New York entrepreneurs in the virtual currency space must be careful to follow New York’s licensing requirements enacted under Financial Services Law Sections 102, 104, 201, 206, 301, 302, 309, and 408. Under the new regulations issued by the New York State Department of Financial Services, a business that engages in “Virtual Currency Business Activity” must be licensed by the New York State Department of Financial Services.  A business is engaged in Virtual Currency Business Activity if it:

  1. receives virtual currency for transmissions or transmits virtual currency;
  2. stores, holds, or maintains custody or control of virtual currency on behalf of others;
  3. buys and sells virtual currency;
  4. exchanges or converts something of value, into virtual currencies; or
  5. controls, administers, or issues a virtual currency.

However, businesses chartered under New York Banking Law and “approved by the superintendent to engage in Virtual Currency Business Activity,” as well as “merchants and consumers” that use virtual currencies for investment purposes or to buy and sell goods or services are exempt from the licensing requirement.

The license application fee to register as a business engaged in Virtual Currency Business Activity is $5,000.00 and is nonrefundable.  The application must include:

  1. the exact name of the applicant, including any doing business as name;
  2. a list of all of the applicant’s affiliates and an organization chart illustrating the relationship among the applicant and such affiliates;
  3. a list of, and detailed biographical information for, each individual applicant and each director, principal officer, principal stockholder, and principal beneficiary of the applicant;
  4. a background report prepared by an independent investigatory agency for each individual applicant, and each principal officer, principal stockholder, and principal beneficiary of the applicant, as applicable;
  5. for each individual applicant; for each principal officer, principal stockholder, and principal beneficiary of the applicant, as applicable; and for all individuals to be employed by the applicant who have access to any customer funds, whether denominated in fiat currency or virtual currency: (i) a set of completed fingerprints, or a receipt indicating the vendor (which vendor must be acceptable to the superintendent) at which, and the date when, the fingerprints were taken, for submission to the State Division of Criminal Justice Services and the Federal Bureau of Investigation; (ii) if applicable, such processing fees as prescribed by the superintendent; and (iii) two portrait-style photographs of the individuals measuring not more than two inches by two inches;
  6. an organization chart of the applicant and its management structure;
  7. a current financial statement for the applicant and each principal officer, principal stockholder, and principal beneficiary of the applicant, as applicable, and a projected balance sheet and income statement for the following year of the applicant’s operation;
  8. a description of the proposed, current, and historical business of the applicant;
  9. details of all banking arrangements;
  10. all written policies and procedures required by, or related to, the requirements of this part;
  11. an affidavit describing any pending or threatened administrative, civil, or criminal action, litigation, or proceeding before any governmental agency, court, or arbitration tribunal against the applicant or any of its directors, principal officers, principal stockholders, and principal beneficiaries, as applicable;
  12. verification from the New York State Department of Taxation and Finance that the applicant is compliant with all New York State tax obligations in a form acceptable to the superintendent;
  13. if applicable, a copy of any insurance policies maintained for the benefit of the applicant, its directors or officers, or its customers; and
  14. an explanation of the methodology used to calculate the value of virtual currency in fiat currency; and

Businesses operating in the virtual currency space, that are not exempt from these new regulations, must ensure that they comply with these new licensing requirements. Businesses interested in pursuing a New York virtual currency license should consult with legal counsel.

 

Does your operating agreement reflect your intentions?
New Jersey’s Revised Uniform Limited Liability Company Act (the “RULLCA”) became effective on March 18, 2013. As noted in a post we authored in 2014, although initially applicable only to limited liability companies formed after its effective date, the RULLCA now governs all New Jersey limited liability companies.

Similar to other limited liability company statutes in other states, the RULLCA provides a number of default provisions that apply if the members of a limited liability company (the “LLC”) have not adopted an operating agreement for the LLC or if the operating agreement is silent on a particular issue.  As a result, the rules that apply to New Jersey LLC’s and their members may not reflect the parties’ intentions as to certain topics, even if the parties had previously entered into an operating agreement drafted to conform to the New Jersey’s original Limited Liability Company Act (the “Original LLC Act”).

By way of example, and without limitation, in the absence of a contrary provision in an operating agreement the RULLCA provides that: (1) distributions made by an LLC to its members are to be made to the members in equal shares (in lieu of proportionate distributions based on capital contributions); (2) most decisions are made by a majority in number of the members of a member-managed LLC (rather than based upon the vote of members holding a majority of the interests in the profits of the LLC); (3) an assignment of a member’s “transferable interest” in an LLC is an assignment only of the member’s right to receive distributions from the LLC (with the transferring member retaining all voting rights of member, unless such transferring member is expelled by the unanimous consent of the remaining members following the assignment of a member’s entire “transferable interest” in the LLC).

These are just some examples to highlight the importance of  reviewing with counsel your existing operating agreements, particularly if prepared prior to the adoption of the RULLCA, to confirm that the operating agreement complies with current law and overrides any default provisions of the RULLCA that are contrary to the parties’ intended business arrangement. Further, the current law provides some other possible provisions which may be desirable and which were not available under the Original Act.   The same holds true for entities formed in other states. It is important to note that the default provisions of the RULLCA do, in certain cases, differ from the default provisions of limited liability company statutes in other states. For example, under the default provisions of the New York Limited Liability Company Law, distributions by an LLC are made to the members in proportion to their capital contributions, member voting is in proportion to the members’ respective interests in profits, and a member ceases to be a member or have any voting rights upon the transfer of all of his membership interest in the LLC.

Regardless of the state of formation, you should be certain that what your operating agreement says (and does not say) accurately reflects the parties’ business deal.

Mobile food vending is now a billion dollar industry. The hospitality subset has experienced a major boom since the economic downturn of 2008. Food trucks nationwide are expected to bring in $2.7 billion in revenue this year alone according to Priceonomics. This meteoric growth is attributable to a confluence of changing consumer demands and a relatively easy start-up process.

In New York City, home to an estimated 12,000 mobile food vendors, legislators are struggling to find balance between regulation and sustained growth.  The issues are many and range from permitting to parking to health and safety concerns.  Here’s a closer look.

For that estimated 12,000 mobile food vendors, there are only 5,100 valid food vendor permits currently allotted by the city’s Department of Health.  That number has not increased since the 1980s. The lack of permits has created a black market whereby permit owners can attain as much as $20,000 per permit as reported in the New York Times.

In addition, more vendors equates to more competition for brick and mortar restaurants. Having a large number of vendors operating illegally has restaurant proponents fuming about unfair competition, lost profits, and inadequate regulation.

Further, unpermitted vendors may put consumers’ health at risk. City health inspectors cannot inspect nor regulate what they do not know exists.

Proposed Legislative Solutions

The New York City council has proposed the Street Vending Modernization Act (“SVMA”) to expand the number of available permits to 8,000 by the year 2023. Proponents of the SVMA see mobile food vending as a legitimate industry and want the city to cultivate an environment where these businesses can flourish. In addition to increasing the number of permits, the SVMA intends to improve mobile food vendor compliance with local regulations and create an independent office of street vendor enforcement.

Despite the apparent benefits, the SVMA has been met with opposition from brick and mortar restaurant proponents. Restaurateurs are concerned with the effect an increased number of permits will have on their businesses, and concerned consumers detest the idea of further congesting already overcrowded New York City streets and sidewalks with more food trucks and carts. The SVMA has yet to pass.

On another front, mobile food vendors may face increased regulations regarding where they can conduct business. Today, New York City has fairly lax regulations addressing where a mobile food vendor may park. Vendors are only banned from occupying areas in and around crosswalks, fire hydrants, bus stops, building entrances, and the like. The New York City council has received pressure from local restaurant owners to further restrict the location of food trucks to address what they see as unfair competition. As an example of the conflict, some point to the area around the Second Avenue subway station.  When the station was under construction, several restaurants in the vicinity suffered a decline in sales. Now that the subway has opened, mobile food vendors are setting up directly outside the subway entrance and in front of brick and mortar restaurants. Currently there is no pending legislation that restricts the proximity to which a mobile food vendor may park from a brick and mortar restaurant.

New York legislators have also struggled with the regulation of health and safety for mobile food vendors. Until just recently, there was no requirement for displaying food inspection grades for mobile food vendors. In May 2017, Mayor de Blasio signed into law a bill that requires mobile food vendors to display health inspection grades. A similar bill is currently active in the New York State Senate which would require inspection grades to be displayed and also require vendors to submit their routes to the health commission for tracking purposes.  This bill is viewed as a win-win for both brick and mortar restaurants and mobile food vendors. The bill holds mobile food vendors to the same health and sanitation standards as brick and mortar restaurants, while those vendors displaying satisfactory food grades can attract more business by assuring consumers of a sanitary product.

Given that the mobile food vending industry now accounts for close to 18,000 jobs in New York City and it has become a part of the city’s fabric, we do not expect to see city or state legislators significantly curtail such business. However, with increased pressure from consumers, food vendors and brick and mortar restaurants, we do believe that legislators will act on the issues discussed above.

A recent decision of the Delaware Court of Chancery (the “Court”) places certain fiduciary constraints on a company’s ability to satisfy its obligations to its preferred equity holders. While investors often seek to acquire preferred stock in return for their investments, the Court’s decision in The Frederick HSU Living Trust v. ODN Holding Corporation (“ODN”) et al., makes it clear that actions taken by a company in connection with the payment of such preference will be subject to the fiduciary duties that a company’s board owes to its holders of common stock.

Plaintiff, a founding stockholder of ODN Holding Corporation (the “Company”), brought an action against the Company’s board of directors (the “Board”) alleging, among other things, breach of fiduciary duty in connection with the redemption of preferred shares owned by the Company’s controlling stockholder, the venture capital firm Oak Hill Capital Partners (“Oak Hill”). As consideration for Oak Hills’s investment in the Company, Oak Hill received shares of preferred stock in the Company, carrying a mandatory redemption right exercisable by Oak Hill five (5) years after the investment (See id. at 6). In the event that the Company did not have sufficient funds to redeem the preferred stock at the time of exercise, the Company agreed to make redemption payments to Oak Hill as funds became available (See id. at 6-7). Plaintiff claimed that Oak Hill caused the Company to alter its business strategy prior to the time that the redemption right was able to be exercised, prioritizing the hoarding of cash to satisfy Oak Hill’s redemption demand rather than fostering the growth and development of the Company for the benefit of the common holders (See id. at 10-14). This included selling two (2) of the Company’s primary lines of business in an effort to raise capital to fund such redemption, and failing to use funds to pursue acquisitions, as was the Company’s prior practice (See id.). As a result of the foregoing, Plaintiff brought several claims against the Company, Oak Hill, and individual members of the Board, among which was a claim for contravention of the Board’s fiduciary duty of loyalty to the holders of the Company’s common stock (See id. at 21).

With respect to the fiduciary duty claim, the Court held in favor of Plaintiff, denying Defendants’ Motion to Dismiss. The Court’s rationale centered on the premise that a company’s board of directors has a fiduciary obligation to maximize the long-term value of the company for the benefit of holders of its “undifferentiated equity” (i.e. its common stock) (See id. at 36-37). The Court distinguished the rights of preferred holders as contractual in nature, entitling them to fiduciary duty protection only to the extent their interests align with the interests of the common holders (See id. at 41 and 44). While the Court readily acknowledged the contractual obligation to redeem the preferred shares held by Oak Hill, it emphasized that the Board took actions to satisfy the redemption obligation before there was any contractual obligation to redeem. In other words, the Board took actions to maximize the value of the redemption right rather than the value of the common stock, which the Court ultimately held to be a direct breach of the Board’s fiduciary duty of loyalty to the shareholders of the Company.

The Court’s holding in this case reminds investors that, at the end of the day, a board’s primary directive is to maximize the company’s value to its common stockholders, not its preferred holders. Because the rights of the preferred are contractually founded, they must ultimately be subject to the overall interests of the “undifferentiated equity” of a company. From an investor’s perspective, the Court’s decision will likely spur efforts to structure preferred equity obligations in a way that gives the preferred holders the ability to take direct action rather than going through the board, thereby making the fiduciary duty issue a moot point. This may be preferable from a company’s perspective as well, especially in the case of board members who are appointed by holders of preferred stock.

However, in structuring the rights of preferred holders, care should be taken to ensure that the protections do not inadvertently lead to other issues. For example, affording preferred stock too many protections could cause it to fall under the definition of “disqualified preferred stock,” or a similar term contained in a company’s senior credit agreement, if applicable, which could have adverse consequences on the company and all of its equity holders.

The full text of the case, The Frederick HSU Living Trust v. ODN Holding Corporation (“ODN”) et al., can be found here.

On May 30, 2017, Mayor de Blasio signed into law Int. No. 1456, requiring mobile food vendors (food trucks, hotdog carts, etc.) to display letter grades received after sanitary inspections akin to those displayed in windows of city restaurants. The new law will be a win-win for both consumers and vendors as seeing satisfactory grades will assure customers of a sanitary product, further legitimizing the ever-expanding food truck industry in NYC.  A similar bill is active in the NY State Senate. The state law would require the inspection grades to be displayed and require tracking of the mobile food vendors in order to efficiently find their protean locations for inspection purposes. Currently, the NY State bill has passed the State Senate and has been delivered to the State Assembly.  At the very least, expect to see health inspection grades displayed on mobile food vendors in the near future.