Takeaways from Fisher II for University Admissions Policies

albano_jonhall_emmaby Dean Richlin and Sarah Burg

Case Focus

In Fisher v. University of Texas at Austin, 136 S. Ct. 2198 (2016) (“Fisher II”), the Supreme Court upheld the constitutionality of the University of Texas at Austin’s (“UT”) race-conscious admissions program.  The 4-3 decision ended Abigail Fisher’s long-running equal protection challenge to UT’s policy.  The decision surprised many observers after the Court’s earlier consideration of the case in Fisher v. University of Texas at Austin, 133 S. Ct. 2411 (2013) (“Fisher I”), in which the Court had seemed to establish a more demanding, and perhaps insurmountable, standard of review.

Fisher II gives new hope to universities seeking to employ race-conscious admissions policies to promote diversity.  The decision reaffirms the framework of Grutter v. Bollinger, 539 U.S. 306 (2003), without restating Grutter’s prediction that affirmative action would no longer be necessary in 25 years.  Fisher II declares that universities are owed “considerable deference” in articulating diversity goals and, by accepting UT’s showing on race-neutral alternatives, suggests more leeway for universities to develop narrowly-tailored policies geared to their specific circumstances.

Legal Background

In 2003, the Supreme Court in Grutter applied “strict scrutiny” analysis to a race-conscious admissions policy, holding that diversity is a compelling governmental interest that can justify the narrowly-tailored use of race in public university admissions.  539 U.S. at 326-27.  Grutter upheld an admissions policy that sought to admit a “critical mass” of minority students by considering race as one factor among many in a holistic, individualized process, when doing so was necessary to achieve the educational benefits of a diverse student body.

Fisher first challenged UT’s policy after being denied admission in 2008.  Under UT’s policy, most freshmen are admitted using a percentage plan that guarantees admission to Texas high school students in approximately the top 10 percent of their class.  The remaining freshmen are admitted through a holistic review process that combines each applicant’s SAT score and grades with her “Personal Achievement Index” comprising numerous other factors including race.  UT’s policy was designed to comply with Grutter.

Fisher did not qualify under the percentage plan and challenged only the policy’s holistic review component, arguing that it overstepped Grutter or, alternatively, that Grutter should be overruled.  The district court granted summary judgment in favor of UT, and the Fifth Circuit affirmed.  In Fisher I, the Supreme Court reversed in favor of Fisher, holding that the Fifth Circuit had applied an incorrect legal standard by giving too much deference to UT in considering the narrow-tailoring requirement.  Fisher I, 133 S. Ct. at 2420-21.  The Court remanded to the Fifth Circuit to engage in a new, and apparently more rigorous, examination of UT’s admissions criteria to see whether it was consistent with Grutter, stating that the “reviewing court must ultimately be satisfied that no workable race-neutral alternatives would produce the educational benefits of diversity.”  Id. at 2420 (emphasis added).

On remand, the Fifth Circuit upheld the policy, Fisher appealed again, and the Supreme Court granted certiorari.

The Fisher II Opinion

In Fisher II, the majority opinion articulated three controlling principles.  136 S. Ct. at 2207-08.  First, the use of race must withstand strict scrutiny.  Second, if the university chooses to “pursue the educational benefits of student body diversity,” and articulates “a reasoned, principled explanation” for that choice, its conclusion that diversity serves its educational goals is entitled to judicial deference.  Third, the university nonetheless bears the burden of proving that “race-neutral alternatives that are both available and workable do not suffice,” a determination to which “no deference is owed.”

The Court concluded, among other things, that the record established that UT “articulated concrete and precise goals” that mirrored the compelling interest in diversity that the Court had previously approved in GrutterId. at 2211.  The Court concluded that “a reasonable determination was made that the University had not yet attained its [diversity] goals.”  Id. at 2212.

Notably, although the record in the case was extensive, the decision did not declare that any particular type of evidence was necessary to demonstrate narrow tailoring.

The Court rejected Fisher’s emphasis on the purportedly race-neutral percentage plan, explaining that percentage plans, “though facially neutral,” “are adopted with racially segregated neighborhoods and schools front and center stage.”  Id. at 2213.  The Court then stated that “to compel universities to admit students based on class rank alone is in deep tension with the goal of educational diversity as this Court’s cases have defined it.”  Id. at 2213-14.

Justice Alito dissented, criticizing the Court’s deference to UT without requiring UT to articulate specific objectives, such as numerical metrics for critical mass.  Id. at 2215-43.  This, he argued, made the narrow-tailoring inquiry “impossible.”  Id. at 2222.

Significance

The Court’s opinion includes several caveats, including the explicit statement that UT’s program is sui generisId. at 2208.  This language may limit the opinion’s value for prospective guidance.

Nonetheless, Fisher II appears to soften Fisher I’s standard for race-conscious admissions policies.  The decision importantly concedes that universities—rather than the courts—are best positioned to assess the benefits of diversity on their campuses and how to achieve those goals.  The opinion thereby eschews the Fifth Circuit’s focus on critical mass and how specifically UT had to define metrics for critical mass.

Confirming Grutter

Fisher II confirms Grutter’s holding that a university’s pursuit of diversity can constitute a compelling government interest.  Consistent with Grutter, a university must carefully evaluate how the benefits of diversity relate to its specific mission and circumstances.  A university must show that any available and workable race-neutral alternatives are “insufficient” to meet diversity goals and, if it adopts a race-conscious policy, must utilize an individualized, holistic review such as that of UT, where race is but a “factor of a factor of a factor.”  Id. at 2207.

Giving Universities Deference

In perhaps the most significant sentence for universities crafting admissions policies, the majority opinion states, “[c]onsiderable deference is owed to a university in defining those intangible characteristics, like student body diversity, that are central to its identity and educational mission.”  Id. at 2214.  The opinion thus recognizes that more than one policy might survive under this standard and that universities, like states, “can serve as ‘laboratories for experimentation.’”  Id.  Fisher II’s reasoning implies that universities have some flexibility in the narrow-tailoring analysis to adopt policies tailored to their specific goals.

Dean Richlin is a partner in the Litigation and Administrative Departments at Foley Hoag LLP. Sarah Burg is a litigator in the firm’s Intellectual Property Department.


Chatting With Jurors in Jury Rooms

Kaplan_Mitchellby Hon. Mitchell Kaplan

Voice of the Judiciary

Before I was appointed a judge, if someone had asked me to list the most interesting things that a trial judge does, I doubt that I would have included chatting with jurors after they have rendered their verdict. However, over the last seven years I have found those post-verdict conversations to be enlightening, reaffirming, and frequently entertaining.

In each county, Superior Court judges are assigned on a rotating basis, each week, to welcome the day’s pool of prospective jurors, as required by law.  See G.L. c. 234A, § 65.  Depending on the county in which you are sitting, your turn comes up every couple months.  Judges take different approaches in their greetings. Part of my approach is try to convince my audience, some of whom are usually skeptical, that most people find jury service an interesting and rewarding experience. I go on to say that when we (judges) speak to jurors who have been seated on juries after they have returned their verdicts, we find that sometimes they have made new friends, they have learned something more about our criminal or civil justice system, and they always feel that they have made an important contribution to their community.  I say this to encourage our potential jurors to serve, and also because I believe it is true.

While I have had the good fortune to speak to a great many juries over the past seven years, these are just personal observations and, therefore, only anecdotal.  After I receive a verdict (or declare a mistrial) and formally thank the jurors for their service, I always tell the jurors in open court that I would like to thank them in a less formal setting in the jury room.  I make it clear that this isn’t an order and they are free to go, but if they have time I hope they will stay a few moments.  I don’t think that any juror has ever left before my court officer escorted me to the jury room.  While some juries are polite, but clearly anxious to disperse and go on about their business, the majority of juries have questions they want to ask, suggestions they want to offer, or generally want to chat about their experience.  I think that juries that have “bonded” during their service are more likely to linger.

After explaining that I do not want to know anything about what jurors said to one another or the course of their deliberations, which I hope they will hold confidential (although having returned their verdict they are freed from any legal obligations not to speak to others), I ask if any juror has any question, comment or observations.  Sometimes that prompts a number of jurors to speak up and sometimes I have to prod with a few questions of my own before a conversation ensues.  Here are some general observations.

Jurors take their responsibilities very seriously–they truly understand that they have been the judges of the facts of the case. Obviously, the subject matter of cases varies.  Some cases are clearly more difficult to decide; some are more emotional; and in some the consequences of the verdict are clearly enormous. Frequently, jurors are physically exhausted at the end of their deliberations.  It is not uncommon to find jurors in tears or fighting them back.  I suspect sometimes that may be because a juror has been convinced to change his or her view of the evidence or a fact.  Sometimes, it is because they have had to make an emotionally difficult decision.

I believe that jurors take very seriously their oath to apply my instructions to the facts as they find them.  Personally, I don’t think that I have ever witnessed jury nullification.  To the contrary, I have had jurors in tears in a personal injury case because they had found for the defendant, even though the plaintiff was very sympathetic or had suffered a debilitating injury.  They had concluded that the defendant just was not negligent.  On a number of occasions in criminal cases, it has been clear that the jurors thought that the defendant was probably guilty of the crime, but the prosecution had not proven guilt beyond a reasonable doubt.  Conversely, jurors have found defendants guilty, but expressed concern over the potential length of the sentence.

Frequently, jurors ask me if there was any additional evidence that had been excluded from trial.  More often this comes up in criminal cases, but sometimes in civil cases as well.  I don’t have the sense that the jurors are angry that evidence was not presented, they just wish that they had more material on which to base their decisions.  I think that collectively juries are very good at figuring out where the missing pieces are in the chain of evidence or events.

A recurring comment is that jurors do not want the lawyers to repeat the same point, over and over.  Innumerable times juries have told me that they got it the first time, certainly the second time, and by the fifth time they really didn’t want to hear about it again. Indeed, some juries find the repetition condescending not convincing.  Often juries will point out that the trial bogged down over “stuff” that was not relevant to their decision making.  It was as if the lawyer was afraid to leave something out.  I think that jurors appreciate charts and graphs that make data understandable, although they will do their best to sort through materials themselves if they have to. In one case in which critical evidence was on a surveillance video, a technologically savvy juror displayed the video frame by frame during deliberations.  Juries tell me that they try to get past which lawyer they liked the best, but obviously they appreciate lawyers who make their job easier.

I think that even in an informal setting there is a tendency for jurors to tell judges what they think the judge would like to hear.  Nonetheless, when I ask, jurors overwhelming tell me that their jury service has been a rewarding experience and they would like to do it again—but not too soon (especially when the trial takes more than a week).

I truly believe that if lawyers, or the public, were flies on the wall when judges chatted with jurors after a trial, it would make them believe what I believe, that while jury trials may not be the perfect way to resolve disputed issues of fact, they are the best way so far devised.

Mitchell Kaplan is a justice of the Superior Court and currently sits on the Business Litigation Session of the court.  He was previously a partner at Choate, Hall, & Stewart and served as a law clerk to Hon. Joseph L. Tauro, USDC.


The ABCC’s Crackdown on “Pay to Play”: Is Sporadic Enforcement Better Than No Enforcement?

Lyons_Crystalby Eric Hawkins

Viewpoint

Last February, the Massachusetts Alcoholic Beverages Control Commission (ABCC) presented an Everett-based beer distributor, Craft Brewers Guild, with a draconian choice: either face a lethal 90-day suspension of licensed activities, or pay an unprecedented $2.6 million fine, equal to half of projected profits for the time of suspension.  This “choice” stemmed from admitted-to violations of laws forbidding bribery and price discrimination.  In its Chapter 30A suit appealing the fine, however, the Craft Brewers Guild principally claims that (like its competitors) it simply did what was necessary—that “pay to play” is the industry norm, practiced by all or most, necessary for survival.  And when viewed in context, this perhaps unusual defense forces the observer to take a second glance at how we regulate the industry and ask again: is this the best way?

First some background.  The volcanic growth in the number of U.S. breweries is no secret. In 1978, American beer drinkers were served by an estimated 89 breweries, a post-Prohibition nadir.  In line with the oft-dubbed “craft beer revolution,” last year saw an 18% increase over 2014’s record numbers, with the total number of breweries chiming in at 4225.  Regardless of whatever paradox lies with choice, the market has permanently and fundamentally changed.  And one consequence is simply space: no matter a bartender’s ingenuity, there are only so many actual tap lines in bars available to pour such unprecedented variety and creativity.  Resultant competition for those lines is predictably fierce and growing fiercer.

Despite this altered market, these competing actors play on an old stage: an entrenched tapestry of regulation governs the alcohol market.  In Massachusetts (like most states), the alcohol industry is artificially divided into three parts.  Generally, (i) licensed manufacturers of alcoholic beverages (like a brewery) sell their goods to (ii) licensed distributors (like Craft Brewers Guild), who in turn sell to (iii) licensed retailers, such as a bar or liquor store—which then may serve the consumer.  Vertical integration or substantial ownership between these three “tiers” is highly restricted; for the most part, they must operate independently.  Notwithstanding its many critics, this tripartite demarcation at least intends to prevent organized and monopolistic crime, increase orderliness in what was once a disorderly market, and artificially inflate prices to bolster temperance.

Further, the Commonwealth extensively regulates the means and methods of business across the borders it erected.  For example, if a brewer (one tier) wishes to stop selling beer to a particular distributor (another tier), it may not simply re-negotiate the contract.  It must show cause to the satisfaction of the ABCC before doing so.

At issue in the Craft Brewers Guild story, however, is the regulatory decision to restrain the methods these tiers may use to compete.

The statute and regulation at play are G.L. ch. 138, §25A and 204 CMR 2.08.  Section 25A forbids brewers and distributors from offering the same product to different purchasers on different terms.  What is offered to one—be it price, credit or favor—must be offered to all.  In turn, 2.08 forbids paying purchasers to carry a particular brand of alcohol.  (For good measure, the federal Alcohol and Tobacco Tax and Trade Bureau forbids the same).  Together, these rules intend to eliminate discrimination and prevent monopolization by a single major brand, in theory conserving fertile soil for up-starts and innovators while stifling disorderly conduct throughout the industry.

So on one hand, there’s unprecedented competition among a rapidly growing number of brands seeking increasingly scarce tap lines.  On the other, a regulatory framework—codified in a different era—that artificially partitions alcohol distribution among three distinct entities and then attempts to prevent those entities from purchasing an advantage from one another.  More players, scarcer resources, and tight restraints: this is context in which the ABCC’s fine of Craft Brewers Guild (and pending investigation into five bars) must be considered.

With that context in mind, this is what happened.  Craft Brewers Guild, as part of a “pay to play” scheme, kicked back varying levels of cash and other favors to bars for putting its beers on tap (and thereby taking another distributor’s beer off).  Although no brewers were cited in the decision, the ABCC speculated that Craft Brewers Guild would then accept (or demand) reimbursements from the benefited breweries.  The legal issue is therefore clear: not all bars received the same kickbacks, and some received none at all, violating Section 25A’s prohibition on price discrimination; and tap space was purchased at the expense of other beer, violating 2.08’s prohibition on bribery.  Media coverage reveals that the practice may be (perhaps necessarily) very common.  But it was Craft Brewers Guild that was hit with the fine.  And that sparks some thoughts.

First, there’sirony in a distributor of mostly craft beers running afoul a law meant in part to protect craft beers from larger market forces.  And the irony is compounded by the fact the entire ABCC investigation grew from a seed planted by a series of angry tweets from the owner of the now-closed craft brewery Pretty Things, whose beers were carried by Craft Brewers Guild (but who presumably was not benefitting from the practice).  At first blush his anger makes sense—the law should be followed, there’s a large variance in economic power even within the “craft” sector of the beer market, and consumer choice could still be largely inhibited by prices offered (or demanded) for tap lines that burden already-thin profit margins of emerging breweries.  Yet, the fact that a craft brewer triggered an investigation into its own craft distributor indicates that a law meant in part to protect small companies from allegedly law-breaking “big guys” may in actuality be causing unintended consequences.  One wonders whether emerging entities are most in need of market freedom to purchase space in a crowded field.  Further, roles have been reversed: entities that typically resist what they consider byzantine restrictions are now essentially calling for stricter government enforcement.  All of which is to say that it’s complicated: a simple pro/anti-regulation dichotomy is, as always, insufficient.

But fundamentally, when presented with a complicated background and a choice between a less-fettered market (with its risks) and rather ironic, sporadic and ineffectual enforcement of old laws with antiquated origins (by an agency that has regulated hesitantly in the past), one is hard-pressed to gleefully embrace the latter.  The Suffolk Superior Court’s Chapter 30A review of the ABCC decision will, therefore, make for interesting reading.  Arbitrary and capricious?  Perhaps.

Eric Hawkins is an associate who works on a diverse range of matters within WilmerHale’s Litigation/Controversy Department. Prior to joining WilmerHale, Mr. Hawkins worked in the Administrative Law division of the Massachusetts Attorney General’s Office, where he researched, drafted and argued motions on behalf of various Massachusetts agencies facing administrative appeals and constitutional challenges. Throughout law school, Mr. Hawkins worked part time as a Brewery Ambassador for the Samuel Adams brewery in Boston.


Honest Answers: Learning How Best To Phrase Questions To Prospective Jurors In Voir Dire

giles_lindaby Hon. Linda E. Giles

Voice of the Judiciary 

Trial lawyers and I have not always seen eye-to-eye on the purposes or methods of juror voir dire.  As a trial judge, I view the overarching objective of juror voir dire as the selection of an impartial jury, with a corollary need to make sure peremptory challenges are exercised constitutionally.  Many trial attorneys admit freely that they are interested in as partial a jury as possible, with the subsidiary goal of learning as much as possible about the selected jurors so that they might later tailor arguments and present their case more persuasively.

With the advent last year of attorney-conducted voir dire in Massachusetts, we now have an array of mechanisms for conducting voir dire of prospective jurors:  (1) traditional, judge-controlled questioning of prospective jurors; (2) attorney-conducted voir of individual jurors (each examined one at a time by the attorney or self-represented party at sidebar or in the absence of the rest of the venire); or (3) panel voir dire (the questioning by counsel or pro se litigant of jurors as a group).  There has been much recent discussion within the Superior Court and the bar about which of these methods, alone or in combination, is more effective generally or in a particular case.

I am here to say that, whatever your goals in selecting a jury and whatever mechanism you select, if you want “to learn whether [a juror] . . . has . . . formed an opinion . . . or is sensible of any bias or prejudice,” G. L. c. 234, § 28, it is the phrasing of the voir dire questions themselves that matters most.  The simple truth is that questions do more than solicit information; “[q]uestions put words in answerers’ mouths.”  Kellerman, Kathy, “Persuasive Question-Asking:  How Question Wording Influences Answers” (2007).  The slightest differences in a question’s form, phrasing, terminology, and presumptions can alter the answer the prospective juror gives.  Id.  If a universal aim of jury selection is to elicit truly honest answers from prospective jurors, then we trial judges and lawyers alike should be mindful of and seek out training on the type of questions that could best accomplish this shared goal.

Questions shape answers in many ways.  A “suggestive question,” for example, is one that implies that a certain answer should be given in response, Copeland, James M., “Cross Examination in Extemp,” National Forensic League (2010), or includes an assumption as accepted fact, Loftus, Elizabeth F., “Eyewitness Testimony,” Harvard University Press, Cambridge, MA (1996).  Asking, “Don’t you think this was wrong?,” subtly influences the respondent into answering in the affirmative, whereas a one-word variant of that question, “Do you think this was wrong?,” does not.  “Repeated questions” may make interviewees think that their first answer was wrong, leading them to change their answer.  See Lyon, Thomas D., “Questioning Children: The Effects of Suggestive and Repeated Questioning,” Electronic Publishing, Inc. (1999).  A “forced-choice question,” e.g., “Is this yellow or green?,” forces people to choose between two options when neither choice may be true or might need more explanation.  See Peterson, Carole, & Grant, Melody, “Forced Choice:  Are Forensic Interviewers Asking the Right Questions?,” Canadian Journal of Behavioural Science (2001).

“Confirmatory questioning” during voir dire can be particularly risky.  Confirmatory questions are those posed to support a preexisting perception.  For example, if a questioner assumes a hypothesis about a respondent, such as being extroverted, he/she may slant the questions to confirm that hypothesis, e.g., “What would you do if you wanted to liven up a party?” or, “In what situations are you most talkative?”  Snyder, M., & Swann, W. B., “Hypothesis Testing Processes in Social Interaction,” Journal of Personality and Social Psychology (1978).  Conversely, if the interviewer wanted to make the interviewee look introverted, he/she would ask questions like, “Have you ever been left out of a social group?” or, “In what situations do you wish you could be more outgoing?”  Id.  In both instances, the questioner simply finds what he/she expects to find.  Such an intentional or unintentional strategy can produce non-representative answers that are shaped by the questions asked.  See Swann, W. B., Guiliano, T., & Wegner, D. M., “Where Leading Questions Can Lead:  The Power of Conjecture in Social Interaction,” Journal of Personality and Social Psychology (1982).

Moreover, many people have a tendency to say what they believe is acceptable or appropriate.  This is the so-called “social desirability bias.”  Fisher, R. J., “Social Desirability Bias and the Validity of Indirect Questioning,” Journal of Consumer Research: 20, 303-315 (1993).  Whether questioning jurors individually or in a group, there is a great danger that venirepersons will tell the judge, attorney, or litigant what he/she wants to hear. In addition, prospective jurors who experience difficulty discerning “desired” answers may choose not to answer at all.  Marshall, L. L., & Smith, A., “The Effects of Demand Characteristics, Evaluation Anxiety, and Expectancy on Juror Honesty During Voir Dire,” The Journal of Psychology (1986).

Several states, including Texas, North Carolina, and Maryland, have adopted rules prohibiting improper “commitment” (or “stake-out” or “precommitment”) questions in juror voir dire, see, e.g., Standefer v. State, 59 S.W.3d 177, 183 (Tex. Crim. App. 2001); Hyundai Motor Company v. Vasquez, 189 S.W.3d 743, 756 (Tex. 2006); State v. Parks, 324 N. C. 420, 423 (1989); Stewart v. State, 399 Md. 146, 162 (2007); some other federal and state jurisdictions have addressed the issue in the context of “death-qualifying” juror voir dire in capital cases, see Morgan v. Illinois, 504 U.S. 719, 735-736 (1992); U.S. v. Tsarnaev, U.S. District Court No. 13-CR-10200-GAO (Dist. Mass. 2014).  A commitment question is one that “commit[s] a prospective juror to resolve, or to refrain from resolving, an issue a certain way after learning a particular fact.”  Standefer, 59 S.W.3d at 179.  “[A]n improper commitment question seeks to create a bias or prejudice in the panelists before they have heard the evidence.”  Rodriguez-Flores v. State, 351 S.W.3d 612, 621 (Tex. App. 2012).  An example of an improper commitment question (asked by the prosecutor in a drug case) would be the following:  “If the evidence, in a hypothetical case, showed that a person was arrested and he/she had in his/her pocket a crack pipe with residue in it, is there anyone who could not convict a person based on that?”  Standefer, 59 S.W.3d at 179.  This question asks the jurors whether they would resolve a person’s guilt based on his/her possession of a residue amount of cocaine in a crack pipe.  Id.  By contrast, the question, “If the alleged victim is a nun, could you be fair and impartial?,” is not an improper commitment question because it does not ask the panelist to resolve any issue in the case based on the fact that the victim is a nun, only to commit to what the law requires, i.e., being fair and impartial.  Id. at 180, 181.

Not all case-specific questions are inappropriate, of course.  “[T]he proper tests for whether a question is a ‘stake-out’ question are the following:  (1) Does the question ask a juror to speculate or precommit to how that juror might vote based on any particular facts? or (2) Does it seek to discover in advance what a prospective juror’s decision will be under a certain state of the evidence? or (3) Does it seek to cause prospective jurors to pledge themselves to a future course of action and indoctrinate them regarding potential issues before the evidence has been presented and they have been instructed on the law?”  U. S. v. Johnson, 366 F. Supp.2d 822, 845 (N.D. Iowa 2005).  The line between a proper and an improper commitment question is not always a bright one.

This discussion of framing voir dire questions only scratches the surface.  I am concerned that trial judges and attorneys are not well informed about or skilled at asking questions during juror voir dire.  I strongly urge the courts and the bar to develop training programs on the topic of questioning prospective jurors.  By learning to keep our words out of the jurors’ mouths, we can achieve a more effective, trustworthy way of choosing a jury.

Judge Linda Giles has served as an Associate Justice of the Superior Court since 1998. She is an adjunct professor of law at Suffolk University Law School and a member of the Board of Editors of the Boston Bar Journal. Judge Giles is a graduate of McGill University and New England School of Law.


The Impact of Recent Revisions to Fed. R. Civ. P. 37(e) — Electronic Spoliation

bresnahan_elizabethby Elizabeth Bresnahan

Heads Up

The amendments to the Federal Rules of Civil Procedure, effective December 1, 2015, include significant changes to Rule 37(e) concerning spoliation of electronic evidence.  See Fed. R. Civ. P. 37(e).  With electronically stored information (“ESI”) becoming increasingly prevalent, the amendments are designed to clarify and streamline litigants’ preservation obligations, imposing a high bar on parties who seek to have sanctions imposed on their opponents.  Litigants can now expect uniform standards for curative measures where the circuits had previously been split and sanctions inconsistently applied.  For example, the amended Rule 37(e) represents a departure from the negligence standard which precipitated sanctions in a variety of circuits under the former Rule, and “forecloses reliance on inherent authority or state law to determine when” sanctions and remedial measures should be used.  Fed. R. Civ. P. 37(e) advisory committee’s note to 2015 amendment, available at https://www.law.cornell.edu/rules/frcp/rule_37.  (“Advisory Committee Notes”).  Instead, under the current Rule 37(e), courts are instructed not to impose an adverse inference, or other harsh sanctions, absent a party’s intent to deprive the other party of the at-issue evidence, resulting in prejudice.   Moreover, under the amended Rule, such corrective measures can only be imposed where electronic information that should have been preserved in anticipation of litigation is lost.  The amended Rule offers some additional protection to litigants by permitting additional discovery to repair or replace such presumed “missing” evidence.  And, even if the court eventually finds that sanctions are appropriate, they are limited to “measures no greater than necessary to cure the prejudice.”  Fed. R. Civ. P. 37(e)(1).  Thus, the result may be that, as litigants find additional protections under the amended Rule, and higher hurdles to imposing sanctions on their opponents, we may see a decrease in litigation concerning failure to preserve.

Fed. R. Civ. P. 37(e), as amended.

The text of the amended Rule, marked to show changes from the prior version, follows:

(e)  Failure to Provide[Preserve] Electronically Stored Information. Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good faith operation of an electronic information system.[If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court:

(1) upon finding prejudice to another party from loss of information, may order measures no greater than necessary to cure the prejudice; or

(2) only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation may:

(A) presume that the lost information was unfavorable to the party;

(B) instruct the jury that it may or must presume the information was unfavorable to the party; or

(C) dismiss the action or enter a default judgment.

Evidentiary Sanctions Under the Amended Rule.

Failure to take reasonable measures to preserve.  Rule 37(e) does not create a new duty to preserve, and as such, does not apply if the ESI is lost before the duty to preserve arises.  See Advisory Committee Notes.  Indeed, a party’s preservation obligations remain triggered when litigation is pending or reasonably foreseeable, or where the party has independent preservation obligations, e.g., under a specific statute or internal company policy.

In determining whether a party has taken reasonable steps to preserve, the Rule allows courts to consider “routine, good-faith operation of an electronic information system,” as well as the “proportionality” of the efforts to the case and to a party’s resources.  Id.  The Advisory Committee directs that courts be “sensitive to the party’s sophistication with regard to litigation in evaluating preservation efforts…” Id.  And, a party’s efforts need not be perfect.  Id.

No sanctions or other remedial measures unless information is lost.  Critical to whether remedial measures are permitted under the amended Rule is that the information at issue be lost; if it can be “restored or replaced through additional discovery,” Rule 37(e) does not permit remedial action.  Fed. R. Civ. P. 37(e).  The Advisory Committee reasons that “[b]ecause electronically stored information often exists in multiple locations, loss from one source may often be harmless when substitute information can be found elsewhere.”  Advisory Committee Notes.  Moreover, “efforts to restore or replace lost information through discovery should be proportional to the apparent importance of the lost information…. [S]ubstantial measures should not be employed to restore or replace information that is marginally relevant or duplicative.”  Id.

Measures “no greater than necessary” on finding of prejudice.  Assuming the above prerequisites are met, a court may order certain proportional remedial measures under subsection (e)(1) of the amended Rule only “upon finding prejudice to another party from loss of information.”  Fed. R. Civ. P. 37(e)(1).  The measures must also be “no greater than necessary to cure the prejudice.” Id. How to assess prejudice is left to the discretion of the courts; the Rule does not address which party has the burden.  Advisory Committee Notes.

Upon finding prejudice, courts may impose remedial measures that are proportional to the prejudice.  Id.  The Advisory Committee identifies these less severe, but serious measures, as “forbidding the party that failed to preserve information from putting on certain evidence, permitting the parties to present evidence and argument to the jury regarding the loss of information, or giving the jury instructions to assist in its evaluation of such evidence or argument, other than instructions to which subdivision (e)(2) applies.”  Id.

Specified and severe measures only upon finding “intent to deprive.”  Under the amended Rule, the most severe sanctions, such as adverse inference jury instructions, dismissal of claims, and entry of a default judgment, are now reserved for a “finding that the party acted with the intent to deprive another party of the information’s use in the litigation.”  Fed. R. Civ. P. 37(e)(2).  The Advisory Committee counsels the importance of a finding an “intent to deprive” in order to address and deter such failures.  Advisory Committee Notes.  Mere negligence — or even gross negligence — is no longer sufficient.

While the Rule sets forth four severe sanctions that may be imposed under the Rule upon a finding of intent, proportionality again directs the analysis.  Likewise, the Advisory Committee cautions that “[t]he remedy should fit the wrong, and the severe measures authorized … should not be used when the information lost was relatively unimportant or lesser measures such as those specified in subdivision (e)(1) would be sufficient to redress the loss.” Id.

Elizabeth Bresnahan is a litigation associate in the Boston office of Morgan, Lewis & Bockius LLP.


Proportionality Emphasized In Amendments To The Federal Rules Of Civil Procedure

foster_mannyby Immanuel R. Foster

Heads Up

Significant amendments to the Federal Rules of Civil Procedure became effective on December 1, 2015.  The amendments modify Rules 1, 4, 16, 26, 30, 31, 33, 34, 37, 55, and 84.  The amendments seek to increase the efficiency and speediness of litigation while slowing the rising costs of discovery.  Toward the latter goal, certain of the revisions establish an express guiding principle to limit the scope of discovery:  proportionality.

The application of the proportionality requirement likely will have an immediate and lasting influence on how parties conduct discovery in federal courts and how the courts referee discovery disputes.  Specifically, amended Rule 26(b)(1), which governs the scope of discovery, permits discovery into relevant, non-privileged information “proportional to the needs of the case.”  (Emphasis added.)  Old Rule 26(b)(1) permitted discovery into relevant, non-privileged information “reasonably calculated to lead to the discovery of admissible evidence,” a phrase that was often misconstrued and which is now removed.  Old Rule 26(b)(1) also permitted such discovery into sources of additional discovery, “including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter.”  Thus, the new rule:  (i) establishes “proportionality” as a limiting principle (ii) potentially limits “discovery about discovery” and, consequently, (iii) will, it is hoped, add a needed control to the rising costs of discovery.

Proportionality Is The New Standard

The amended rule removes “reasonably calculated” – an ambiguous phrase that sometimes allowed for expansive discovery – and focuses on “proportional.”  And the amended rule specifies the considerations for determining whether discovery is proportional, including “the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.”  Parties now must consider these factors when making or responding to discovery requests.

To be sure, proportionality is not a wholly new concept in federal practice.  For example, before the 2015 amendments, proportionality was implied by Rule 26(b)(2)(C)(iii), which required courts to limit discovery where “the burden or expense of the proposed discovery” would “outweigh[] its likely benefit,” and Rule 26(g) required a party seeking discovery to certify that the discovery was “not . . . unduly burdensome or expensive,” in light of the circumstances of the litigation.  But while parties seeking protective orders pursuant to Rule 26(c) would frequently call the court’s attention to these proportionality considerations, opposing parties would often invoke “reasonably calculated,” which the Advisory Committee Notes on the new rule state “were used by some, incorrectly, to define the scope of discovery.”  The amendments change that.  The Committee Notes also state that “[t]he present amendment restores the proportionality factors to their original place in defining the scope of discovery,” empowering courts to enforce tighter limits on disproportionate discovery.

Proportionality May Restrict Discovery About Discovery

The amendment to Rule 26 deletes language that permitted discovery into information about “the existence, description, nature, custody, condition, and location of any documents . . . and location of persons who know of any discoverable matter.”  However, the Committee Notes suggest that this change is more style than substance.  It states that the long list of examples is so “deeply entrenched” that to include it would only maintain unnecessary “clutter” in an already lengthy rule, and that “[t]he discovery identified in these examples should still be permitted under the revised rule when relevant and proportional to the needs of the case.”

Still, the revision suggests limitations to the scope of this discovery to the extent that it would be at cross purposes with proportionality.  For example, in a recent case, a magistrate judge ruling on a motion for a protective order applied Rule 26(b)(1) and limited a proposed Rule 30(b)(6) deposition topic, noting that “[w]hile Plaintiffs have articulated credible reasons for seeking this information nationwide, its production is not proportional to the needs of the case.”  Cooper v. Charter Commc’ns, Inc., No. 3:12-cv-10530-MGM, 2016 WL 128099, at *2 (D. Mass. Jan. 12, 2016).  One of the credible reasons that Plaintiffs had advanced was that they were entitled to test Defendant’s assertion that they lacked certain relevant records for Massachusetts by inquiring about “how [Defendant] is able to track service losses in other states.”  Pl.’s Opp’n To Charter’s Mot. at 7, Cooper, ECF No. 187.  Thus, although the discovery request might have been permitted under the old rule, it was deemed not proportional under the new rule, and therefore exceeded the scope of discovery now permitted.

Proportionality Considerations Will Likely Contain The Costs Of Discovery

Proportionality figures to slow the ballooning costs of litigation caused by technological advances.  Specifically, widespread use and adoption of electronically stored information (ESI), often over many platforms, has made once-mundane discovery requests exponentially more burdensome.  In the past, responding to a discovery request might have meant collecting the data from a few computers from a few custodians, and each of those computers might have stored only a few gigabytes of data.  Now, discovery sometimes requires searching and reviewing terabytes of data harvested from local computers, from networks, and from the cloud – all of which must be reviewed for relevance and privilege.  This discovery can be similarly onerous for discovery recipients who must review and analyze large productions to determine how the information fits into or modifies their theory of the case or how the information might necessitate additional discovery.

The Committee Notes express the hope that parties and the courts will continue to embrace sophisticated ways to reduce the costs of producing ESI.  For example, to the extent that a discovery request could call for a click-by-click review through thousands or millions of documents, courts should permit parties to use reasonably-tailored search terms to narrow the scope of review.  Proportionality may now require it.  Limiting the scope of e-discovery would certainly make discovery less expensive.  Moreover, as discussed above, if courts become more reluctant to permit discovery into potential sources of additional discovery, that would further contain costs.

Conclusion

At the very least, the amended Rule 26(b)(1) will require parties and federal courts to weigh the proportionality factors and determine, for example, whether the importance of certain discovery in resolving an issue is proportional to the burden or expense of providing that discovery.  The Committee Notes suggest that parties should use Rule 26(f) and other scheduling and pretrial conferences to gain a “full appreciation of the factors that bear on proportionality” to inform their discovery requests and responses.  In discovery motion practice, parties will no longer prevail by arguing that a discovery request is reasonably calculated to lead to admissible evidence; now they must demonstrate that the request is proportional.

Immanuel R. Foster is a litigation associate at Skadden, Arps, Slate, Meagher and Flom LLP, and a member of the Boston Bar Association.


Federal and Massachusetts Exemptions for Securities Crowdfunding

sutcliffe_thomasby John D. Hancock

Legal Analysis

Companies in Massachusetts have two new methods to conduct smaller securities offerings: crowdfunding under a federal regulation adopted in October 2015 and crowdfunding under a Massachusetts regulation adopted earlier in 2015. Both are designed to provide efficient and affordable means of raising capital through the sale of small amounts of securities to a large number of investors.[1]

The SEC’s new Regulation Crowdfunding,[2] which takes effect on May 16, 2016, significantly changes how companies can conduct securities offerings exempt from registration under the Securities Act of 1933. Traditionally, requirements for exempt offerings have imposed significant restrictions on the offering process, such as limits on solicitation and advertising, the number or type of offerees, or the offering’s geographic scope. Under Regulation Crowdfunding, companies may offer and sell up to $1 million of securities to the public anywhere in the United States without registering the offering. The regulation allows companies to reach potential investors who are ordinarily excluded from exempt offerings and may enable companies unable to raise funds through traditional offerings to grow and thrive.

Unfortunately, the regulation imposes some requirements, such as the obligation to provide ongoing public disclosure, that may limit its utility.

The Massachusetts Crowdfunding Exemption[3] was adopted after Regulation Crowdfunding was proposed but before it was adopted. The exemption relies on Section 3(a)(11) of the Securities Act and federal Rule 147, which historically have had limited utility.[4] The state exemption is more flexible than Regulation Crowdfunding, including a higher maximum offering amount, fewer affirmative disclosure requirements and no ongoing reporting requirements.[5]

The new exemptions may be most attractive to newly organized startups with straightforward business plans whose capital needs can be satisfied entirely through crowdfunding. Companies considering crowdfunding should nonetheless anticipate the risks and costs associated with a large shareholder base.

Federal Crowdfunding

Under Regulation Crowdfunding, an issuer may conduct one or more offerings to raise up to $1 million in any twelve-month period.[6] The dollar limit applies to offerings under the regulation by the issuer of the securities, its predecessors, if any, and companies controlled by it or under common control with it.  The securities are generally non-transferable for one year.

Each investor can purchase only a limited dollar amount of crowd-funded securities in any twelve-month period, regardless of the number of issuers involved. If a person’s annual income or net worth is below $100,000, he or she can invest up to $2,000 or, if greater, 5% of the lesser of his or her annual income or net worth. If both a person’s annual income and net worth equal or exceed $100,000, he or she can invest up to 10% of the lesser of his or her annual income or net worth, up to $100,000.

Significantly, offerings under the regulation are eligible for federal preemption of state securities laws under Section 18(b)(4)(C) of the Securities Act, which should reduce compliance costs.

Some companies are ineligible to conduct offerings under Regulation Crowdfunding.[7] The regulation provides an exemption only for the initial issuance of securities and does not expressly extend to a later conversion or exercise of those securities, which could occur months or years after the conclusion of the offering. Accordingly, there may be practical limits on the types of securities that can be included in a crowdfunding offering without introducing excessive complexity or cost.

Intermediary; Online-Only Offerings. Under the regulation, an issuer must engage an intermediary and conduct its offering “exclusively” through that intermediary’s online platform. The intermediary must be either a broker registered under Section 15(b) of the Securities Exchange Act of 1934 or a “funding portal” registered under Regulation Crowdfunding.[8]

Neither an intermediary nor its directors, officers or partners may have or receive an interest in the issuer’s securities, except that an intermediary may receive, as compensation for its services, securities on the same terms and conditions as investors in the offering.

Limited Advertising; Promoters. The regulation prohibits advertising in connection with the offering and prohibits payment of compensation for promoting the offering outside the intermediary’s platform.  An issuer may, however, distribute notices that refer investors to the intermediary’s online platform if the notices contain only certain limited information.[9] The issuer may communicate with potential investors through the online platform, but its founders, employees and promoters must disclose their relationship with the issuer and the receipt of any compensation from the issuer.

Offering Structure. Crowdfunding offerings must remain open for at least 21 days before the issuer may consummate any sale. The issuer must disclose the targeted offering amount, the deadline for reaching that amount and, if greater than the target, the maximum offering amount. Importantly, investors may cancel their offering commitments until 48 hours before the offering deadline.

If funding commitments fall short of the target at the offering deadline, investors’ funds must be returned to them. If the target is reached earlier than the offering deadline, the issuer may, in some circumstances, accelerate the closing.

Offering Statement. The most challenging aspect of an offering under the regulation is the requirement to prepare an offering statement. The SEC has estimated that, on average, preparation of the necessary disclosures will take approximately 100 hours, and experience suggests that the SEC’s estimates of paperwork burdens are often low. The regulation will likely be more attractive to very early-stage enterprises because the disclosure requirements will be less burdensome than for more mature companies.

The offering statement must disclose specific information, including, e.g., descriptions of the issuer’s business, business plan, financial condition (including material changes or trends since the most recent balance sheet), the terms of the offering, the anticipated use of proceeds and risk factors.  The statement must also include information about directors, officers, beneficial owners and related parties. Issuers must provide financial statements prepared in accordance with U.S. generally accepted accounting principles for the two most recently completed fiscal years or, if shorter, the period since inception. For offerings up to $100,000, the issuer’s CEO must certify the financial statements. For offerings between $100,000 and $500,000, or for an issuer’s first offering under Regulation Crowdfunding, an independent accounting firm must “review” the financial statements. For subsequent offerings greater than $500,000, an independent accounting firm must audit the financial statements. These financial statement requirements may significantly increase the cost of a crowdfunding offering.

The offering statement is subject to the anti-fraud provisions of the Securities Act[10] and must be updated to reflect material changes. Because the disclosure is directed at retail investors, SEC staff may expect a level of clarity closer to that found in a public offering prospectus than a private placement memorandum. Many issuers will benefit from the advice of experienced disclosure counsel in satisfying this requirement.

Progress Updates. An issuer must notify investors within five business days after investment commitments reach 50% and 100% of the targeted offering amount.[11]  If the issuer accepts funds above the targeted offering amount, the issuer must also notify investors of the total amount sold.

Filing Requirements. Offering statements, amendments and progress updates must be filed with the SEC, via EDGAR, on new Form C. This information will be publicly available.

Ongoing Reporting. One downside of a crowdfunding offering is that the issuer must file an annual report with the SEC within 120 days after each subsequent fiscal year. The annual report is substantially similar to the offering statement, excluding offering-related information. The financial statements in the annual report must be certified by the issuer’s CEO and need not be reviewed or audited; however, reviewed or audited financial statements must be included, if available.

The obligation to file annual reports terminates if (a) the issuer becomes a public reporting company, (b) after the completion of the offering, the issuer has filed an annual report and has fewer than 300 shareholders or the issuer has filed annual reports for the three most recent years and has assets of $10 million or less, (c) all of the securities issued under the crowdfunding exemption are repurchased or (d) the issuer liquidates.

Exemption from Exchange Act Registration. Ordinarily, companies with more than $10 million of assets and more than 500 shareholders of record that are not “accredited investors” must register under the Exchange Act. However, shares issued in a crowdfunding offering are excluded from this calculation if the issuer has filed all required annual reports, has assets of $25 million or less and has engaged the services of a registered transfer agent.

Investor Management. Given the potentially unlimited number of participants in a crowdfunding offering, issuers should consider how they will manage a company with hundreds or thousands of unfamiliar investors. Investors in early crowdfunding offerings will likely be inexperienced with investing in non-public companies and may not anticipate how little information or access to management they will receive. Issuers should consider how to respond to myriad requests for information and progress reports or to unfavorable or inaccurate public comments by investors. Issuers should anticipate that disappointed investors may assert claims or may file complaints with government regulators. Issuers should consider adding contractual provisions to their offering documents to reduce the costs of investor disputes, such as mandatory arbitration.

Lastly, issuers should consider the impact of a crowdfunding offering on potential exit opportunities. Acquisitions of non-public companies usually involve indemnification by the target’s securityholders, and a large number of unsophisticated securityholders may complicate the target’s ability to consummate a transaction that is attractive to both a buyer and the target’s own larger shareholders, who may be asked to bear a disproportionate share of potential liability. Similarly, a large number of unaccredited investors may limit the buyer’s ability to pay with securities, since the exemptions that buyers customarily rely upon for acquisitions of private companies will be unavailable.

Massachusetts Crowdfunding

In January 2015, Massachusetts adopted its own crowdfunding exemption from state registration requirements. Like Regulation Crowdfunding, the state exemption requires specific written disclosures to investors, imposes dollar limitations on investors’ purchases,[12] is unavailable to disqualified issuers and certain types of issuers, and limits offerings to $1 million in any twelve-month period.[13] Under the state exemption, however, issuers with audited financial statements can offer up to $2 million of securities. The exemption is limited to issuers organized under Massachusetts law with a principal place of business in Massachusetts, and securities may be offered and sold only to investors in Massachusetts. Moreover, the exemption requires issuers to comply with either Section 3(a)(11) or Rule 147.[14]

Notably, the state exemption does not require that the offering be conducted exclusively online, nor does it require an intermediary. However, the exemption prohibits the issuer from remunerating anyone, other than registered broker-dealers, for soliciting prospective purchasers, which may limit the use of funding portals that are not registered broker-dealers.

The state exemption imposes certain requirements absent from the federal exemption. The minimum offering amount must be “sufficient” to implement the business plan described in the offering materials and must be at least 30% of the maximum offering amount. If the minimum offering amount is not met within one year, the issuer must return investors’ funds. The issuer must also file with the Secretary of the Commonwealth a notice of the offering, copies of offering materials and, after the offering, a sales report.

Although the express disclosure requirements of the state exemption are narrower than those of Regulation Crowdfunding, the state exemption requires disclosure of “any additional information material to the offering” and “full and fair disclosure to offerees and investors of all material facts relating to the issuer and the securities being offered, in accordance with Section 101” of the Massachusetts Uniform Securities Act, M.G.L. ch. 110A. Section 101 follows the traditional anti-fraud formulation of Rule 10b-5 under the Exchange Act that the issuer may not “make any untrue statement of a material fact or … omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading,” nor may the issuer otherwise commit fraud.  The potentially open-ended nature of this disclosure requirement may discourage some issuers from using the state exemption.

Conclusion

Both the federal and Massachusetts crowdfunding exemptions offer novel but untested means to raise funds from a broad section of the public. As companies and investors gain experience with the exemptions, regulators should augment their usefulness by eliminating requirements that prove to be burdensome, costly or impractical.

John D. Hancock is a partner at Foley Hoag LLP. He practices in the areas of corporate finance, securities, and mergers and acquisitions. He can be reached at jhancock@foleyhoag.com. The views expressed in this article are his alone and do not necessarily express the views of Foley Hoag.

[1] These regulations apply when a crowdfunding campaign involves the offer or sale of securities; they do not apply to crowdfunding campaigns that offer participants, for example, early access to, or a discount on, a new product or service, such as an album, video game, or software.

[2] 17 C.F.R. Part 227, adopted under Sections 4(a)(6) and 4A of the Securities Act of 1933.

[3] 950 C.M.R. 14.402(B)(13)(o).

[4] Under Section 3(a)(11) and Rule 147, a safe harbor thereunder, an issuer may conduct a crowdfunding offering, but only to investors in the state in which it is organized and operating. When the SEC adopted Regulation Crowdfunding, it proposed to amend Rule 147 to permit offers by out-of-state issuers. However, the amended rule would require that the offering be registered under state law or conducted under a state exemption that limits the offering size to $5 million and imposes an investment limitation on each purchaser. See Securities Act Rel. No. 33-9973, Exemptions to Facilitate Intrastate and Regional Securities Offerings, 80 F.R. 69786 et seq.

[5] All offerings must comply with federal and applicable state securities laws. As explained below, Regulation Crowdfunding generally preempts state law. An offering under the new Massachusetts exemption must also comply with existing federal exemptions under Section 3(a)(11) and Rule 147.

[6] The SEC made clear that its “integration” doctrine – under which multiple offerings may be treated as a single, integrated offering based on factors such as the timing of the offerings, the purpose of the offerings and the types of securities offered – will generally not apply to offerings under the regulation, as long as each offering independently satisfies the requirements of the exemption applicable to it. Nonetheless, an issuer may face difficulty satisfying these requirements simultaneously. For example, advertising permitted under Regulation Crowdfunding may constitute unlawful solicitation under Rule 506(b) of Regulation D, and a general solicitation permitted under Rule 506(c) of Regulation D may constitute illegal advertising under Regulation Crowdfunding.

[7] For example, the regulation is generally unavailable to foreign issuers, public companies, investment companies, special purpose acquisition companies, companies without a specific business plan and issuers disqualified for prior illegal conduct.

[8] A “funding portal” is a limited-purpose broker that acts as an intermediary in a crowdfunding offering but that does not offer investment advice or recommendations, solicit purchases, sales or offers to buy the securities displayed on its platform, compensate employees or others for solicitations or sales on the platform, or handle investor funds or securities.

[9] Permitted information includes the issuer’s name, address, telephone number and website, the terms of the offering and a brief description of the issuer’s business.

[10] Liability is imposed on the issuer and its directors, key executives and others who “offer or sell” the securities, including intermediaries, and extends to any written or oral communication made to an investor in connection with the offering. These individuals should not overlook their exposure to personal liability, particularly for issuers that lack the resources to provide insurance coverage or meaningful indemnification.

[11] The issuer need not provide any progress reports, however, if the intermediary provides “frequent” progress updates to investors through its online platform.

[12] Under the federal exemption, the dollar limits on each investor apply across all issuers whose securities are purchased under the crowdfunding exemption; under the state exemption, the dollar limits apply on an issuer-by-issuer basis.

[13] Interestingly, the dollar limits do not apply to securities offered and sold to the issuer’s directors, officers, partners, trustees and 10% shareholders.

[14] Through incorporation of Section 3(a)(11) and Rule 147, the state exemption effectively prohibits out-of-state offers. In order to comply with this prohibition, an issuer would need to take steps to ensure that information about its offering is available only to investors in Massachusetts.