violate due process unless the court decides that the action is legislative in nature.

To determine when a procedural due process right has been violated, a court must first evaluate whether the license is a constitutionally protected liberty or property interest under the Fourteenth Amendment, and then assess whether the licensees have received the appropriate level of procedural due process.

Substantive Due Process

The presence of a property right is not required for substantive due process or equal protection. As a result, deciding whether a license is property is not required for assessing constitutional protection under these principles.

As applied to state or municipal regulatory activities, substantive due process guards against state action that is “arbitrary and unreasonable or without proper relation to the legitimate legislative purpose.” There must be a real and significant link between the rules imposed and the prevention of harm to the public’s moral, social, or economic well being.

In other terms: substantive due process is the notion that due process not only protects certain legal procedures, but also protects certain rights unrelated to procedure.

In this case, there are two major things you must look for: 

  1. Did the government pass legislation?
  2. Does that legislation ban rights previously enjoyed by citizens?

If the answer to both is “yes”, we have a substantive due process problem. The resolution of that problem is that no law can be arbitrary. Any law that offends substantive due process must be analyzed by either:

  1. Strict scrutiny
  2. Rational basis test

Choosing which one to apply is based upon the nature of the right. If the right is a fundamental right, you must apply strict scrutiny, any other rights will be analyzed with the rational basis test.

In substantive due process actions, once the plaintiff proves that there is a law that is banning their rights, it is the government’s burden to prove that, if in fact it is interfering with a right, the law is necessary to achieve a compelling government interest.

Main difference between substantive and procedural due process

Substantive due process asks the question of whether the government’s deprivation of a person’s life, liberty or property is justified by a sufficient purpose, while procedural due process asks whether the government has followed the proper procedures when it takes away life, liberty, or property.

For advice on how you can protect your cannabis license, feel free to contact us, and also, visit our blog, Cannabis Industry Lawyer.

RELATED: What are valuation caps?

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Stock Warrant Purchase Agreements

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Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

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What are valuation caps?

What are valuation caps?

What are valuation caps?

Valuation Caps

A valuation cap is a term of a convertible note or a SAFE. It is also a great way to attract investors to any startup, providing them with an incentive to invest.

Starting a successful financing round for your business will expose you to a slew of new terms. It is essential that you grasp these terms and what they represent to secure finance on favorable terms for your company.

If you’re thinking about obtaining financing for your startup or firm, you’ve probably heard the term “convertible notes,” “SAFEs,” or “value cap” before. Here’s an explanation of what these phrases imply and how they relate to the financing process.

Relevant definitions for valuation caps

Convertible Note

A convertible note is a loan made to your startup or firm by an investor. It is essentially an investment vehicle that is frequently utilized by seed investors who want to delay setting a value for a business until a later round of funding or a milestone.

They are structured as loans with the goal of being converted to equity. At a certain milestone -generally the value of a later financing round- the existing loan balance is automatically converted to stock.

SAFE

A SAFE -simple agreement for future equity- is a financial contract that a business can utilize to acquire capital during its initial fundraising rounds. Some see the instrument as a more founder-friendly alternative to convertible notes.

A SAFE is designed as an investment contract between a startup and an investor that grants the investor the right to obtain ownership in the firm in the case of specified triggering events, such as further equity funding or the company’s sale.

What is a Valuation Cap?

The definitions mentioned above are useful because valuation caps depend on SAFE or convertible note holders to exist. A valuation cap provides SAFE or convertible note holders an opportunity to convert their investment into equity at the lower end of the valuation cap, or the price in subsequent funding rounds.

Simply put, a valuation cap assures that an investor’s investment to a startup or firm in the form of a SAFE or convertible note gets converted into stock at a predetermined maximum price. It is crucial to note that this maximum price is restricted — even if the value of a firm in succeeding rounds exceeds the amount stated in the valuation cap.

Let’s assume a firm engages into a SAFE or offers convertible notes to an investor with a $1 million valuation cap. If the company’s valuation reaches $2 million in the next fundraising round, the investor’s SAFE or convertible note will convert into equity at the valuation cap price of $1 million.

If there’s a $1 million valuation cap, and the next round the company it is decided that the company is worth $2 million dollars, and pay $1/share, your note will convert into equity as if the price had been $1 million.

So, in this case, if you divide $1 million by $2 million, you will get an effective price of $0.50/share. That means that you would get twice as many shares as the investors after the company’s valuation for the same price.

Benefits of Valuation Caps

Valuation caps incentivize people to invest early in potential businesses. As mentioned above, if the valuation cap, for example, is half the valuation of a startup or firm at the time of the next fundraising round, the investor will receive twice the amount of stock in return for their contribution.

A lower valuation cap, on the other hand, will offer an investor with a potentially larger equity share in the next fundraising round. A valuation cap also safeguards investors from excessively low equity conversion percentages in succeeding valuation rounds.

RELATED: How to add a new member to an LLC

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Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

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Thomas Howard

Thomas Howard

Corporate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

How to add a new member to an LLC

How to add a new member to an LLC

How to add a member to an LLC

How to add a member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration.

Most operating agreements lay out how to add a new partner on their operating agreement. However, if your LLC doesn’t have an operating agreement, you would need to follow your state’s laws concerning LLCs.

The process for how to add an LLC member involves amending the LLC’s operating agreement that brings in the new member. Current LLC members must then vote on the amendment for it to pass—and most states, as well as many LLC operating agreements, require unanimous approval. In this sense, aside from the partner’s name, you should also include their financial contribution, if any, and the new member’s share of interest in the company.

Review Your Operating Agreement

The operating agreement that governs your LLC should lay out the process of adding a new partner, including how the members vote on the issue. If it does include this information, following the process is important, as it shows the independence of your organization and its willingness to abide by its own rules. If your operating agreement does not include this process, it may be a good idea to have an attorney draft one for you. If you would rather do this yourself, many states have forms that can be tailored to the needs of your LLC.

The rule in most states is that when a new member is considered for addition, and no operating agreement exists on how to accomplish this, the agreement of all existing LLC members is needed. Any new member will automatically become a partner equal to the current members. However, adopting an operating agreement can change such rules, allowing new members to be let in by a majority vote, with their share being less than that of the more senior members.

Remember, an LLC is a distinct business entity that protects its owners from personal liability. Following formal procedures and keeping good records helps to maintain that protection and to avoid future disputes among the owners.

Decide the Specifics

After the process for bringing on a new partner is laid out, the exact details of the arrangement should be determined. In ownership structure, LLCs have almost limitless flexibility. For instance, one could own a percentage of a business that differed from his profit percentage. Ownership percentages should be discussed with current members of the LLC and the potential member to make sure that all are in agreement. Unless state default rules apply because there is no operating agreement, each member’s percentage of ownership need not correspond with the percentage of capital they invest in the company.

Once this is agreed upon, the new member’s capital contribution should be collected, then the interest the new partner will own in the company and how much this will cost should be decided. In an LLC, all members need to have a capital account representing their equity contribution to the company in the form of service, property, or money.

Vote on an Amendment to Add an Owner to the LLC

Once a decision has been reached regarding the percentage of the new member’s share, an amendment to bring the oncoming member into the LLC should be prepared for addition to the operating agreement. On this amendment, there should be listed the new partner’s name, percentage of stake in the company, capital contribution, and percentage of losses and profits she will be allocated. Once this is done, a vote should be held concerning the amendment in accordance with the process in the operating agreement.

In voting on a new partner, one should remember that other partners cannot be forced unilaterally to dilute their own shares by bringing on a new member — the agreement must be mutual, and the vote must follow the rules of your operating agreement. If there is no agreement, then the vote has to comply with your state’s LLC Act, which usually demands a unanimous consensus.

However, this vote is conducted, it should be documented in the LLC’s minutes or recorded in a resolution, and all members of the LLC (along with the newest one) should sign the amendment. This document should also state:

  • The voting rights,
  • managerial responsibilities,
  • and ownership percentage

of each member, and it should be kept in your place of business along with your other business documents.

Amend the Articles of Organization, If Necessary

When your LLC was formed, you were required to submit articles of organization to the state. When you add a new member, certain states will require you to submit a form amending your articles, while others do not. Such state requirements can be checked through the agency that handles business filings, which is usually the secretary of state.

One should also be aware of any deadlines if an amendment is necessary. Additionally, if your business management structure is being changed from a manager-managed LLC to a member-managed LLC or vice versa, you will need to amend the articles of organization, as well.

File Required Tax Forms

Although having a single-member LLC allows you to use your Social Security number for your federal tax identification number, you will be required to get a federal Employer Identification Number (EIN) when you change to a multimember LLC. You can get this by completing a free form on the IRS website, and it will act as your LLC’s tax number for both state and federal filing.

Generally, if your LLC’s structure or ownership changes, you will need to get a new EIN; however, if you are adding a new partner and already are a multimember LLC, you most likely will not need to change your EIN. If in the past, your LLC was classified for tax purposes as a partnership or sole proprietorship, additional forms will need to be filed with the IRS in order to elect corporate status. A tax accountant or lawyer can inform you of the best way to have your LLC taxed.

Check Your State’s LLC Act

If you lack an operating agreement, the state in which you set up your LLC has rules outlining the required steps for bringing in another member, as well as the documents that need to be submitted or amended by law.

Amend Your Operating Agreement

When bringing a new member into your LLC, numerous parts of the operating agreement will need updating. At the least, the sections covering the percentage of shares of each of the company’s members, the dispensation of losses and profits, the member’s capital contributions, and the voting capacity of all the members must be updated. Because an oncoming member will receive a stake of the corporation, the shares of current members’ distributions, losses, and profits will be changed, and any rules in the operating agreement related to the current members’ fiscal interests must be adjusted. 

Submit the Amendments to the Secretary of State

If amending the articles of your organization is deemed necessary, this amendment must be filed with the secretary of state or other state agency that deals with business filings. Because operating agreements do not need to be submitted to the state, the agreement can be amended without any filing being done, although there are some states that do allow you the ability to file your operating agreement. If you do choose this option, your amendment should be filed with it, too.

You should also check in with your secretary of state’s office to see if it is possible for the amendments to be filed online or if paper forms are required. Don’t forget to ask how much you must pay for the filing, although it is usually about $100.

Either the business filings agency in your state or your secretary of state will be able to tell you what the fees are and what they include. Should a certified copy of the filing not be included in the fee, then you also must pay for that in order to obtain a copy for your business records.

File the Entity Classification Election Form With the IRS, If Needed

Bringing a new partner to your LLC can result in the LLC’s classification being changed. If it does, an Entity Classification Election Form must be filed with the IRS. Unless a different election form is made using Form 8832, your LLC will be classified by the IRS in accordance with the default rule.

By default, multimember LLCs are regarded as partnerships for tax purposes, so if you want your LLC to be classified as a corporation, you must file Form 8832. Usually, as long as your LLC has two members prior to a new member being added, the income tax status of the LLC will not change by bringing on a new partner, and there will be no need to contact the IRS. 

Register the Name Change With Federal and State Authorities, If Needed

Sometimes when a new member is added, the company’s name is changed. For instance, let’s say you and a friend ran “Jim and John’s Jukebox, LLC.” Then, a mutual friend named Jake joined the business, and thus you wanted to change the name to “Triple J Jukebox, LLC.” To accomplish this, documents would need to be filed with both the IRS and the secretary of state.

The secretary of state will require the appropriate business name change form to be filled out along with a fee that could be up to $200. The IRS would require notice of the street address where your return was to be filed, with said notice being signed by all business partners involved.

Free Strategy Session?

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Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

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Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

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Subscription Agreements

Subscription Agreements

Subscription Agreements

Subscription Agreements

A subscription agreement is an investor’s request to become a member of a limited partnership (LP). It also serves as a two-way warranty between a corporation and a new shareholder (subscriber). The company intends to sell a specific number of shares at a fixed price in exchange for the subscriber’s promise to buy the shares at the same price.

How Subscription Agreements Are Regulated

Subscription agreements are generally covered by SEC Rules 506(b) and 506(c) of Regulation D. These stipulations define the method of conducting an offering and the amount of material information that companies are required to disclose to investors.

When new limited partners are added to an offering, general partners seek the approval of existing partners before making changes to the subscription agreement. Raising capital through a Reg D investment entails far fewer stringent requirements than a public offering. This allows companies to save time and sell securities that they would not be able to issue otherwise in some cases.

Subscription Agreements With Private Placements

When a company wishes to raise capital, it will often issue shares of stock for purchase by either the general public or through a private placement. The primary disclosure form for potential general public investors is a prospectus. The prospectus is a disclosure document listing information about the business and its underlying security.

A private placement is a sale of stock to a limited number of accredited investors who meet specific criteria. The criteria for accredited status include having a particular level of investment experience, assets, and net worth. Investors will receive a private placement memorandum as an alternative to the prospectus. The memorandum provides a less comprehensive description of the investment.

In many cases, a subscription agreement accompanies the memorandum. Some agreements outline a specific rate of return that will be paid to the investor, such as a particular percentage of company net income or lump sum payments.

Also, the agreement will define the payment dates for these returns. This structure gives priority to the investor, as they earn a rate of return on the investment before company founders or other minority owners.

KEY TAKEAWAYS

  • A subscription agreement is an agreement that defines the terms for a party’s investment into a private placement offering or a limited partnership (LP).
  • Rules for subscription agreements are generally defined in SEC Rule 506(b) and 506(c) of Regulation D.
  • Regulation D lets companies doing specific types of private placements raise capital without needing to register the securities with the SEC.

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Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens