The Lawyer’s NDA

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Every once in awhile a prospective client will ask me to sign a non-disclosure agreement (the so-called “NDA”) before engaging me. I do see the irony in the fact that I provide a form NDA for my clients to use in their business dealings with others and, yet, I will never sign one in connection with an engagement for my own legal services. So just where do I get off?

Well, in most business dealings, your business counterpart does not owe you any kind of duty. Your counterpart is free to exploit whatever you reveal to her, subject only to her sense of fair play and good conscience. You can change this dynamic, however, if you and your counterpart sign an NDA. At that point her commitment becomes more than a mere matter of conscience; it becomes a binding contractual obligation. Top Secret

But engaging an attorney is entirely different. Unlike most business dealings, attorneys already owe you a duty not to disclose your confidential information — even if you don’t hire them. The Rules of Professional Conduct that govern our dealings with prospective clients commands it:

(b) Even when no client-lawyer relationship ensues, a lawyer who has had discussions with a prospective client shall not use or reveal information learned in the consultation, except as Rule 1.9 would permit with respect to information of a former client or except as provided in paragraph (e).
….
(e) A lawyer may condition conversations with a prospective client on the person’s informed consent that no information disclosed during the consultation will prohibit the lawyer from representing a different client in the matter. The prospective client may also expressly consent to the lawyer’s subsequent use of information received from the prospective client.

RPC 1.18. I never ask a potential client to agree in advance that I may use the information I receive from them.

And when I am hired, the Rule becomes even clearer:

A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).

RPC 1.6.

In my standard terms of engagement, I make the commitment to you that I will perform work at a level “you would expect of a reasonably prudent and competent attorney providing legal services in the State of Washington under similar circumstances and time constraints.” This commitment necessarily includes complying with ethical obligations, the duty of confidentiality chief among them.

Beyond this, when you hire me, you are entitled to the benefits of the attorney-client privilege. This means that, by the Rules of Evidence, I cannot even be compelled by a court to disclose your secrets, so long as they are secrets that only you and I share during the course of our engagement.

I choose not to sign an NDA, therefore, because it doesn’t give you anything you don’t already have. It does, however, potentially matter to me. I do not want to set myself up where my contractual obligation to you potentially alters my ethical obligation to you or to any of my other clients. I will not allow other clients, past or future, to place me in a position by contract where I cannot zealously pursue your best interest. And I will not allow you to do the same to them.

Advisory Committee Questions Reg A Value

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During yesterday’s meeting of the SEC’s Advisory Committee on Small and Emerging Companies, the Committee considered whether to join the growing chorus calling for a ten-fold increase of the Reg A offering limit from its current $5 million to $50 million. In the end, the Committee supported the recommendation. But not without first questioning whether it would do any good.

A brief explanation: Reg A provides an exemption to the registration requirements for offerings of up to $5 million, if pursued in compliance with a number of conditions. Among these is a requirement to file an abbreviated form of offering circular with the SEC and each state in which the offering is made. As Reg A does not preempt state blue sky laws, some states, including Washington, conduct a “merit review” of any Reg A offering made within its borders.

Because of these requirements, Reg A is not, shall we say, “highly trafficked.” The regulatory hurdles make the $5 million “bang for the buck” difficult to pencil; particularly when its far easier to complete a “Reg D” offering (for accredited investors only) in an unlimited amount. It is not surprising, then, to learn that there were only 24 Reg A filings in each of 2009 and 2010, and that only three of those in each year were ultimately qualified.

In recommending to the Commission that it pursue a ten-fold increase to the Reg A limit, the Advisory Board touched on various impediments and, generalizing, voiced strong doubt that any increase in the offering amount alone would be sufficient to invigorate Reg A’s use. Presumably most members (although certainly not the one there on behalf of NASAA) would like to see a preemption of State law for Reg A offerings as well.

But as David Feldman wrote recently on his blog, there is another missing piece that also requires attention. A company that relies on Reg A to issue shares is not a “reporting company,” and therefore its shares cannot be listed on an exchange, much less the OTC Bulletin Board. Without a listing, investors who buy Reg A stock suffer an illiquidity problem due to the absence of an immediately viable secondary market. While their shares can trade on lower-tier over-the-counter markets (and remain subject to state blue sky laws for secondary trading), Mr. Feldman advocates the implementation of a “fast track” system that would smooth the path to full reporting and consequent “uplisting” for these companies.

Manny members of the Advisory Board must have quietly thought so, too.

SEC Advisory Committee Dislikes Crowdfunding

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It is safe to say that the lawyers, professional investors, and bankers that dominate the SEC’s Advisory Committee on Small and Emerging Companies dislike the idea of crowdfunding. At its meeting this morning, the Committee declined even to recommend that the SEC staff study the issue for potential agency rule making. Yes, the group considers the idea of crowdfunding to be that unworthy.

I confess that until recently I shared their view.

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Advisory Committee Recommends 1000 Shareholder Rule

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How many stockholders does it take before a company must begin formally issuing publicly available reports under the federal securities laws? Presently, the rule is that a company must meet reporting obligations once it reaches 500 stockholders “of record.” The rule, first adopted over 50 years ago, is not without its critics.

Many argue that the thresh hold is too low and thus forces many smaller, privately-held companies to begin reporting too early in their development. Others argue that, because the rule is tied to holders “of record,” larger companies are able to game the system (by holding “street securities” and using special investment vehicles) to avoid reporting obligations entirely.

Today, the SEC’s Advisory Committee on Small and Emerging Companies met to discuss this issue, among others. The discussion focused on whether the rule should be changed from holders “of record” to beneficial holders. That change would catch the larger companies that game the system.

The discussion also focused on increasing the triggering number to something significantly greater. That change would bring relief to smaller companies who run up against the 500 stockholder limit.

Many committee members also supported the idea that, whatever the triggering number, employee-shareholders should be excluded from the count. Had such a rule been in place, Facebook reportedly would have stayed private even longer than it has.

In the end, the Advisory Committee determined that a move to a different system (“beneficial owners” instead of “holders of record”) requires study and feedback. But the Advisory Committee also agreed on the need for immediate interim relief.

In the end, the Advisory Committee passed a resolution (with only 2 dissenting votes) recommending to the Commission that it immediately increase the 1960s rule from 500 to 1000 holders “of record.” The Committee also recommended that any Company that becomes a reporting Company should not be able to end reporting until it falls below 600 shareholders of record, a number that is double the current 300.

Crowdfunding Conundrum – Part 1

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I participate on two different committees (one for the American Bar Association, the other for the Washington State Bar Association) that are tasked with analyzing and commenting on proposals for crowdfunding legislation. I spent this past weekend digging into the various alternatives that are now making their way through Congress and various state and federal administrative bodies.

I thought it might be worth sharing my observations about the major issues — highlighting both the areas of general consensus and the areas of significant difference. My aim here is not only to inform readers, but also to refine my own thinking.

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