April 2012

Will PPACA Be Deemed Unconstitutional?

By Jeff Goodwin, Executive VP, IMASERV, Inc., jgoodwin@imaweb.com,  317-713-5936.

Jeff Goodwin		The U.S. Supreme Court heard oral arguments in March regarding the constitutionality of the Patient Protection and Affordable Care Act (PPACA). There were four legal arguments before the court. The four arguments were: 1) can the court hear the case prior to a taxable event; 2) does Congress have the power to issue an individual mandate to purchase health insurance; 3) if the individual mandate is unconstitutional, can it be severed from the law; and 4)
did Congress place an undue burden on the states when it expanded Medicaid eligibility?

Members of the IMA should be most immediately concerned about two of these arguments - the individual mandate and the severability issue, as they have the greatest probability of impacting decisions and future costs. Both of these issues could immediately impact group health benefit programs.

Justice Kennedy voiced concerns that the individual mandate has serious implications regarding individual liberty, and that the current administration is required to meet a “very heavy burden of justification” for the mandate to be upheld. Justice Kennedy then stated that the health insurance market may be different enough from other “commerce” to justify upholding the constitutionality of the individual mandate, even with the government’s heavy burden.

Chief Justice Roberts and Justice Scalia questioned if the individual mandate is a permissible exercise of Congress’s power to regulate commerce, i.e., are there any limits on Congress’s authority to impose other types of mandates in the future such as a mandate that Americans purchase burial insurance or healthy foods like broccoli?

The court seemed to have a difficult issue with how much of the PPACA, if any, can survive if the individual mandate is ruled unconstitutional. It appeared that a majority of the court was concerned about striking down the individual mandate without also striking the PPACA’s guaranteed issue and community rating rules. The guarantee issue and community rating rules would expose insurance companies to greater risks than Congress considered appropriate based on the recent negative experience of several states when doing the same type of changes to insurance laws.

The severability analysis by the court assumed that the individual mandate is unconstitutional, thus requiring it to decide which, if any, other provisions of the PPACA will survive if the individual mandate is struck down. Opponents of the PPACA argued that the health care reform law was enacted for purposes of creating nearly universal health insurance coverage, and that the individual mandate was the linchpin of such coverage. The current administration argued that the PPACA’s guaranteed issue and community rating rules – applicable to insurers beginning in 2014 – were so interconnected with the individual mandate that Congress would not have enacted them without the individual mandate. The administration argued that if the individual mandate is struck down, then so too should the guaranteed issue and community rating rules – but all other provisions of the PPACA should stand.

Most media opinions were that the final vote will likely be split with Justice Anthony Kennedy as the swing vote. Kennedy stated that the PPACA “changes the relationship of the federal government to the individual in a very fundamental way.” Chief Justice Roberts questioned the power of Congress to regulate the health insurance market as currently the states regulate insurance. He was also concerned that perhaps Congress has taken on more power than they have been assigned by the Constitution.

There are several potential outcomes from the court: 1) it could deem the individual mandate unconstitutional and strike it down entirely; 2) it could deem the individual mandate unconstitutional but only remove the individual mandate and whatever else it deems affected adversely by that decision; or 3) it could decide the individual mandate is constitutional and the bill would remain intact. A decision is expected from the Supreme Court in late June 2012 before adjournment.

Recent Indiana Legislation Poses New
Challenges for Local Government Officials

The following article was contributed by Philip Sicuso, an attorney with Bingham Greenebaum Doll LLP. Philip may be reached at psicuso@binghammchale.com or 317-968-5541.

In the final hours of the 2012 legislative session, the Indiana General Assembly passed House Enrolled Act 1003 – a law that amends Indiana’s Open Door Law and the Access to Public Records Act in a variety of significant ways. Although
HEA 1003 generally affects public agencies and officials at both the state and local levels, not all sections of the new law are equally applicable to state and local government. A careful look exposes a few noteworthy differences, some of which could create pitfalls for local government officials.

Personal Liability and Fines for Government Officials
In a portion of the act that is equally applicable to both state and local levels of government, the General Assembly imposes a framework for courts to assess civil penalties against certain public officials and/or public agencies for intentional violations of various aspects of Indiana’s open government statutes.

Specifically, the act creates liability whenever an individual, with specific intent to violate the law:

The act authorizes fines of up to $100 for the first violation and up to $500 for each additional violation. If the civil penalty is imposed against an individual, the individual is “personally liable” for the fine. A penalty imposed against a public agency must be paid from the agency’s budget. No penalties may be assessed unless a plaintiff obtains an advisory opinion from the public access counselor prior to filing a judicial action.

Personal liability for government officials can attach only to individuals who are either “officer[s]” of a public agency or who hold a “management level position.” The act includes a specific defense for individuals who violate the law due to reliance on an opinion from the public agency’s legal counsel or from the attorney general. An individual holding a management level position is also specifically protected from liability in instances where an officer of the public agency directs the person to not provide notice or to improperly deny access to a public record.

Additionally, the act prohibits a court from issuing more than one fine in any single lawsuit, even if multiple violations occurred.

Public Meetings Via Modes of Electronic Communication
In an apparent recognition that modern modes of live electronic communication do not inherently hinder the public’s right to an open government, the act creates a framework for members of the governing bodies of state level public agencies to fully participate in meetings without being physically present. In a nutshell, if a state agency adopts a policy that is in line with the specific requirements and limitations of the act, a member who participates remotely via electronic communications:

Under the act, full participation in a public meeting from a remote location is not permitted at the local government level. Although the act does not ban members of local governing bodies from using electronic means to observe, listen or communicate during a meeting, the act does prohibit such members from taking part in any final action, or even being considered present. A local government body can be free of these restrictions only through separate and express statutory authority or legislative action.

Even despite the restrictions on local governments, whenever a member participates in a meeting via electronic means, the act requires local government bodies to prepare a memorandum that specifically identifies each member who:

Notably, if a local government official intentionally fails to include this information in the required memorandum, he or she (as well as the public agency) may be liable for fines issued under the act.

Public Notice Via the Internet
The act also offers local governing bodies the ability to more efficiently notify the public about upcoming meetings. In instances where one or more individuals (other than news media) make a timely written request to be notified about meetings in the next succeeding calendar year, local governing bodies may now provide such notice either via email or on the agency’s website at least 48 hours in advance of each meeting.

Once again, however, if an officer or management level employee of a participating local body fails to satisfy the statutory requirements, fines may be issued under the act. In addition, local governing bodies that wish to take advantage of this new option for public notice are not excused from their pre-existing obligations to post meeting notices at the public agency’s principal office, as well as providing news media notices via the U.S. Postal Service, email or fax.

DISCLOSURE REQUIRED BY CIRCULAR 230. This Disclosure may be required by Circular 230 issued by the Department of Treasury and the Internal Revenue Service. If this article, including any attachments, contains any federal tax advice, such advice is not intended or written by the practitioner to be used, and it may not be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Furthermore, any federal tax advice herein (including any attachment hereto) may not be used or referred to in promoting, marketing or recommending a transaction or arrangement to another party. Further information concerning this disclosure, and the reasons for such disclosure, may be obtained upon request from the author of this article. Thank you.

The JOBS Act - Big Changes for
Capital Formation and Public
Company Reporting Compliance

The following article was contributed by John Millspaugh, an attorney with Bose McKinney & Evans LLP. John may be reached at jmillspaugh@
boselaw.com or 317-684-5114.

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act – also known as the JOBS Act – dramatically changing the landscape for many companies raising capital, hoping to go public or avoid doing so, or dealing with the regulatory burdens of being a public company.

The JOBS Act is intended to stimulate economic and job growth by easing restrictions on certain methods of capital formation and through new measures designed to facilitate initial public offerings (IPOs) for emerging growth companies (EGCs). The Act received broad bipartisan support in Congress, but has generated a fair amount of controversy among investor protection advocates and others.

There is little question that the forthcoming changes to Rule 506 of Regulation D and the new permissive crowdfunding rules will significantly affect startup and growth company funding activities. Less certain is the likely impact of the new IPO on-ramp for EGCs and the increases to stockholder limits for private companies looking to remain private.

Bring in the Mad Men—General Advertising
and Solicitations in Rule 506 and Rule 144A Offerings
General advertisements and solicitations have long been prohibited in Rule 506 and Rule 144A offerings. And, in Rule 506 offerings in particular, confusion and frustration over what constitutes a general advertisement or solicitation abounds. This confusion and frustration, along with frequent accidental (or not) public and publicized offering-related disclosures, create traps for the unwary issuer hoping to rely on the safe harbor of Regulation D. Those concerns, in Rule 506 offerings at least, will soon be eliminated; and issuers and entrepreneurs will be able to speak to the public about their companies more freely, advertise Rule 506 offerings on their websites, and stop acting coy when asked about their fundraising plans.

More specifically, the JOBS Act requires the Securities Exchange Commission (SEC) to revise Rule 506 within 90 days of its enactment to allow general advertising and solicitations of investors, provided sales are made solely to accredited investors, and the issuer takes reasonable steps (as yet undefined) to verify that purchasers in fact are accredited investors. Exempt sales to up to 35 non-accredited investors will still be possible if there is no general advertising or general solicitation.

Similarly, the JOBS Act would allow general advertising and solicitation of investors in offerings under Rule 144A, provided sales are made exclusively to qualified institutional buyers.

The JOBS Act will also exempt certain trading platforms used in Rule 506 offerings from broker-dealer registration. This should increase the prevalence of these platforms and enhance the efficient exchange of issuer information, although critics of the JOBS Act point out the potential for an increase in fraudulent activity resulting from impersonal, general solicitations in offerings where extensive disclosure and reporting are not required.

Crowdfunding—A different Kind of Investing Groupthink
The most popular component of the JOBS Act is its embrace of crowdfunding. Crowdfunding is the process of gathering small investments from a large number of investors (typically via the Internet). Startup enthusiasts view the potential for raising seed capital through crowdfunding as a boon to cash-starved, early stage companies with otherwise limited capital access.

Under the JOBS Act, an issuer may utilize the crowdfunding exemption to raise up to $1 million within a 12 month period without registering the sales with the SEC. However, the aggregate amount sold to any investor in a 12 month period by the issuer relying on the crowdfunding exemption must not exceed:

Crowdfunding issuers will be required to file with the SEC and make enhanced financial, business and risk disclosures at the time of the offering, and to provide annual updates thereafter, with the extent of disclosure dependent on the size of the offering. The JOBS Act also imposes civil liability on issuers and control persons for material misstatements or omissions in connection with a crowdfunding offering and expressly permits rescission claims by investors.

Crowdfunding transactions will be permitted only via a registered broker-dealer or compliant funding portal. Those intermediaries will have enhanced “gatekeeper” obligations designed to prevent fraud and abuse, including ensuring that investors understand investing and its risks, performing background checks on issuer executives, and monitoring investor compliance with individual investment limits.

Again, some critics loathe the new crowdfunding rules, sensing the imminent return to pervasive sham investments marketed through slick-looking websites. Certainly that is a risk that should not be discounted, but the potential liability to the issuers and individuals involved in such a scheme, and the gatekeeper obligations imposed on broker-dealers and intermediaries in crowdfunding transactions, are designed to prevent or ameliorate that risk.

Crowdfunding looks promising for startups, but it will likely not become more prevalent until after the SEC issues its required new rules, which are due 270 days after enactment.

Widely Held Private Companies—
New Flexibility in Avoiding Public Company Reporting
Currently, any non-public issuer with assets over $10 million and shares held by 500 or more persons at the end of the issuer’s fiscal year is automatically subjected to public company reporting obligations under the Exchange Act. In other words, these companies essentially have the same expense structure and reporting requirements as companies who have been through an IPO.

The JOBS Act will raise the trigger for public reporting requirements from 500 stockholders to 2,000 stockholders (although not more than 500 of the stockholders can be non-accredited investors). The asset test will remain at $10 million, but the JOBS Act will exclude from the stockholder trigger calculation those who receive shares pursuant to an employer compensation plan and stockholders who acquire their shares via the crowdfunding exemption.

The current 500-stockholder limit has been cited as an impediment to capital formation by companies who rely on multiple rounds of successive investment, and creates problems for large private companies who provide equity-based compensation to employees. Google, for one, rather famously struggled with this stockholder limit as the number of its current and former employees with option shares ballooned. Relatively few companies, however, approach these limits, but for those dealing with hundreds of investors or equity incentive recipients, the increase in the reporting threshold should come as welcome relief. The exclusion of crowdfunding investors from the calculations also prudently avoids creating this issue for even more companies who raise crowdfunded capital.

Making Life Easier Pre- and Post-IPO—Streamlining the IPO Process
and Relaxed Reporting Requirements for Emerging Growth Companies
One of the JOBS Act’s main objectives is to streamline the IPO process and reduce SEC reporting burdens after an IPO for qualifying EGCs. EGCs are defined by the JOBS Act as companies with annual gross revenues less than $1 billion in the most recent fiscal year. An EGC will benefit from less strenuous disclosure and reporting obligations if its IPO is effective after December 8, 2011, until the earlier of the:

Among other benefits, the JOBS Act permits EGCs to do the following to:

Conclusion
The wide-ranging changes contained in the JOBS Act will undoubtedly make capital raising easier in some ways for many types of issuers. What remains to be determined are questions of degree – how much easier? For whom, really? And what of the seemingly fair criticisms that the unscrupulous will use the relaxed rules as an opportunity for fraud and abuse? Which will be the JOBS Act’s dominant legacy – increased economic activity, or a failed experiment? Betting on the former, we look forward to the first JOBS Act crowdfunding-made millionaires, the EGCs who make it to the IPO, and the first iteration of advertised Rule 506 offerings.

Leading Index for Indiana

STATS Indiana is the statistical data utility for the State of Indiana, developed and maintained since 1985 by the Indiana Business Research Center at Indiana University's Kelley School of Business. Support is or has been provided by the State of Indiana and the Lilly Endowment, the Indiana Department of Workforce Development and Indiana University.

Following last month’s brief pause, the LII continued its ascent. At 98.2, the LII is up 0.2 points this month and at its highest level since August 2008.

The Ceridian-UCLA Pulse of Commerce Index™ (PCI), another economic indicator, also rose 0.3 percent in March, following a 0.7 percent increase in February. That said, the PCI is still down 2.2 percent from a year ago. This lackluster growth is likely attributable to the recent spike in oil prices, as the PCI tracks real-time diesel fuel consumption for over-the-road trucking.

But we are still looking for that undiluted good news. Thomson Reuters/University of Michigan (TR/UM) overall index of consumer sentiment continued to disappoint. Its preliminary April index fell to 75.7 from its March value of 76.2. Bloomberg Businessweek reports that economists were expecting the index to remain unchanged, suggesting consumer sentiment may be worse than previously thought.

The picture continues to be mixed. Earlier this month, the Chicago Federal Reserve reported that Midwest manufacturing increased a percentage point, with the auto, machinery and steel sectors posting improvements. As it has throughout the economic recovery, gradual and punctuated upward movement in the LII provides evidence of an economy struggling to reach takeoff velocity.

Drivers of Change

Updated monthly, the Leading Index for Indiana™ (LII) was developed for Hoosier businesses and governments to provide a signal for changes in the general direction of the Indiana economy. In contrast to The Conference Board’s Leading Economic Index and other national indexes, the LII focuses on key sectors that are important to the Indiana economy.

Surviving in the New Economy
May 24, 2012
Online Webinar

10-Hour OSHA Voluntary Compliance Course
June 4-5, 2012
IMA Conference Center, Indianapolis

30-Hour OSHA Voluntary Compliance Course
June 4-7, 2012
IMA Conference Center, Indianapolis

Synergy of Energy: Environmental and Energy
Regulations and Their Impact on Economic Development
June 6, 2012
Taft Law Offices

IMA/IMPAC Golf Outing
June 21, 2012
The Country Club of Indianapolis

10-Hour OSHA Voluntary Compliance Course
August 7-8, 2012
IMA Conference Center, Indianapolis

10-Hour OSHA Voluntary Compliance Course
Sept. 10-11, 2012
IMA Conference Center, Indianapolis

30-Hour OSHA Voluntary Compliance Course
Sept. 10-13, 2012
IMA Conference Center, Indianapolis

10-Hour OSHA Voluntary Compliance Course
Nov. 12-13, 2012
IMA Conference Center, Indianapolis

30-Hour OSHA Voluntary Compliance Course
Nov. 12-15, 2012
IMA Conference Center, Indianapolis

10-Hour OSHA Voluntary Compliance Course
Dec. 11-12, 2012
IMA Conference Center, Indianapolis

To register for any IMA conference, click the link and register online; or contact IMA at 317-632-2474, ext. 237 or 800-462-7762, ext. 237. Additional information is available by contacting Angie Glass at the above numbers or at aglass@imaweb.com.

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