Legal Developments

and Compliance Issues in

Crowdfunding: International Trade

Michelle Schulz, PartnerGardere Wynne Sewell LLPThanksgiving Tower, Suite 3000Dallas, Texas 75201-4757214.999.3000 214.999.4667 fax

Agenda‒ Overview‒ What is an Export?‒ Due Diligence in Crowdfunding‒ Export Red Flags

Who Regulates Trade?

“DUAL USE” ITEMS

Bureau of Industry & Security

Export Administration Regulations

(EAR)

15 CFR

DEFENSE ITEMS

Directorate of Defense Trade Controls

International Traffic in Arms Regulations

(ITAR)

22 CFR

OTHER AGENCIES

OFAC, Census Bureau, EPA

U.S CUSTOMS AND BORDER PROTECTION

“Policemen” to Enforce Regulations

19 CFR

What is an “Export?”‒Tangible Exports

‒ Shipments through a US port via air, ocean, truck, rail, mail, etc.

‒ Intangible Exports‒ Electronic transfers (including

email, fax and Internet downloads)‒ Technical reports, drawings, data

or source code released to foreign nationals

‒ Also includes “deemed” exports

What is an “Export?” (cont’d)

‒Re-Exports‒ Shipments from one foreign country

to another of US-origin goods or foreign made goods containing certain US-origin parts, components or materials.

Export Due Diligence

‒ Crowdfunding is uniquely international‒ Online platform

‒ Many parties

‒ Money changing hands

‒ Who are you doing business with?

‒ What are you funding?

Export Due Diligence (cont’d)

‒ U.S. Government requires that U.S. parties know their end users and end uses

‒ Sanctions and Embargoes are broad and often apply to monetary transactions

‒ Example: Bank of Russia‒ Company could not receive payment

from that bank!

Export Due Diligence (cont’d)

‒ Sanctions and Embargoes can involve political support

‒ What are you funding? Who is receiving funds?

‒ Example: support for military group or person

‒ May be prohibited under the International Traffic in Arms Regulations (ITAR) and Office of Foreign Assets Control (OFAC) regulations

‒ Sanctions and Embargoes can involve receiving money‒ What are you funding? Who is receiving funds?

‒ Example: support for military group or person

‒ May be prohibited under the International Traffic in Arms Regulations (ITAR) and Office of Foreign Assets Control (OFAC) regulations

Export Due Diligence (cont’d)

‒ Denied Party Screening

‒ Example: Large telecom company

‒ Do they know their end users?

Export Due Diligence (cont’d)

‒ BIS Red Flags‒ Customer or purchasing agent reluctant

to offer information about end-use

‒ Product’s capabilities do not fit buyer’s line of business

‒ Customer willing to pay cash for an expensive items when terms of sale would normally call for financing

‒ Customer has little or no business background

Export Due Diligence (cont’d)

‒ BIS Red Flags (cont’d)

‒ Customer is unfamiliar with product’s performance characteristics but still wants product

‒ Freight forwarding firm is listed as the product’s final destination

‒ Shipping route is abnormal for the product and destination

Export Due Diligence (cont’d)

Pop Quiz!

If I receive a minimal amount of funding from Kim Jong-un, I could get a monetary penalty.

‒ Antiboycott

‒ Covered under the EAR

‒ Red Flag Countries: UAE, Iraq, Bangladesh

‒ Language appears in Letters of Credit, contracts, etc.

‒ Prohibited language may seem harmless…

Export Due Diligence (cont’d)

‒ What if you are not the exporter of record?

‒ You STILL have an obligation to conduct “due diligence” for products subject to export controls

‒ You and your company can be penalized for proceeding with a transaction with knowledge that a violation of the EAR is occurring or is about to occur

Export Due Diligence (cont’d)

‒ “Knowledge” does not always mean “you knew”‒ It also means “you should have known”

‒ Cannot “self blind”

‒ So, when should you know?

Export Due Diligence (cont’d)

Implementation

‒ All departments play a role:‒ Engineering‒ Finance‒ Human Resources‒ Sales & Marketing‒ IT‒ Operations‒ Supply Chain

Questions?

So you’ve tackled the tariff code!

‒ Key Concepts – tariff classification‒ Duty Rates‒ Nuts and Bolts of Tariff

Classification‒ Schedule B‒ Binding Rulings

Michelle Schulz, Partnermschulz@gardere.com214-999-4181