It’s 4:00pm on a Friday. You get a text message from a colleague saying they can’t log into their email. Then others start texting you with a similar message. Your IT person reports that there’s unusual activity on your computer network and they’re having trouble remoting into the system. An hour or so later, you get the weekend-ruining-news: your systems have been hacked and the hackers are demanding ransom in Bitcoin to get your files back.

What you do next largely depends on the nature of your business, whether you have recent backups of your critical files, and whether you have cybersecurity insurance (which almost all businesses should). The specifics of a proper ransomware response are outside of the scope of this article and will vary widely depending on the circumstances of each attack. Here, we focus on the single critical question: should you (or your insurer) pay the hackers the ransom they are demanding?

Unsurprisingly, the answer is, “It depends.” Most likely, your business is not in the financial position to pay the six or seven-figure sums demanded by the hackers, so you rely upon your insurer for advice and guidance. Naturally, you probably would be very much inclined to tell your insurer to “do whatever it takes” to get access to your systems back. But, it’s not that simple, especially in light of recent guidance from the United States Department of the Treasury.

That guidance warns businesses who have been victimized by ransomware attacks to carefully consider whether they or their insurers should pay ransom to hackers. Putting aside the obvious ethical issues associated with continuing to fund bad actors who do bad things, the government wants businesses and insurers to know that directly or indirectly facilitating payments to hackers may violate federal law and regulations if it turns out that the ransomware payments were made to groups or individuals on the government’s “Specially Designated Nationals and Blocked Persons List.” In other words, if the government subsequently learns that you or your insurer made a payment to a person or entity on this list, you may face legal consequences even if you did not know that the recipient of the payment was on the government’s list. (Helpfully, however, the government notes that if you promptly consulted with law enforcement before making any ransomware payment, the government will consider that consultation with law enforcement a mitigating factor in your favor.)

Does this mean that your insurer should never pay ransom? No, because again, the complexities associated with that question vary widely on the facts and circumstances of each ransomware attack. If a business believes it may have experienced or is experiencing a ransomware attack, it should promptly contact their insurer, a qualified cybersecurity expert, competent legal counsel, and perhaps law enforcement to determine the best path forward.

In any cybersecurity incident, a business is often faced with lots of really bad options. They key is to pick the approach that allows the business to continue to operate while minimizing any potential legal fallout as much as possible. This may or may not include paying the ransom demanded. If you have questions and would like further information or a review of your organization’s cybersecurity policy, please contact PLDO Partner Brian J. Lamoureux at 401-824-5155 or email bjl@pldolaw.com. Attorney Lamoureux is a member of the firm’s litigation, employment, and cybersecurity teams.

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Hemp-based CBD is popping up in mixed drinks, post-workout smoothies, candy, and various other food and drink products. However, conflicts between federal and state law makes the hemp-based CBD market challenging to navigate. For example, while federal regulations do not sanction food or beverages that contain CBD in interstate commerce, the largest hurdle is federal treatment of CBD as a food additive which has not yet been approved by the Food and Drug Administration for such purpose. On the other hand, Rhode Island’s Industrial Hemp Growth Act not only defines “hemp-derived consumable CBD products,” but provides packaging and labeling requirements.

Nevertheless, there are numerous products on the market that are conspicuously labeled as containing hemp-derived CBD. A 2018 FDA Statement makes it clear that the FDA will take enforcement action against companies that claim their products have therapeutic or health benefits. It appears that any warning letters that the FDA has issued, regarding CBD in food or drink, have been for products that make health or therapeutic claims, such as “companies illegally selling CBD products that claimed to prevent, diagnose, treat, or cure serious diseases, such as cancer.”

By contrast, Rhode Island law now permits hemp-based CBD in ingestible products. In July 2019, Rhode Island’s Industrial Hemp Growth Act was revised to permit commercial production and retail sale of hemp-derived consumable CBD products, so long as those products clearly outline that they contain 0.3% THC or less. These hemp-derived consumable CBD products may only be sold to persons age twenty-one (21) or older. Further, a specific warning must be prominently displayed on the packaging of hemp products stating that the product has not been approved by the FDA. The amount of THC and CBD in the product must also be displayed on the label.

In order to produce hemp for processing into commodities, products, or agricultural hemp seed or cultivate hemp for commercial purposes, an individual or entity must hold a handler license, a grower license, or both. These licenses are issued by the Department of Business Regulation, and in accordance with The Hemp Growth Act. There are numerous other requirements and precautions that individuals and entities in Rhode Island should be sure to follow in this rapidly growing and evolving area. With nuances and conflicting federal and state law abound, those interested in pursuing hemp-based CBD business opportunities in Rhode Island would be best served by reaching out to experienced legal counsel in cannabis law and regulations.

For assistance and further information, please contact PLDO Partner Benjamin L. Rackliffe, a leading authority in the areas of corporate and regulatory compliance within the cannabis industries, at 401-824-5100 or email brackliffe@pldolaw.com, or PLDO Associate Randelle L. Boots at 401-824-5100 or email rboots@pldolaw.com.

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In 2015, the Rhode Island Division of Taxation issued Declaratory Ruling 2015-01. The question at issue was whether a non-Rhode Island resident decedent’s interest in a multi-member LLC that owned real property was sufficient to subject the decedent’s estate to the Rhode Island Estate Tax. Generally, property has a tax situs in Rhode Island if it is either real estate or tangible property with an actual situs in Rhode Island, or the property consists of intangible personal property and the decedent was a resident. Rhode Island General Law s. 7-16-34 states that a membership interest in a limited liability company is personal property, but since the member’s interest is in the LLC’s property at large, an interest in a multi-member LLC is intangible personal property. As such, the Division of Taxation held in Ruling 2015-01 that the non-resident decedent's less than 100% interest in the LLC is not subject to the Rhode Island estate tax and, consequently, would not require an estate tax lien discharge.

By contrast, a single member LLC is disregarded, so is considered the same as the individual owner, unless the LLC is taxed as a corporation for federal tax purposes. If no election is made to be taxed as a corporation, the LLC is disregarded, and the value of the real property owned by the LLC is included in the non-resident decedent’s gross estate. This may be an unwelcome surprise, especially as the default is to tax a single member Rhode Island LLC as a sole proprietorship- so a non-resident one must affirmatively elect to be taxed otherwise to avoid estate taxes being imposed on the property.

In 2021, where a non-resident’s gross estate exceeds $1,595,156.00 and includes real estate (including real estate owned by the decedent’s single-member LLC) or tangible personal property located in Rhode Island, the decedent’s estate will be required to file an estate tax return and pay any related tax imposed. The Rhode Island Estate Tax is calculated based on the total gross estate and is not based solely on the Rhode Island property.

In order to avoid this result, the non-resident owner of a single member LLC holding real estate in Rhode Island may wish to consider adding additional members (even a small dilution will remove the “single member” stigma). The question of who, and in what proportion, to add members and divest of single member status is an important estate and business planning consideration, and the decision needs to be made in light of one’s existing estate plan, desired changes, and current operating documents. For more information, please contact your PLDO estate and tax planning attorney or Senior Counsel Leah A. Foertsch in our Boca Raton, Florida office at 561-362-2030 or by email at lfoertsch@pldolaw.com and PLDO Partner Gene M. Carlino in Rhode Island at 401-824-5100 or in Florida at 561-362-2030 or email gcarlino@pldolaw.com.

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UNDERSTANDING THE IMPORTANCE OF A “LOI” IN BUSINESS TRANSACTIONS

The importance and impact of a letter of intent or “LOI” in a prospective transaction should not be minimized as it establishes the basic understanding of the parties, and lays out certain terms of the deal that will ultimately be included in the final documents. Despite the overall non-binding nature of a LOI, there will be certain aspects that are legally binding, which requires careful drafting of what will become the structure of the transaction. The terms of this initial document will have significant implications relating to the terms of the transactional documents. Most importantly, and to avoid legal issues, delaying or torpedoing the deal, parties of the transaction are wise to seek legal counsel in the preparation of the LOI to maintain their leverage by weighing all the issues that will flow from the LOI to the operative documents. When the LOI is carefully drafted, it will eliminate confusion and avoid unnecessary disputes during the drafting stages of the transactional documents.

In his latest business advisory, How Important is a Letter Of Intent?, PLDO Principal Gary R. Pannone provides a thorough review of a letter of intent with details as to its propose, the components of a properly drafted LOI, why conflicts may arise when deciding to forego or move forward in drafting a LOI and how issues addressed or deferred are key strategic decisions impacting the negotiating process. Please click the link above to access the advisory or click here. If you have questions about LOIs or other business matters, please contact Attorney Pannone at 401-824-5100 or email gpannone@pldolaw.com.

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THE CAP TABLE AND THE START-UP VENTURE

For start-ups seeking investors, having an up-to-date Capitalization Table or “cap table” is a key document for securing the funding. For investors, understanding how it applies to investment decisions is just as important.

Essentially, a cap table is a financial spreadsheet listing all the owners, stockholders and membership interests in an entity, revealing the equity ownership of the founders and investors. Its purpose is to secure future investment. As such, accuracy of ownership percentages of the founders and investors is the responsibility of the entity’s leadership.

A cap table should be accessible to management, board members and future investors, which allows all parties a clear understanding of the structure of the company, as well as how the company is incentivizing employees in terms of future ownership. Percentage ownership in the company is always reviewed by lenders who may be seeking guarantees on any financing provided to the company.

As the company grows, it is important for current and future owners to have a comprehensive understanding of their existing percentage ownership and how future investment may impact this percentage. The cap table becomes complicated as the company expands its ownership or when various forms of investors become part of the enterprise. The elements of a cap table are straight forward in that it lists the equity holder, whether it is a founder, employee or investor, the number of shares owned and the percentage of shares owned compared to the total issued with the total percentage of shares owned adding up to 100%.

The table becomes more complicated when there are multiple classes of stock or options for future ownership. What is reflected on the cap table will assist the future investor in determining if there are controlling investors, how much they own and the implications of issuing additional equity in the company as it would relate to their investment. Equally important for the potential investor is confirming that the founders are motivated to make certain that the company is successful.

Overall, an up-to-date and well-managed cap table details the history of a business and is a critical document used for attracting investors for decision-making purposes. Business owners are wise to realize its importance and advised to create a cap table early on in the life of their company. If the cap table is maintained properly and accurately, it will become a strategically detailed resource leading to long term success of the business. If you have questions about cap tables or other business matters, please contact PLDO Managing Principal Gary R. Pannone at 401-824-5100 or email gpannone@pldolaw.com.


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STAY INFORMED – PLDO COVID-19 RESOURCE LIBRARY

PLDO’s team of attorneys continue to add updates and advisories regarding the pandemic and its impact on families, businesses and organizations. To access our COVID-19 Resource Library, click here.

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