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socrateaser, Lawyer
Category: Legal
Satisfied Customers: 39045
Experience:  Retired (mostly)
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We have a POS company selling Software as a Service to retailers

Customer Question

We have a POS company selling Software as a Service to retailers all across the US and worldwide. We have a new product aimed at wholesalers (a tier up from the retailer). We would like to offer this product free of charge to wholesalers so they can encourage their own customers (the retailers) to subscribe to our main POS service. My question is, can we also open a new daughter-company and offer these wholesalers a partnership % to further encourage them to promote our product?
Submitted: 4 years ago.
Category: Legal
Expert:  socrateaser replied 4 years ago.

What you are describing is simply a licensing agreement under which you pay a commission to the wholesaler to obtain subscriptions to your software. There is absolutely no law prohibiting this activity.

The subsidiary corporation would receive a license from the development corporation to market the subscription sales to wholesalers. The subsidiary would be in the position of a "manufacturer's rep." This is not a franchise, because you're not selling an entire business interest. There simply isn't any law prohibiting your contemplated activity.

Hope this helps.

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Customer: replied 4 years ago.

My question is, if the subsidiary company is given as a % to different wholesalers, will the latter be able to gain the profit / Loss from the subsidiary's TOTAL net profit. I'm not asking if they can profit from selling subscriptions (of course they can) but - if we provide 1% of the subsidiary to Wholesaler A and 1% of the subsidiary to wholesaler B, and so forth.. let's say up-to 50 wholesalers. Can these wholesalers actively promote our main product, the POS service with the revenue generated by the wholesalers considered part of the subsidiary's revenue? Is there any law prohibiting this activity?

Expert:  socrateaser replied 4 years ago.
There's no law prohibiting the sale of an investment interest in a business. There are however, some very onerous regulations from the Securities and Exchange Commission regulating the private sale of an investment interest in a business organization. These regulations are collectively known as "Regulation D."

Here is a link to the SEC website's discussion of the Reg. D basics. Failure to follow the regulations can leave the offeror liable for the entire value of the investment -- in addition to potential criminal prosecution.

The point being that while the "manufacturer's rep" business model is simple and straightforward -- the investment model is exactly the opposite. And, there is no model in between the two, so you're stuck with a choice of one or the other.

Hope this helps.