Letter to the Hon. Cory Gardner Re: ASIAN, Inc.

August 3, 2017
VIA US MAIL
The Honorable Cory Gardner
354 Russell Senate Office Building
Washington DC 20510

Re: ASIAN, Inc.

Dear Senator Gardner:

I write to you as a member of the Board of ASIAN, Inc. to encourage you to support full funding (at the current enacted FY2017 level) of the U.S. Department of Commerce’s Minority Business Development Agency (MBDA) in FY2018, currently included the Department of Commerce Appropriations Act, 2018.1

I applaud the House and Senate appropriators for overwhelmingly passing appropriations bills that both fund the Minority Business Development Agency (MBDA) at $34 million in FY2018. I urge similar support by the full House and Senate of their respective Commerce, Justice, Science and Related Agencies Appropriations bills.

On average, MBDA facilitates more than $4 billion in contracts and capital for minority-owned firms annually. Between 2015 and 2016, ASIAN, Inc. contributed nearly $1.1 billion (or over a quarter) of all transactions facilitated by MBDA. Each MBDA center secures an average of $18.8 million worth of financial investment in minority firms; and higher-performing centers like ASIAN, Inc.’s secure more than $50 million worth of investment.

For the past eight years, MBDA has created and saved more than 142,000 jobs and achieved a return on taxpayer investment between 102x and 179x. Given the economic challenges that minority-owned businesses face and the income and wealth gap between minority and non-minority communities, it is important that we fund MBDA to support these firms with overcoming the obstacles that they disproportionately encounter.

I support ASIAN, Inc.’s call for not less than $17,000,000 to be awarded through cooperative agreements, external awards and grants. Attached to this letter is a graphic illustrating recent performance by ASIAN, Inc. and successes other MBDA center operators have had with their projects. I also attach a letter by Michael Chan, which provides additional context.

Very truly yours,
Royse Law Firm, PC
Roger Royse
Attorney at Law

______________________________________________________________
1 Commerce, Justice, Science, and Related Agencies Appropriations Act, 2018, H.R. 3267, 115th Cong. (2017).

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HEARING: Subcommittee on General Farm Commodities and Risk Management – Public Hearing RE: The Future of Farming: Technological Innovations, Opportunities, and Challenges for Producers

Thursday, July 13, 2017 – 10:00 a.m.
1300 Longworth House Office Building
Washington, D.C.

Subcommittee on General Farm Commodities and Risk Management – Public Hearing RE: The Future of Farming: Technological Innovations, Opportunities, and Challenges for Producers Witnesses

Panel I (Click on each name for written statement of testimony)

Mr. Billy Tiller, Co-Founder and Advisor to the CEO, Grower Information Services Cooperative, TTU Innovation Hub at Research Park, Lubbock, TX

Mr. Todd Janzen, President, Janzen Agricultural Law, Indianapolis, IN

Ms. Deb Casurella, CEO, Independent Data Management, Hudson, WI

Mr. Roger Royse, Founder, Royse Law Firm, Menlo Park, CA

Related News
Subcommittee Chairman Crawford’s opening statement
Press Release

Video
Watch Live

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The Financial CHOICE to Fix Crowdfunding

Regulation Crowdfunding (“Regulation CF”) was designed to improve access to capital for small businesses as well as investment opportunities for smaller investors. However, the JOBS Act still requires that the sale of securities occur through a funding portal, i.e., a third-party intermediary registered with the SEC and FINRA. There is also a $1 million investment cap that is limiting small business’ access to capital. Finally, strict disclosure requirements impede small business growth where disclosures can cost up to 20 percent of the raise. Thus, removing registration requirements, increasing the cap, and reducing disclosure requirements is an effective means to encourage more entrepreneurs to consider CF crowdfunding.

The Fix the Crowdfunding Act (H.R. 4855) was introduced by Rep. Patrick McHenry during the 114th Congress. The bill would have amended the Securities Act to allow a crowdfunding issuer to sell shares through a crowdfunding vehicle. The bill would also have amended the Securities Exchange Act to revise the exemptions from SEC registration. The bill was passed by the House in July 2016 but was never passed by the Senate. Several provisions of the bill were then merged into the Financial CHOICE Act.

The Financial CHOICE Act of 2017 (H.R. 10) was introduced by Rep. Jeb Hensarling on April 26, 2017. Subtitle P would remove the individual and aggregate investment caps. It would also allow an issuer to conduct federal crowdfunding without a registered intermediary and remove a significant amount of the existing regulatory requirements on issuers. These reforms permit everyday investors to diversify their portfolios while supporting small business growth. We therefore support easing these restrictions on crowdfunding and effectively increasing American access to capital.

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Supporting Small Business Starts with Codifying the Finder’s Exemption

For many years, the U.S. Securities and Exchange Commission (the “SEC”) allowed small businesses to engage unlicensed finders to assist them in raising money. These finders served a valuable role in the fundraising process by putting investors in touch with companies who were seeking capital, typically in transactions that were too small to attract the attention of federally regulated broker-dealers. Over the past several years, however, the “finder’s exemption” has been steadily eroded by the SEC through enforcement actions to the point where unregistered “finders” no longer exist.

The de facto regulatory repeal of the finder’s exemption has outlawed an entire industry, with no legislative action at all, resulting in a conspicuous absence of legal alternatives for small businesses seeking capital. The SEC’s brief to the 11th Circuit after the SEC v. Kramer case provides a summary of the SEC’s current view of unregistered finders, wherein any commission payment will cause the recipient to be categorized as an unregistered broker-dealer. There is judicial support, however, for finders to take percentage-based compensation without having to register as brokers or dealers. These courts generally hold something more than just transaction-based compensation is necessary to require broker registration.

The purpose of the SEC is to protect investors, not to increase the transaction costs of startup financing by regulating finders. Registration under these circumstances is inefficient and receives inconsistent treatment from the SEC and courts on appeal. The federal securities law should be liberalized to explicitly exclude finders from broker-dealer registration. A codified finder’s exemption will increase economic efficiency by lowering transaction costs associated with the present law’s uncertainty as well as resolve court splits within the judicial system.

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A Section 382 Carve-Out Would Remove the Limitation on Startup Innovation

Internal Revenue Code Section 382 generally requires a corporation to limit the amount of its taxable income in future years that can be offset by net operating losses (NOLs) after a change in ownership. After an ownership change, the corporation may only deduct its pre-change losses against taxable income in an amount equal to the section 382 limitation. The limitation amount is the fair market value of the company’s stock multiplied by the federal long-term tax-exempt rate (e.g., 2.09% for May 2017). As a practical matter, section 382 renders the losses of a corporation useless to an acquiror as the NOLs essentially disappear after a sale.

The loss limitation rules under section 382 were enacted to quite sensibly restrict a corporation from trading in tax losses, i.e., engaging in transactions based on their NOLs instead of legitimate business purposes. Startups, however, will invariably have NOL carryforwards because the upfront cost of innovation is high and the basic startup model is focused on building long-term value rather than generating short-term profits. Consequently, the loss limitation rules effectively prevent startups from ever using their losses to offset income and the parties to an acquisition will factor this into the price. As a result, the section 382 limitation is depressing the value of startup company stock and negating the tax incentives to invest in innovation.

We propose a carve-out from the section 382 limitation for innovation. The simplest approach would be an exemption from section 382 for section 174(a) R&D expenses. We believe, however, that the R&D exemption should be broader and less complex than the 174(a) deduction, and should reward activities that may not reach the level of a 174 R&D expense. Our suggested approach would be to exempt NOLs that are attributable to entering new markets, developing new products, or expanding new technologies.

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The Need for a REIV: An Investment Vehicle for Passive Partners in R&D Partnerships

Federal research and development (R&D) tax incentives in the U.S. are subject to strict requirements. Current case law and statutory limitations regulate pass-through taxpayers to such an extent that the available deduction and credit are no longer facilitating innovation in the partnership context. Not enough R&D partnerships are able to take advantage of the tax incentives available, and the value of the tax benefit that is being received by those partnerships that are eligible is insufficient to operate as an incentive. We suggest getting rid of these obstacles, at least for qualifying partnerships able to prove their economic substance, by implementing a Research and Experimentation Investment Vehicle (REIV) into the Internal Revenue Code.

Historically, R&D projects were used by high-bracket taxpayers to shelter income by making large investments in mostly speculative endeavors purely to offset their tax liability. This type of shelter was generally organized as a limited partnership to provide limited liability and pass-through deductions to investors. The section 174(a) deduction for R&D expenses, in particular, was being heavily abused and misused to shelter income. Thus, the case law and statutory limitations for R&D partnerships became increasingly strict to eliminate this type of tax shelter. By interpreting R&D requirements in a manner to prevent tax shelters, however, courts have precluded passive partners from using the R&D deduction even though partners in a partnership should be entitled to the deduction when they make non-abusive R&D investments.

Facilitating innovation with federal tax incentives requires crafting an exception under the current rules for R&D partnerships. Implementing a REIV will permit passive partners to use the R&D deduction and/or credit as long as they keep money at risk and comply with existing anti-abuse rules. Designing a REIV in this manner aligns with Congress’ policy goal of incentivizing innovation without abusively sheltering income. The REIV will operate as a carve-out from the passive loss rules, trade or business restrictions, and other relevant limitations such as the AMT. This kind of reform would grant passive partners the same access to R&D tax incentives as other passive corporate investors, thereby leveling the playing field between the U.S. and other countries’ tax treatment of R&D related joint ventures.

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Incentivize Angel Investments with a Startup Class of Qualified Small Business Stock

The Internal Revenue Code contains several provisions that encourage investment in small businesses. One option is to purchase “small business stock.” Congress permits an individual to deduct the loss from a sale or exchange of small business stock as an ordinary loss under Section 1244. Unlike a capital loss, an ordinary loss may fully offset wage income, dividends, or similar ordinary income.

The Code also provides favorable treatment for gains from investing in small business stock under Section 1202. Non-corporate taxpayers may exclude from gross income 50 percent of any gain from the sale of qualified small business stock (“QSB” stock) held for more than five years. In order to qualify, the issuing corporation must be a C corporation and must have been a C corporation during substantially all of the shareholder’s holding period of the stock. Most small businesses, however, are organized as S corporations or as limited liability companies (LLCs). Thus, the five-year holding period and original issuance requirements are in effect preventing the smallest businesses that are the most in need of funding from issuing investment interests that qualify for QSB stock treatment.

We propose that Congress create a new class of small business stock to encourage investments in S corporations and LLCs. To encourage risk and incentivize early ideas, the class should not have a holding period but may be limited to smaller companies with gross assets under $1 million. This subset would not need to include C corporations or larger companies as they already have access to the income exclusion incentives. The amount taken into account under the new exclusion and its rollover period would remain the same. Creating this class would level the playing field for the most popular types of small business entities by facilitating access to angel investments and startup capital.

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Redefining S Corporation Eligibility for the 21st Century

Corporations are generally subject to two levels of tax: once at the corporate level and again at the individual level when corporate earnings are distributed. Certain corporations may elect under Subchapter S of the Internal Revenue Code to be subject to a regime in which the earnings are generally taxed only once to the individual owners of the corporation. The Subchapter S rules acknowledge the unfairness and inefficiency of the double taxation of C corporations, especially those that are debt financed; however, because of the limitations on eligibility, Subchapter S does not go far enough in allowing small businesses to compete on a tax-neutral basis. A corporation is not eligible to elect S status unless it has only one class of stock, no non-resident alien (NRA) shareholders, and no non-individual shareholders.

Partnerships (and LLCs taxed as partnerships) are taxed in a manner similar to S corporations except they may have NRAs and non-individuals as owners, as well as multiple classes of interests. Notably, the popularity of such entities belies the notion that pass-throughs are too complicated for typical corporate structures. Accordingly, we would like to see S corporations taxed more like partnerships, thus removing a tax artificiality from the choice of entity decision and allowing companies to conduct business in the most efficient form.

To neutralize tax considerations regarding choice of entity, S elections should be made available to a greater number of small businesses by allowing corporations with preferred stock, NRA shareholders, and non-individual shareholders to be eligible to elect S status. Removing these arbitrary limitations on eligibility would make the S election available to the existing class of taxpayers who are either stuck with the LLC form of doing business or forced to pay taxes twice on the same income. Thus, our proposal is to amend the Code to remove the requirements that an eligible corporation can only have one class of stock, and only U.S. individual shareholders, in order to bring the tax treatment of small business entities into the 21st century.

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How a Startup Visa Program Can Lead to Meaningful Immigration Reform

Immigration is a valuable source of entrepreneurship and innovation in the tech community. This is demonstrated by the Silicon Valley and other tech-heavy regions’ heavy reliance on H1-B visas to bring skilled workers from other countries into their states. These visas are only available, however, to people migrating to the U.S. to work for established companies. Conversely, startup visas can help increase our nation’s human capital and economic output by attracting the best and brightest entrepreneurs from around the world. Thus, it is important to encourage entrepreneurship and facilitate innovation in the U.S. with startup visas so our nation can reap the benefits of emerging industries.

Starting in July 2017, the Department of Homeland Security (DHS) may use its parole authority to grant a period of authorized stay, on a case-by-case basis, to foreign entrepreneurs who own a substantial interest in a U.S. startup that can create a “significant public benefit” and acquire investments from qualified U.S. investors. Known as the International Entrepreneur Rule, this regulation allows entrepreneurs who fit those requirements to stay in the U.S. for 30 months. They can then apply for an additional 30 months if the company shows continued growth and benefit to the American public.

This discretionary parole authority makes it possible for some foreign-born entrepreneurs to legally enter the U.S. to start and grow successful businesses. Such case-by-case opportunities should be codified into a startup visa program so we can provide more predictable innovation opportunities for nonresidents in our quest to attract the best and brightest entrepreneurs from around the world. Implementing a startup visa program with clear procedures for qualified applicants under federal law will lead to additional capital investment, job creation, and revenue. Thus, the codification of this program alone can implement meaningful immigration reform.

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Lobbying for Legislation to Protect Your Worker Classification

Under current law, there is a presumption that workers are employees, and the IRS will aggressively pursue collection activities against employer-taxpayers that inappropriately classify employees as independent contractors. There is a conspicuous lack of bright line tests, however, for permissible classification variations under both federal tax and labor law standards. Moreover, the states’ varying standards create additional disparities in treatment. The uncertainty and complexity associated with classifying workers subjects the employer to expensive lawsuits, employment taxes, penalties, and interest for misclassification. Class action lawsuits from a misclassified employee can even lead to the bankruptcy of an otherwise emerging business. Thus, the highly subjective and fact-sensitive analysis under common law creates an unnecessary barrier to contract formation and exercising one’s business judgment.

A change in classification also results in a change in the parties’ economic burdens as employers are obligated to pay payroll taxes that would otherwise be borne by the service provider if he or she is an independent contractor. A reclassification of a misclassified employee therefore results in the reshuffling of an economic deck that the parties did not intend.

Section 530 is a safe harbor provision meant to prevent the IRS from retroactively reclassifying independent contractors as employees. To qualify for section 530 relief, an employer must have: (1) consistently treated the worker and similar workers as independent contractors, (2) filed all Forms 1099 for these workers treating them as independent contractors, and (3) had a reasonable basis for not treating them as employees. While there is no explicit definition as to what constitutes a “reasonable basis” for purposes of section 530, the legislative history shows that the reasonable basis requirement should be construed liberally in favor of the taxpayer. Regardless, misclassification is a recurring problem despite Congress’ intent that the IRS show deference to the business judgment of service recipients and not aggressively pursue collection activities in this context.

While an employer can fill out an IRS Form SS-8 to document the basis for his worker classification, taxpayers are currently unable to make a binding election. The modern workaround is to sign a written agreement stating the worker is an independent contractor, but even binding contracts are subject to the IRS’ ad hoc reasonable basis determination for worker classification. This is a waste of government and taxpayer resources. Instead, the policy of liberal construction in favor of the taxpayer should be codified by expanding the 530 safe harbor to classes of persons who can be expected to protect themselves from reclassification. The provision of statutory relief, especially through state preemption, will facilitate business deals and economic growth in our communities.

We support legislation that allows for freedom of contract and the ability for parties to agree among themselves as to their respective rights, liabilities, and obligations. We suggest that contractor status be elective, at least for certain types of workers that can be expected to be able to protect their own interests. Such an approach would not result in any threat to the fisc, as the same net amount of taxes would be due, but rather provide contracting parties with greater certainty that their economic deal will not be rearranged by a regulatory agency. Thus, we are advocating for legislation to protect your worker classification.

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