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2017 Real Estate Crowdfunding: Surveying the Landscape

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“Copyright” By Jonathan B. Wilson CrowdFund Beat Sr. Guest Editor, Partner, Taylor English Duma LLP

The impact of crowdfunding on real estate finance and deal-making has been one of the hottest topics of the past year.[1]  With the advent of crowdfunding, real estate developers and investors have multiple pathways to finance their projects and even to plot their exits.  But in many ways the impact of crowdfunding has not yet arrived.  Crowdfunding for real estate is still in the early stages and may take several detours along the way to its final destination.

What is Crowdfunding?

The idea of “crowdfunding” has been in the news a great deal but investors have only just begun to realize its potential for the industry.  Crowdfunding is the idea that a large number of people, with no particular expertise, can accurately predict the likely success or failure of a venture by combining their own observations and communicating with each other.  James Surowiecki‎, in his book, The Wisdom of Crowds[2], recounts dozens of examples where a large group of people who were able to collect and share information were able to make more accurate guesses about the success of a project than the best guess of any individual expert in the topic.  The Internet, with its ability to collect a large number of people quickly and easily, makes it possible to collect a “crowd” to evaluate an idea better than was ever possible before.

Crowdfunding applies this idea to the process of evaluating investment opportunities, allowing members of the crowd to put money behind their predictions and preferences.  Proponents believe that by allowing a crowd of potential investors to share their opinions about the investment and the information they collect that crowd will be better able to predict the success of the investment than individual investment experts.  Sydney Armani, the publisher of CrowdFundBeat, says, “People get excited when they engage with a new product that arouses their passions.  Those passions take on even greater intensity when they can invest in that new product.” [3]

Crowdfunding can take several forms.  Popular crowdfunding sites like Kickstarter and Indiegogo let project sponsors describe their projects to the public and ask for donations.  In an “affinity” campaign, supports of a project pledge funds for a project because they like it and support it.  Their affinity for the project is their only reward.  In a “rewards-based” campaign, project sponsors offer rewards for cash contributions.  Rewards may range from recognition on a website or on a wall, to t-shirts, products samples and more.

Securities-Based Crowdfunding

Securities-based crowdfunding is possible through several recent changes in U.S. securities laws, most of which are derived from the 2012 Jumpstart Our Business Startups Act (or “JOBS Act”).  In particular, the JOBS Act created three types of crowdfunding: (a) crowdfunding to “accredited investors” under Rule 506(c), (b) crowdfunding for up to $50 million each year under new Regulation A+ and (c) crowdfunding to both accredited and non-accredited investors in small offerings under Title III.

Investing Under Rule 506(c)

First, a sponsor could offer debt or equity securities to “accredited investors” under Rule 506(c).  The JOBS Act changed some of the rules affecting private offerings under Rule 506 so that sponsors could publicly-advertise their offerings.  Before this change in the law, public solicitations of private offerings were strictly prohibited.  Under new Rule 506(c) however a promoter that wants to advertise publicly must take various steps to ensure that every investor who participates in the offering is “accredited”, which is defined as having a net worth of over $1 million (excluding the investor’s principal residence) or having an income of more than $200,000 for two consecutive years ($300,000 is the investor is married and files tax returns jointly with a spouse).

Crowdfunding under Rule 506(c) has been feasible for more than a year and several websites, have had some success hosting real estate crowdfunding campaigns that have included securities under Rule 506(c).  Most of the popular real estate crowdfunding sites included in our survey, however, require accredited investors to create a membership on the site before they can view any live offerings.  As a result, the offerings made available to members are intended as a private offering, and not a general solicitation.  Because there is no general solicitation, those websites take the position that their offerings are private offerings under Rule 506(b) rather than publicized general solicitations under Rule 506(c).

Investing Under Regulation A

Another legal change that came from the JOBS Act was a change to Regulation A, an SEC rule that allows a private company to qualify its securities (which may be equity or debt) through filing a formal prospectus with the SEC.  The SEC reviews the prospectus to ensure that it adequately describes all of the risks of the business and the risks to investors.  Once the issuer’s prospectus is approved by the SEC (at which point it is said to be “effective”) the sponsor may sell the securities to both accredited and non-accredited investors.

Before the JOBS Act, offerings under Regulation A were limited to not more than $5 million.  Under the new provisions of Regulation A (sometimes called “Regulation A+”) an issuer of securities may raise up to $50 million in any 12-month period.

One of the advantages of a Regulation A offering is that the company will be able to solicit investments from both accredited and non-accredited investors, thereby widening the scope of interest in the project.  The SEC’s rules, implementing these changes to Regulation A, however, have only been effective since October 2015.  As a result, there have been relatively few offerings that have completed the new process and it is harder to tell how these new offerings will be accepted by investors.

Regulation CF

The third possible route for crowdfunding is often called “Title III” because it arises under Title III of the JOBS Act.  Although the JOBS Act became law in 2012, the SEC only released its rules implementing this new law in October 2015 and those rules didn’t take effect until May 2016.  Under those roles, a promoter may issue securities, in an amount up to $1 million in any 12-month period, to both accredited and non-accredited investors.  But, soliciting for investors may only take place through licensed crowdfunding portals that have received a license from the Financial Institutions Regulation Authority (“FINRA”).

Under Regulation CF (the name used for the SEC’s Title III regulations), issuers do not file a prospectus with the SEC but do need to include certain disclosures about the company in their offering memorandum.  The funding portal will also be liable for making sure that all of the prospective investors receive certain notices about the process and for ensuring that each investor does not invest more than a certain maximum that is derived from the investor’s taxable income.  While a Regulation CF offering can “go national” by accepting investments from people across the country (whether they are accredited or not) the $1 million limit and the requirement that all solicitations take place online through the licensed portal make this approach a challenge for many new ventures.

Because of the $1 million annual cap on fundraising under Regulation CF, however, this approach is usually not a good fit for real estate projects that often require more than this maximum amount.

Surveying the Landscape

The following websites have used one or more of these regulatory pathways to create a marketplace for crowdfunding real estate projects.  By surveying some of the more popular websites I have tried to provide an overview for how industry players are using these now crowdfunding regulations to make deal flow and investment opportunities possible.  This list is not an endorsement of any of these sites and a site’s omission from this list is not intended as a criticism or a suggestion that the site is not worthwhile or valuable.

Peer Street

PeerStreet specializes mostly in residential debt investments (with a smattering of multifamily and commercial). PeerStreet utilizes Rule 506(b) to solicit accredited investors to participate in loans that are secured by real estate.[4]  They have one of the lowest minimums in the top 10 ($1K versus $10K average), and a healthy volume of new transactions.

Virtually every site in the industry claims that they have superior due diligence. PeerStreet, however, supports its claim with concrete proof.  PeerStreet allows investors to review the performance of every past investment. PeerStreet’s site claims that, since 2014, the site has offered more than 200  notes but without any foreclosures or unremedied defaults.

Unlike many other real estate crowdfunding sites, however, PeerStreet does not originate its loans.  Rather, project sponsors introduce opportunities to the site and then earn a fee based on successfully closing the investments.  As a consequence, investors that participate in deals on PeerStreet pay slightly higher total fees than some other sites.  Because of the relatively high performance that PeerStreet’s deals have produced,[5] however, these fees so far have not kept investors away.

Real Crowd

Real Crowd acts as a syndication platform for real estate development companies and real estate funds.  The development companies and funds pay a fee to Real Crowd to have their offerings listed on the site.  Viewing the offerings is possible only for accredited investors who have created a free membership account on the site.  Most of the opportunities on Real Crowd involve commercial real properties or multi-family properties.  Some of the investments are funds in which the fund manager will be investing in the proceeds in a targeted type of property while others are syndicating take-out financing for existing properties.

From the investor’s point of view, Real Crowd has successfully recruited a large number of property developers and fund managers, so there are many investment opportunities to consider.  Most investments, however, require a minimum investment of at least $25 to $50,000, so the platform is not friendly to small retail investors who want to dip their toes in the water.   In addition, most of the investment opportunities are equity securities, so there is a higher risk of principal loss than is generally the case with debt-oriented platforms.

Realty Mogul

Realty Mogul is one of the largest real estate crowdfunding sites and it uses several different approaches based upon the needs of the project sponsor and the class of investor involved.  Accredited investors may invest in either debt or equity securities.  Accredited equity investors invest in syndicated private placements of special purpose limited liability companies that exist to finance equity investments in particular properties.  The equity investment has the higher potential return associated with equity as well as the potential downside risk of loss.

Accredited investors may also invest in debt securities called “Platform Notes”.  Each Platform Note is a debt security issued by a Realty Mogul special purpose vehicle which uses the proceeds of the Platform Notes to make a loan to particular sponsored investment.  By issuing the note from its special purpose vehicle, Realty Mogul is able to take on the management function of managing the underlying loan (reviewing financials, monitoring loan covenants, working out any defaults, and so on) without involving the passive investors who have purchased the Platform Notes.

For non-accredited investors, Realty Mogul has sponsored its own non-traded real estate investment trust.  Although the REIT (called Mogul REIT I) is not traded on any stock exchanges, its shares were qualified with the SEC through a Regulation A prospectus.[6]  According to the prospectus (which went effective in August, 2016) the REIT plans to hold:

“(1) at least 55% of the total value of our assets in commercial mortgage-related instruments that are closely tied to one or more underlying commercial real estate projects, such as mortgage loans, subordinated mortgage loans, mezzanine debt and participations (also referred to as B-Notes) that meet certain criteria set by the staff of the SEC; and (2) at least 80% of the total value of our assets in the types of assets described above plus in “real estate-related assets” that are related to one or more underlying commercial real estate projects, these “real estate-related assets” may include assets such as equity or preferred equity interests in companies whose primary business is to own and operate one or more specified commercial real estate projects, debt securities whose payments are tied to a pool of commercial real estate projects (such as commercial mortgage-backed securities, or CMBS, and collateralized debt obligations, or CDOs), or interests in publicly traded REITs.  We intend to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes beginning with our taxable year ending December 31, 2016.”

Because Realty Mogul facilitates both equity and debt investments for accredited investors as well as equity investments for non-accredited investors through MogulREIT I, Realty Mogul is ideally-situated to generate substantial deal flow and relatively rapid underwriting for projects that apply for funding.  As a platform for providing funding for sponsored-projects as well as a platform for creating investment opportunities, Realty Mogul has one of the best head starts of all the available real estate websites.

Those advantages, however, come at a cost.  Realty Mogul has a large staff operation (which is required for its extensive underwriting duties) and that cost is borne by investors through the 1-2% fees they pay to participate in investments on the site.  While the site has tremendous deal flow, however, a student of the industry might ask, “is this really crowdfunding?”  Because Realty Mogul takes such an active role in performing due diligence on its projects and in structuring the investment opportunities on its site, the overall experience is more structured than most crowdfunding sites and there is less opportunity for the collectively give-and-take than crowdfunding was originally thought to represent.

Realty Shares

Realty Shares facilitates both debt and equity investments into both commercial and residential real estate.  The site claims that it has funded over $300 million to 550 projects that have returned more than $59 million to the site’s more than 92,000 registered accredited investors.[7]   Project sponsors must submit to underwriting through Realty Shares and only projects that have exceeded the site’s standards can be offered to the site’s members.  Fees range from 1 to 2% of the investment amount, but investment minimums are as low as $5,000.

As with most of the other real estate crowdfunding sites, investments are made through private placements under rule 506(b).

Residential Real Property Sites

There are several websites that focus primarily on residential real estate.  Because of the similarity of their focus and approach, they can be surveyed as a group:

LendingHome

Lending Home describes itself as the “largest hard money lender” [providing] “fix and flip loans up to 90% LTC and 80% LTV.”[8]  Unlike many of the other sites that aim their value proposition at investors, Lending Home addresses itself primarily to homeowners how are looking for loans and are willing to pay “hard money” rates of interest to get cash.  Accredited investors can participate in Lending Home in increments as low as $5,000.[9]

Roofstock

Roofstock’s tagline is “Property Investing Like the Pros.”[10]  Like Lending Home, Roofstock focuses only on single family residential properties.  Differently, however, Roofstock allows accredited investors to invest directly through loan participations as well as through small funds that focus on particular regions or particular rates of return.  Roofstock also emphasizes, through its underwriting and its messaging, the underlying quality of the properties and their surrounding communities, school systems and the like.  Browsing through loan opportunities on Roofstock feels more like browsing through listings on Zillow than looking for investments.

Patch of Land

Patch of Land is one of the largest and most heavily-trafficked real estate crowdfunding sites.  The site claims to have originated more than 400 loans for over $245 million in loans, returning over $61 million to investors.[11]  Although Patch of Land has made investments in multi-family and commercial real estate, more than 70% by value of its investments have been made in single family real estate.

Fund That Flip

Fund that Flip is a site that proudly advertises its role in financing single family residential rehab and resale projects.[12]  The site claims that the sponsors underwrite individual deals, requiring borrowers to put at least ten percent in the property’s value in equity.[13]  The site also tries to entice investors, claiming average returns between 10 and 14%.

The Future of Real Estate Crowdfunding

Real estate crowdfunding has definitely arrived.  Through the dozens of existing sites claiming to offer some kind of real estate crowdfunding, investors have invested more than a billion dollars through thousands of investments in just a few short years.  While this method of investing is still very small (in contrast to retail investments in mutual funds and the stock market) it fills a market need that shows no sign of disappearing.

For real estate crowdfunding to achieve a wider degree of acceptance, platform owners will need to continue to facilitate high quality investment opportunities while improving transparency.  Wider acceptance will require a level of information sharing that does not yet exist in the industry.  Even the most popular sites today have varying levels of information available to potential investors.  These inconsistent levels of disclosure can undermine the trust that is necessary to grow crowdfunding as a method of investing.  Real estate crowdfunding sites that facilitate exempt transactions under Rule 506(b) are not regulated, and that is probably a good thing.  But the lack of regulation also permits a wide diversity in style and approach that can make comparing the platforms difficult.

If the leading crowdfunding platforms could collaborate on a standardized “scorecard” that pulled together standard metrics on transactions, investment amounts and rates of return, the result would make it possible for both investors and project sponsors to compare platforms on a level playing field.  The investor confidence that might come from such a development would encourage new investors to come into the market.  Platforms that did not adopt the scorecard at first would experience market pressure to begin reporting results in the scorecard format.  Adopting a standardized scorecard for recording would, in a sense, demonstrate the power that crowdfunding was supposed to represent, by making it possible for the market to adjust itself to the information needs of the investing community.

[1]           http://www.jdsupra.com/legalnews/the-evolution-of-real-estate-15259/

 

[2]           Surowiecki, James, The Wisdom of Crowds, Anchor Books (2005).

 

[3]           Wilson, Jonathan B., Follow the Crowd: What the Future of Crowdfunding Holds for Startup Restaurant Owners, Restaurant Owner Startup & Growth Magazine, 18 (Feb. 2016).

 

[4]           www.peerstreet.com.

 

[5]           PeerStreet claims that its loans have generally yielded between 6 and 12%.  See PeerStreet FAQs, available at https://info.peerstreet.com/faqs/how-do-peerstreet-returns-compare-to-other-debt-investments/ (last visited January 29, 2017).

 

[6]           MogulREIT I, LLC SEC File, available at https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001669664&owner=exclude&count=40&hidefilings=0 (last visited January 29, 2017).

 

[7]           Realty Shares website available at https://www.realtyshares.com/  (last visited January 29, 2017)

 

[8]           Lending Home website available at www.lendinghome.com (last visited January 29, 2017).

 

[9]           https://www.lendinghome.com/how-it-works/#individual-investors.

 

[10]          Roofstock website available at www.roofstock.com (last visited January 29, 2017).

 

[11]          Path of Land website available at https://patchofland.com/statistics/ (last visited January 29, 2017).

 

[12]          Fund that Flip website available at www.fundthatflip.com (last visited January 29, 2017).

 

[13]          Fund that Flip website available at https://www.fundthatflip.com/lender (last visited January 29, 2017).

 

The Battle to Launch a Next-Generation Retirement Product & Control $14 Trillion in Investment Direction

By Dara Albright,CrowdFunding Beat Guest Editor, FinTechREVOLUTION.tv  , Dara Albright Media,

In the Fall of 2016, I penned an article entitled, “Modernizing the Self-direct IRA – The Trillion Dollar FinTech Opportunity” – the first in a new series of articles that focuses on next-generation retirement planning. The piece underscored how FinTech will mend America’s flawed retirement system and foster the growth of “digital” investing.

Retire1

This initial report drew attention to the growing necessity for a low-cost, high speed, autonomous retirement solution that would meet the demands of today’s alternative micro-investor. Most significantly, the piece summarized the two distinct individual retirement account prototypes – the Brokerage IRA and the Trust Company IRA – which are vying to become the self-directed IRA exemplar and dominate the $14 trillion retail retirement market.

Sometimes I feel like I am the only one sensing a war brewing in the retail retirement market. But then again, I am somewhat clairvoyant.

Perhaps the majority of America’s retail investors are too busy reluctantly allocating their retirement dollars to sanctioned bond funds – many of which yield more clout than performance – to even notice the race to create a next-generation retail retirement product that will economically custody coveted micro-sized alternative investment products and, in doing so, ensure that a greater number of Americans maintain more properly diversified retirement portfolios.

Maybe most old-school financial professionals are just too preoccupied chasing the “whale” to realize the imminent colossal impact of the rising micro-alternative investor.

No matter the rationale, the fact is that this battle to produce a next-generation retail retirement vehicle is likely to go down as the largest industry duel in the history of commerce – dwarfing the cola and software wars by trillions.

The victorious retirement product stands to inherit the power to redirect $14 trillion dollars of mutual fund assets and disrupt long-standing retirement asset monopolies – thus paving the way for a superior breed of investment products to emerge (download: http://www.slideshare.net/smox2011/the-trillion-dollar-fintech-opportunity).

Unlike previous corporate clashes, the winning IRA model is easy to predict. The frontrunner will be the one possessing the most optimum technological and regulatory framework to accommodate the needs of the modern retail investor. Today’s retail investor is not looking for another mutual fund. He is not begging for ETFs. Nor is he interested in day-trading stocks. Instead, he is craving yield, and he is demanding access to the same level of returns that institutions have been enjoying for years through alternative asset diversification. Simply put, modern investors are looking for a self-directed retirement vehicle that enables them to readily, easily and affordably spread tiny increments of retirement capital across a broad range of asset classes.

Except for the possibility of a sudden legislative change, hands down, the trust company based model will emerge as the clear victor. The Brokerage IRA is bound by too many compliance constraints to enable it to efficiently and cost-effectively facilitate micro investments into alternative asset classes such as P2P notes or crowdfinanced offerings.

The Trust Company IRA, by contrast, operates under a much more favorable regulatory scheme, and any technological shortcomings are presently being addressed and conquered (see: http://www.prnewswire.com/news-releases/ira-services-launches-p2p-lendings-first-cloud-based-api-driven-retirement-investment-solution-at-lendit-2016-300247413.html).

Because it is faster and easier to overcome a technological deficiency than it is to amend regulations, the Trust Company IRA will continue to amass a significant advantage. This is especially true as technology becomes less and less of a commodity and the political climate becomes more and more contentious

There are simply too many compliance-related obstacles that FINRA-regulated BDs would need to surmount in order to formidably compete with the trust company based model. Perhaps one of the most pressing is the Department of Labor’s fiduciary rule which is scheduled to take effect in April.

Under the new DOL rule – which expands the definition of a fiduciary to include commission-based brokers – brokerage firms that handle retail retirement accounts will find themselves facing additional and unwelcomed liability.

In the wake of the DOL rule, retail brokerages have already been seen scrambling to adjust their existing retail retirement product lines. Merrill Lynch has announced that it will be closing its commission-based retirement business altogether, and Edward Jones pronounced that it will simply stop offering mutual funds and ETFs as options in commission-based retirement accounts.

Yes, you read that correctly. Retail brokerages would prefer to limit access to investment products or exit the retail retirement business altogether than to deal with the regulatory headaches of helping small investors prepare for retirement.

Instead of being able to access “prepackaged” diversified investment products, Edward Jones’ retail clientele will either have to self-diversify across stocks, bonds, annuities and CDs, or move to a managed account that charges an asset-based management fee. Since the typical retail investor’s account is too small to properly self-diversify using individual investment products such as stocks and bonds, and since asset-based management fees tend to be much more expensive than one-time commissions, once again retail investors are getting the shaft.

According to CEI finance expert John Berlau, “The DOL fiduciary rule will restrict access to financial advice and reduce choices for lower and middle-income savers. The restrictions can deter companies from serving middle-class savers, creating a “guidance gap” that could cost an estimated $80 billion in lost savings.”

As the DOL Fiduciary Rule succeeds in eliminating both financial advisors and investment choices from the traditional retirement planning equation, smaller investors will be forced into taking a more autonomous stance to retirement prep – leading to a seismic shift in both retail assets and retirement vehicles.

This will have widespread implications on the financial services industry that will include a mass exodus from brokerage IRAs into Trust Company IRAs as well as a flock to robo-advisors, marketplace finance and well as P2P and digital investing – a trend in retail investing that is already well underway.

As the battle for the retail retirement account unfolds, I am going to be reveling in the irony of how once again needless regulatory oversight is helping fuel the FinTech revolution.

Originally published on Dara Albright Media.

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Dara Albright – President of Dara Albright Media, Co-founded the FinFair ConferenceFinTechREVOLUTION.tv

Recognized authority, thought provoker and frequent speaker on topics relating to market structure, private secondary transactions and crowdfinance. Welcome to my new personal blog where you can glean unique insight into the rapid transformation of global capital markets.

 

Crowdfunding: Can It Work for Brick & Mortar?

By , Crowdfund Beat Guest Post,

Founder + CEO of PieShell – Crowdfunding for food + beverage,

Having a store front or restaurant is expensive, especially when you’re just getting started. Between build-out and equipment costs, starting inventory, licenses, fees, and working capital, starting a brick and mortar business can easily add up to hundreds of thousands of dollars. It’s because of this that many people say that rewards-based crowdfunding isn’t a good option for brick and mortar businesses, but we beg to differ.

Crowdfunding is a great option for restaurants, bakeries, coffee shops, and more (if it’s done in the right way and on the right scale). We’re here to tell you how to make crowdfunding work for brick and mortar operations!

First, A Word of Advice

In previous blogs we’ve cautioned against being overly ambitious when it comes to crowdfunding. Instead, we advise breaking down your grand vision into a series of stepping-stones, picking one and making that the first stepping-stone for your crowdfunding project. Ask yourself, what’s the next step in my business?

We’re doubling down on this advice. If you’re already in business, we recommend using crowdfunding for upgrading or expanding your existing restaurant operation. You may want to invest in new kitchen equipment, renovate your space, or add new offerings to your menu. If you’re still pre-launch, then crowdfunding can be an excellent way to supplement funding from traditional sources like investors and banks. In fact, sometimes crowdfunding can be a precursor to traditional investment, as it shows that there is genuine interest in your venture.

For Existing Restaurants

Crowdfunding, much like running a restaurant, is time consuming and can be hectic. However, we think that brick and mortar businesses actually have a leg up when it comes to crowdfunding.

Unlike online-only businesses or those without a permanent location, owning a restaurant gives you the opportunity to interact with potential supporters in person and on a regular basis. Use this exposure to reach people who love what you’re doing and want to see it continue. Your “regulars” are the perfect people to tap for support, either by asking in person or advertising your crowdfunding project in your space (get ready to make some killer table tents!).

A great example of restaurant crowdfunding comes from Manu Alfau, chef and owner of La Bodega in Seattle, Washington. Manu used his existing customer base to raise $9,000 to build an outdoor patio. For gifts, he offered parties and food from La Bodega — things that he already knew his supporters would love.

For Startups

If you’re in the pre-launch phase, make sure that you’ve invested in the community where you plan to set up shop. That means doing things like being at local farmers’ markets, building an audience on social media that’s made up of people who are local to the area, and networking with other business owners to tap into their pool of customers.

Like we said earlier, it’s unlikely that you’ll be able to raise the full cost of starting a restaurant, so pick a reasonable crowdfunding goal and plan on supplementing it with personal funds, traditional financing, or a combination of both.

For startups, one advantage of crowdfunding is the opportunity to make people feel like they are truly invested in the success of your business. Simply put, crowdfunding is a way to create a sense of community ownership, which is incredibly important when it comes to sustaining a small business.

Gifts that Make Sense

Brick and mortar businesses also have a great opportunity to make a positive impression through gifts. Gifts should get people back into your establishment where they can experience the fruits of their contributions and also become repeat customers!

For example, in 2010 in the small town of Vergennes, Vermont, Julianne Jones and her husband decided to take over a former laundromat and transform it into a French-style bakery. They rewarded their supporters with tokens that could be exchanged for goods once the bakery opened.

Obviously, this strategy is limited to those in the area, so make sure to have a back-up plan for supporters who won’t be able to make it in person.

Meet OUR First Brick and Mortars

Ok, ok, there’s a reason that we chose to focus on crowdfunding for restaurants for this blog. We’re welcoming our first three brick and mortars to the PieShell family!

The first, The Cookie Cups, was live on PieShell at the end of 2016 and successfully reached their first stepping-stone, moving them closer to their bakery cafe dreams!

Second is Bon Chovie, a rock-and-roll seafood restaurant that started life at the “flea food market” Smorgasburg. They will be launching their crowdfunding project on PieShell in the next couple months to help fund the move to a new location in Brooklyn.

And last but not least, LC Farmery. A casual and engaging experience, connecting West Chelsea patrons to passionate craft producers from around the state via a rotating menu of locally sourced ingredients from farmers, fisherman, and purveyors, will be launching a project in the spring.

We’re excited to see them pave the way for many more restaurants to come!

White Paper Report: Expanding into Cannabis-Related Investing

Crowdfund Beat Media,

VIA Folio, the private securities division of Folio Investments Inc., has decided to support capital formation for certain businesses engaged in the cannabis sector. We reached this decision because we believe it will advance our goal of democratizing the private securities sector and will help fund companies that cannot tap traditional venture capital. We began exploring this idea after broker-dealers contacted us about our willingness to support the fundraising efforts of certain cannabis-related businesses.

cannabis_investments_04

Prior to reaching a decision, we studied and carefully considered the complex legal landscape and public policy issues surrounding the growing legalization movement for cannabis. Any use of cannabis is currently illegal under federal law. However, with November’s election results, medicinal use of cannabis is now permitted under state law in 28 states and the District of Columbia, a region compromising more than 60% of the U.S. population. Adult recreational use of cannabis is now legal in seven states and the District of Columbia, an area comprising more than 20% of the U.S. population. We believe that the effort to decriminalize the use and sale of cannabis will continue and is consistent with public policy reforms seeking to mitigate the harmful impact that cannabis-related arrests and imprisonments have, including on minority communities, where they have had a disproportionate effect.

 
We have decided to begin our work in this area by supporting two categories of companies whose activities are legal under both state and federal law. Those companies are (1) pharmaceutical companies engaged in research under waivers granted by the Drug Enforcement Administration; and (2) companies that do not “touch the plant” but provide products or services to businesses that do.

 

We will actively assess developments in this area as they occur and may decide to expand the categories of companies that we have decided to support. We therefore invite companies in categories not described above, specifically companies involved in sales of cannabis for both medical and recreational uses, to contact us to discuss ways that we might assist them in the future.

Here is the cannabis white paper that Folio recently launched
outlook:

 

 

Crowdfunded Cars To Exhibit At Crowd Invest Summit December 7th & 8th

Crowdfund Beat Newswire,

Regulation A+ Conference Proves to be Compelling Destination for Consumer Products Companies Looking to Extend their Brand Equity

LOS ANGELES, CA  / The Crowd Invest Summit, a new conference connecting everyday Americans with crowdfunded investment opportunities, is proud to announce the addition of three innovative companies that will exhibit their unique cars at the event, December 7-8 at the Los Angeles Convention Center in downtown Los Angeles.

The Crowd Invest Summit was developed with the vision that every American, through the Jumpstart Our Business Startups Act (also known as the JOBS Act), can now be a venture capitalist – or shark.

ronn-motor-group-prototype-600x450

Motors Leads the Pack

Elio Motors’ Regulation A+ crowdfunding campaign, launched in June, 2015 and completed this past February, did more than just allow individuals to participate in the company’s vision of disrupting auto transportation – it has been one of the most successful campaigns to date, raising $17 million from 6,500 everyday Americans. In February, Elio Motors became the first crowdfunded IPO in the United States when it listed its shares on the OTC Markets’ OTCQX (“ELIO”).

Although Elio Motors will not be exhibiting this year, the company has inspired other automotive innovators – including Campagna Motors, Ronn Motor Company, and HyGen Industries – to participate.

Campagna Motors

Campagna Motors is a forward-thinking car company that has been designing and producing three-wheel vehicles with a focus on performance since 1988. Located in Montreal, Canada, the company’s most popular models are the T-REX and V13R, both of which will be featured at the conference. The company plans to create a sister company in the United States to facilitate an upcoming Regulation A+ campaign.

CEO of Campagna Motors, André Morissette said, “Campagna is a vehicle manufacturer that wants to expand and grow to be a serious player in the emerging three-wheel vehicle market. We looked at all sorts of financing avenues and opportunities and we chose the Reg A+ route because it will provide us with the possibility of engaging our large fan base to become investors and partners in our business, and it allows us to raise the required capital in conditions that are interesting for us and our investors to realize our vision.”

Ronn Motor Company

Through its current Regulation A+ campaign, Ronn Motor Company has enlisted the support of its community and beyond, asking for one million partners to co-create technology that has “the face of a supercar.”

Ronn Ford, Chairman and CEO of Ronn Motor Company said, “This new investment approach through crowdfunding allows us to partner with many to take on the big automakers and give the small guys a way to bring their collective dreams to fruition by joining us as investors and partners. We celebrate this community approach of building cars by capitalizing community effort through crowdfunding.”

HyGen Industries

HyGen Industries, based in Los Angeles, California, produces fuel to power eco-friendly vehicles, distributing the fuel through partner locations throughout the state. HyGen’s hydrogen refueling pumps coexist with current gasoline dispensers without additional infrastructure. The company is currently running a Regulation A+ campaign to build hydrogen fuel stations.

HyGen’s technology will be on display at the conference; the company will feature a Toyota Mirai that runs on hydrogen fuel.

Paul Dillon, CFO of HyGen Industries said, “What really excites me about Reg. A+ is the ability to connect directly with impact investors. The transition from fossil fuel vehicles to zero-emission cars, buses, and trucks presents unlimited opportunities for innovation, jobs, and economic growth. HyGen is at the forefront of this sea change. We believe Reg A+ lets small investors put their money to work for a sustainable future by opening up access to promising startups.”

About The Crowd Invest Summit

The Crowd Invest Summit was founded by three pioneers in the equity crowdfunding sector: Josef Holm, Darren Marble, and Alon Goren. The conference was developed with the vision that every American – whether accredited or not – can now become equity investors. Visit us online at www.crowdinvestsummit.com.

Trump victory: a bumpy ride or financial opportunities?

CrowdFund Beat  Special Report, 

Trump winning the U.S. presidency is a bigger deal than Brexit, expect enormous volatility, but also important financial opportunities, affirms the boss of one of the world’s largest independent financial advisory organizations.

The observation from Nigel Green, founder and CEO of deVere, comes as multibillionaire real estate mogul and reality TV star Donald Trump wins the race to the White House to become America’s 45th president.

150401134612-donald-trump-gallery-3-super-169

Mr Green comments: “Buckle up for a bumpy ride in the global markets.  Whether President Trump will, in fact, do what he has said he will do throughout his campaign, or whether it was just soaring rhetoric to whip up his support base, for now, Trump winning is sending shockwaves across the world.  As such, enormous volatility can be expected in the markets.

“The Brexit result was a real shock and created instability in the UK.  But this is a far bigger deal as this creates instability on a much wider, international scale.

“The markets’ main concerns include Trump’s protectionist policies, focusing on potential trade wars with China – America’s largest trading partner – and with Mexico, it’s third largest.

“In addition, with Trump having said certain countries are ‘cheating’ due to their undervalued currencies, currency tensions should also be expected.”

He continues: “Whilst some people are put-off investing because of volatility, many of the most successful investors welcome it.  This is because major buying opportunities are always found where there are fluctuations.

“Fluctuations can cause panic-selling and mis-pricing. High quality equities can then, for example, become cheaper, meaning investors can top up their portfolios and/or take advantage of lower entry points. This all, in turn, means greater potential returns.

“A professional fund manager will help investors take advantage of the opportunities that volatility brings and mitigate potential risks as and when they are presented.

“Anyone serious about enhancing their finances should be using this somewhat unexpected turn of events to create, maximise and protect their wealth.”

Mr Green concludes: “As ever, the best way to benefit from the inevitable key opportunities and sidesteps risks is through real diversification – this includes across asset classes, sectors and geographical regions.”

Yesterday, the deVere CEO said: “With a Trump win we can expect in the immediate aftermath a double whammy negative impact on the market.

“This is because the likely sell-offs will be compounded by the markets having priced in a Clinton victory and were wrong.”

NASAA and Members of Congress Come Together on the Need for the SEC to Expand Intrastate Crowdfunding Rules

By Samuel S. Guzik, CrowdFundBeat special guest editor,  Guzik & Associate

It is rare that I am able to find agreement with the publicly stated positions of the North American Securities Administrators Association (NASAA). Equally rare – members of Congress who are traditionally strong advocates for “smart” regulatory reform of capital formation by SME’s to find themselves on the same page as NASAA.  However, there appears to be a growing, even overwhelming, consensus that the SEC’s proposed rules to modify current federal restrictions on the intrastate sale of securities – are on the one hand a step in the right direction.  But on the other hand, the SEC’s rule, as proposed, does not go far enough, and places unnecessary restrictions on the ability of states to decide what is in the best interests of their constituents – free of interference from the SEC.

By way of background, on October 30, 2015, the same day that the Commission announced final investment crowdfunding rules in furtherance of Title III of the JOBS Act of 2012 to implement investment crowdfunding on a national level – it also issued for comment a proposed rule, primarily intended to facilitate investment crowdfunding at the state level – Rule 147A. Significantly, the proposed rule would allow companies to advertise their offering on the Internet, something which the SEC Staff has stated is prohibited under current Rule 147 – and much to the consternation of state regulators and securities lawyers  alike.  In doing so, the SEC proposed to limit the amount that a state could authorize under its laws to $5 million. And it also proposed to eliminate the existing rule, Rule 147, in its entirety.

On October 7, 2016, a bi-partisan group of 15 members of Congress, many members of the House Financial Services Committee, signed a letter addressed to the SEC, encouraging the Commission to finalize its rulemaking, but with some important modifications. In particular, as proposed by the Commission, the existing “safe harbor” rule, Rule 147, which would allow states to regulate offerings occurring entirely within their state, would be scrapped in its entirety, and replaced by a new rule, Rule 147A, under the Commission’s general rulemaking powers.  This approach, if adopted in the final rules, has at least two untoward effects, as regards the ability of states to fashion their own rules for intrastate offering, including intrastate investment crowdfunding.

First, of the 35 or so states which have enacted their own investment crowdfunding statutes, adoption of the Rule, as proposed, would in effect, terminate these exemptions in many of the states which enacted their exemptions based entirely upon the current rule – proposed to be eliminated – bringing intrastate crowdfunding to a halt.  Comment letters to date have almost universally requested the SEC to clarify and expand the existing Rule 147, but to retain the existing rule.  Though a technicality of sorts, failure to fix this glitch would require the large majority of states authorizing intrastate investment crowdfunding to go back to their state legislatures to incorporate any new rule which replaces the current Rule 147. And until then, intrastate crowdfunding would be shut down.

Second, though the SEC’s proposed rule makes necessary improvements, it comes with some conditions which many find unpalatable – and unnecessary. In particular, the SEC rule, as proposed, would limit the ceiling under this proposed exemption to $5 million.  Opposition to this condition has been strong, simply because this is a matter which ought to be determined by each state – on a state by state basis.

The latest missive by 15 members of the House Financial Services Committee includes Congressman and Deputy Whip Patrick McHenry, a leading proponent of the JOBS Act of 2012 and subsequent legislation, and Congressman John Carney, the original sponsor of a Bill which passed the House this year which if enacted would create a new, independent office at the SEC – Office of Small Business Advocate – and would report to the full Commission and to Congress.  Undoubtedly, their letter will signal to the SEC the need to approval final rules as expeditiously as possible nearly a year after originally proposed. So look for good things to come from the Commission in this area in the coming months.

For those who want to dig a little deeper, I am providing links to my Comment Letter to the SEC as well as the Comment Letter submitted by NASAA, both back in January 2016.

Samuel S. Guzik has more than 35 years of experience as a corporate and securities attorney and business advisor in private practice in New York and Los Angeles, including as an associate at Willkie Farr and Gallagher, a major New York based international law firm, a partner at the law firm of Ervin, Cohen and Jessup, in Los Angeles, and in the firm he founded in 1993, Guzik & Associates.

 

samuel guzik

Samuel S. Guzik has more than 35 years of experience as a corporate and securities attorney and business advisor in private practice in New York and Los Angeles, including as an associate at Willkie Farr and Gallagher, a major New York based international law firm, a partner at the law firm of Ervin, Cohen and Jessup, in Los Angeles, and in the firm he founded in 1993, Guzik & Associates.

Mr. Guzik has represented public and privately held companies and entrepreneurs on a broad range of business and financing transactions, both public and private. Mr. Guzik has also successfully represented clients in federal securities litigation and SEC enforcement proceedings. Guzik has represented businesses in a diverse range of industries, including digital media, apparel, health care and numerous high technology based businesses.
Guzik is a recognized authority and thought leader on matters relating to the JOBS Act of 2012 and the ongoing SEC rulemaking, including Regulation D Rule 506 private placements, Regulation A+, and investment crowdfunding. He has been consulted by Congressional members, state legislators and the U.S. Small Business Administration Office of Advocacy on matters relating to the JOBS Act and state securities matters.

Guzik & Associates

1875 Century Park East, Suite 700

Los Angeles, CA 90067

Telephone: 310-914-8600

www.guziklaw.com

www.corporatesecuritieslawyerblog.com

@SamuelGuzik1

Fintech Fundings: 26 Companies Raise $270 Million

The fintech sector attracted $266 million in new capital the second week of August. Half went to Finovate/FinDEVr alums including:

The number of deals totaled 26, slightly below the YTD average of 28 deals per week. The YTD total now stands at 895, about 400 more than last year’s 484. Total dollars raised YTD is $19.9 billion, nearly double the $10.2 billion raised during the same period a year ago.

——-

Fintech deals by size from 6 Aug to 12 August 2016:

Interactions
Virtual customer service
Latest round: $56 million
Total raised: $167 million
HQ: Franklin, Massachusetts
Tags: Institutioins, customer service
Source: Finovate

Finova Financial
Alt-title loans
Latest round: $52.5 million Private Equity
Total raised: $52.5 million
HQ: Palm Beach Gardens, Florida
Tags: Consumer, credit, loans, underwriting, auto lending, vehicles, Finovate alum
Source: Finovate

Yunnex
POS solutions provider
Latest round: $45.1 million Series B
Total raised: $60.9 million
HQ: Guangzhou, China
Tags: SMB, merchants, payments, credit/debit card processing, acquiring, point of sale
Source: Crunchbase

BPS Technology
Digtial currency management for small businesses
Latest round: $21.2 million
Total raised: $21.2 million
HQ: Southport, Australia
Tags: SMB, payments, accounting, bitcoin, blockchain, cryptocurrency
Source: FT Partners

Upguard
Cybersecurity
Latest round: $17 million Series B
Total raised: $27 million
HQ: San Francisco, California
Tags: Institutions, SMB, consumer, security, FinDEVr alum
Source: FinDevR

Touzhijia
Wealth management
Latest round: $12 million Series A
Total raised: $16.5 million
HQ: Shenzen, China
Tags: Consumer, advisors, trading, investing
Source: Crunchbase

ComparaOnline
Financial services price comparison portal
Latest round: $6 million
Total raised: $20 million
HQ: Santiago, Chile
Tags: Consumer, credit, loans, deposits, price comparison, lead gen, discovery
Source: FT Partners

Pindrop Security
Phone-based fraud solutions
Latest round: $5.8 million addition to previously announced $75 million Series C
Total raised: $122.8 million
HQ: Atlanta, Georgia
Tags: SMB, institutions, security, anti-fraud, biometrics, call center, Finovate alum
Source: Crunchbase, Finovate

CUneXus
Consumer lending platform
Latest round: $5 million Series A
Total raised: $6.65 million
HQ: Santa Rosa, California
Tags: Consumer, credit, loans, underwriting, mobile, account opening, Finovate alum
Source: Finovate

DailyPay
Payment provider to employees & contractors
Latest round: $5 million Series A
Total raised: $6.5 million
HQ: New York City
Tags: SMB, payments, payroll, HR, benefits
Source: Crunchbase

Bigstone Capital
SMB lending marketplace
Latest round: $3 million Seed
Total raised: $3 million
HQ: New South Wales, Australia
Tags: SMB, credit, loans, underwriting, commerical loans, crowdfunding, P2P, investing
Source: Crunchbase

Verifly
Drone insurance
Latest round: $2.7 million Seed
Total raised: $4.86 million
HQ: New York City
Tags: Consumer, SMB, insurance
Source: Crunchbase

AlphaFlow
P2P real estate investment management
Latest round: $2.16 million Seed
Total raised: $2.28 million
HQ: San Francisco, California
Tags: Investors, advisors, P2P lending, investing
Source: Crunchbase

HashRabbit
Cloud hashing for blockchains
Latest round: $1.65 million Seed
Total raised: $2.34 million
HQ: San Francisco, California
Tags: SMB, institutions, blockchain, security, bitcoing, payments, crypto-currency
Source: Crunchbase

ET Index
Investor tools to manage carbon risk
Latest round: $1.5 million Seed
Total raised: $3.1 million
HQ: London, England, UK
Tags: Investors, traders, advisors, investing
Source: Crunchbase

Faircent
P2P lending platform
Latest round: $1.5 million Series B
Total raised: $5.75 million
HQ: Haryana, India
Tags: Consumer, credit, loans, underwriting, peer to peer, investing
Source: Crunchbase

Finexio
B2B payments network
Latest round: $1 million Seed
Total raised: $1 million
HQ: San Mateo, California
Tags: SMB, payments, B2B, billing, invoicing, accounts receivables management
Source: Crunchbase

PledgeMe
Equity & loan crowdfunding platform
Latest round: $860,000 Equity Crowdfunding
Total raised: $960,000
HQ: Wellington, New Zealand
Tags: Consumer, SMB, non-profits, credit, loans, underwriting, P2P, peer to peer, investing
Source: Crunchbase

First Access
Alt-credit score & risk management for financial institutions in emerging markets
Latest round: $750,000 Debt
Total raised: Unknown
HQ: New York City
Tags: Consumer, credit, loans, underwriting, solar energy, home equity
Source: Crunchbase

Remitware Payments
Remittance provider, RemitR
Latest round: $590,000
Total raised: $590,000
HQ: Mumbai, India
Tags: Consumer, SMB, payments, funds transfer, FX, remittances
Source: Crunchbase

RateHub
Financial services comparison site
Latest round: $495,000
Total raised: $495,000
HQ: Toronto, Ontario
Tags: Consumer, credit, loans, mortgage, deposits, lead gen, price comparison, discovery
Source: Crunchbase

AppIDentify
Residential real estate valuation system
Latest round: Undisclosed
Total raised: Unknown
HQ: Atlanta, Georgia
Tags: Consumer, home buying, mortgage
Source: Crunchbase

Duocaitou
Real estaete crowdfunding platform
Latest round: Undisclosed
Total raised: Unknown
HQ: Bejing, China
Tags: Consumer, credit, loans, underwriting, P2P, investing, rental real estate
Source: Crunchbase

FintecSystems
Data provider to financial institutions
Latest round: Undisclosed Series A
Total raised: Unknown
HQ: Munich, Germany
Tags: Institutions, metrics, analytics, information, BI, underwriting, risk management
Source: Crunchbase

Red Dot Payment
Payment processor
Latest round: Undisclosed
Total raised: Unknown
HQ: Singapore
Tags: SMB, credit/debit cards, payments, acquring, merchants
Source: Crunchbase

Otly
Spending platform for families
Latest round: Undisclosed investment from Uber
Total raised: Unknown
HQ: Amsterdam, The Netherlands
Tags: Consumer, spending, budgeting, youth market, PFM, mobile
Source: FT Partners

The New and Improved Regulation A

By Mark Roderick CrowdFunding Beat  Sr. contributing editor and crowdfunding attorney with Flaster/Greenberg PC.

“How long will it take?” That’s one of the two questions I’m asked most often about Regulation A.

The answer is that if everything goes smoothly, it should take about 20 – 24 weeks from the day an issuer decides to raise money using Regulation A until it begins selling securities. Every company is different, of course, and lots of things can delay the process, but 20 – 24 weeks is a good rule of thumb.

With this Regulation A Timeline, I hope to provide issuers and their advisors with a framework for conducting a Regulation A offering, with tasks and milestones. Three notes:

  • Don’t try to view this on your phone! There’s a lot to cover.
  • As you’ll see, there’s a lot to do in the first few weeks. The more thorough the attention given to the earliest tasks, the more smoothly the process will roll out.
  • By definition, this Timeline is from the perspective of the lawyer. Each member of the team – the accountant, the escrow agent, etc. – will have a separate timeline, all within the same 20 – 24 week framework.

What is the other question I’m asked most often about Regulation A? You guessed it. I’ll cover assembling the team and the cost of Regulation A in another post.

The JOBS Act created three flavors of Crowdfunding:

  • Title II Crowdfunding, which allows issuers to raise an unlimited amount of money from an unlimited number of investors using unlimited advertising – but is limited to accredited investors.
  • Title III Crowdfunding, which allows issuers to raise up to $1 million per year from anyone, including non-accredited investors.
  • Title IV Crowdfunding, which modified the old Regulation A and is sometimes referred to as Regulation A+.

Quick Summary of Regulation A

  • Raise up to $50 million per year for each issuer
  • Raise money from both accredited and non-accredited investors
  • Register with the SEC
  • Takes about five months, start to finish
  • No State-level registration
  • Shares freely tradeable from day one
  • Sales by existing shareholders
  • Regulation A shareholders not counted toward Exchange Act limits for full reporting
  • Mini-IPO, but with much lower cost

Two Tiers

Theoretically, there are two “tiers” under Regulation A:

Tier One Tier Two
Amount Per Year $20 million $50 million
Non-Accredited Allowed Yes Yes
Limits on Investment None For non-accrediteds, 10% of income or net worth, whichever is greater, per offering.
Audited Financials No Yes
Registration with SEC Yes Yes
Registration with State Yes No
Excluded from Exchange Act Limits Yes Yes
Shares Freely Tradeable Yes Yes
Post-Offering Reporting No Yes
Testing the Waters Yes Yes
Online Distribution Allowed Yes Yes
Bad Actor Limits Yes Yes

Because of the exemption from State registration, most companies will choose Tier Two.

Companies That Cannot Use Regulation A

Investment Companies Companies that own stock or other securities in other companies.
Foreign Companies Issuers must be organized and have their principal place of business in the U.S. or Canada.
Oil and Gas Companies Can’t sell fractional undivided interests in oil and gas rights, or a similar interest in other mineral rights.
Public Companies Can’t be a publicly-reporting company.
Companies Selling Asset-Backed Securities For example, interests in a pool of credit card debt.

Where Regulation A Makes the Most Sense

  • Pools of high-quality real estate assets, especially REITs
  • High quality assets in inefficient markets
  • Sexy companies (companies with high social-media followers or potential)

Additional Resources

261

Markley S. Roderick concentrates his practice on the representation of entrepreneurs and their businesses. He represents companies across a wide range of industries, including technology, real estate, and healthcare.

Regulation A Timeline

By Mark Roderick CrowdFunding Beat  Sr. contributing editor and crowdfunding attorney with Flaster/Greenberg PC.

“How long will it take?” That’s one of the two questions I’m asked most often about Regulation A.

The answer is that if everything goes smoothly, it should take about 20 – 24 weeks from the day an issuer decides to raise money using Regulation A until it begins selling securities. Every company is different, of course, and lots of things can delay the process, but 20 – 24 weeks is a good rule of thumb.

With this Regulation A Timeline, I hope to provide issuers and their advisors with a framework for conducting a Regulation A offering, with tasks and milestones. Three notes:

  • Don’t try to view this on your phone! There’s a lot to cover.
  • As you’ll see, there’s a lot to do in the first few weeks. The more thorough the attention given to the earliest tasks, the more smoothly the process will roll out.
  • By definition, this Timeline is from the perspective of the lawyer. Each member of the team – the accountant, the escrow agent, etc. – will have a separate timeline, all within the same 20 – 24 week framework.

What is the other question I’m asked most often about Regulation A? You guessed it. I’ll cover assembling the team and the cost of Regulation A in another post.

The JOBS Act created three flavors of Crowdfunding:

  • Title II Crowdfunding, which allows issuers to raise an unlimited amount of money from an unlimited number of investors using unlimited advertising – but is limited to accredited investors.
  • Title III Crowdfunding, which allows issuers to raise up to $1 million per year from anyone, including non-accredited investors.
  • Title IV Crowdfunding, which modified the old Regulation A and is sometimes referred to as Regulation A+.

Quick Summary of Regulation A

  • Raise up to $50 million per year for each issuer
  • Raise money from both accredited and non-accredited investors
  • Register with the SEC
  • Takes about five months, start to finish
  • No State-level registration
  • Shares freely tradeable from day one
  • Sales by existing shareholders
  • Regulation A shareholders not counted toward Exchange Act limits for full reporting
  • Mini-IPO, but with much lower cost

Two Tiers

Theoretically, there are two “tiers” under Regulation A:

Tier One Tier Two
Amount Per Year $20 million $50 million
Non-Accredited Allowed Yes Yes
Limits on Investment None For non-accrediteds, 10% of income or net worth, whichever is greater, per offering.
Audited Financials No Yes
Registration with SEC Yes Yes
Registration with State Yes No
Excluded from Exchange Act Limits Yes Yes
Shares Freely Tradeable Yes Yes
Post-Offering Reporting No Yes
Testing the Waters Yes Yes
Online Distribution Allowed Yes Yes
Bad Actor Limits Yes Yes

 

Because of the exemption from State registration, most companies will choose Tier Two.

Companies That Cannot Use Regulation A

Investment Companies Companies that own stock or other securities in other companies.
Foreign Companies Issuers must be organized and have their principal place of business in the U.S. or Canada.
Oil and Gas Companies Can’t sell fractional undivided interests in oil and gas rights, or a similar interest in other mineral rights.
Public Companies Can’t be a publicly-reporting company.
Companies Selling Asset-Backed Securities For example, interests in a pool of credit card debt.

 

Where Regulation A Makes the Most Sense

  • Pools of high-quality real estate assets, especially REITs
  • High quality assets in inefficient markets
  • Sexy companies (companies with high social-media followers or potential)

Additional Resources

 

 

 

261

Markley S. Roderick concentrates his practice on the representation of entrepreneurs and their businesses. He represents companies across a wide range of industries, including technology, real estate, and healthcare.

 

 

 

 

Commonwealth Capital Adds New Crowdfunding Chapter to Its Premier E-Book,

CHICAGO, July 28, 2016 /PRNewswire/ — Commonwealth Capital LLC, a pioneering provider of Corporate Finance Advisory and Regulation Crowdfunding services, announced today that it has updated its popular e-book with a new Chapter Two dedicated entirely to crowdfunding.

Secrets of Wall Street E-Book (PRNewsFoto/Commonwealth Capital LLC)

The definition of the term “crowdfunding” has evolved in recent years. The term was originally used for donation-based crowdfunding only, but is now used to define capital-based crowdfunding — also known as Regulation Crowdfunding — under Title II (2) and then under Title III (3) of the Jumpstart Our Business Startups (JOBS) Act of 2012.

The JOBS Act has significantly leveled the investment playing field, encouraging a growing number of entrepreneurs to begin fielding their own crowdfunded offerings. Unfortunately, in their excitement to take advantage of these new opportunities, many entrepreneurs fail to recognize that significant legal and managerial risks remain when raising crowdfunded capital. These risks can be devastating professionally and personally if not identified and addressed from the start.

“What most entrepreneurs don’t understand is that seeking capital though Regulation Crowdfunding is a securities offering and is still a very tricky business,” said Timothy D. Hogan, CEO of Commonwealth Capital.  “We’ve witnessed too many entrepreneurs making too many unnecessary mistakes and we want to do our part in correcting that problem.”

To help entrepreneurs get started right, Commonwealth Capital provides a complimentary 40-page Abridged Edition of the e-book, downloadable from its website. The new Chapter Two includes comprehensive excerpts and summaries from the 685-page document known as the SEC Final Rules regarding crowdfunding.  More importantly, the Abridged Edition enables entrepreneurs to make qualified decisions on whether a securities offering is right for their company’s capitalization needs.

A complimentary copy of the Abridged Edition can be downloaded at http://commonwealthcapital.co/get-your-ebook.  The complete, 140-page Expert Edition can be purchased online and downloaded at http://commonwealthcapital.co/purchase-expert-edition-e-book/.

About Commonwealth Capital LLC
Commonwealth Capital LLC, a pioneering provider of Corporate Finance Advisory and Regulation Crowdfunding services, is a subsidiary of Commonwealth Capital Advisors (CCA). Since 1998, CCA has successfully engaged hundreds of start-up and early stage companies in their quest for raising millions of dollars in capital. As former Wall Street investment bankers and experts in compliance matters related to selling securities, the company’s executives are intimately familiar with the criteria employed to successfully raise seed, development and expansion capital. Learn more at www.commonwealthcapital.co.

Managing The Risks Of Crowdfunding

By Evan Bundschuh, RPLU  & CrowdFund Beat Guest Editor,

For new ventures looking to raise capital or test their market/product, crowdfunding has proven to be the go-to solution with an ease and excitement that other methods of funding lack. With that excitement though comes challenges. As a fairly young platform with a legal landscape that has yet to develop, the risks of crowdfunding are often overlooked. While the risks may seem invisible, mistakes are inevitable, as are the lawsuits and damages that follow. The challenge is forecasting when and where the potential dangers/disasters will arise (before they do) in order to protect your business, its directors, and its newly formed brand. We outline these risks not to discourage the usage of crowdfunding but to bring risk concerns to the forefront so that they can be properly assessed, managed and mitigated.

  1. Poor communication and lack of transparency. When it comes to describing the performance/effectiveness of your product, prices, associated fees, turn around times, etc. be as descriptive and transparent as possible. In a well published recent case, a disgruntled buyer filed a lawsuit over the failure to disclose a simple shipping fee, ultimately bankrupting the company which could not afford to issue full refunds to its purchasers.
  2. Lack of solvency and reserve capital: The same case example above also highlights the importance of having enough reserve capital on hand for the unexpected. The unexpected can come in the form of disgruntled backers demanding returns, expedited fulfillment costs following unexpected success, or attorney’s fees to defend your IP to name a few.
  3. Poor customer support & upsetting dissatisfied customers. Whether or not you are contractually required to provide a full refund, consider erring on the side of generosity when encountering dissatisfied backers. Dissatisfied customers are, without saying, the most vocal and the most likely to take action, whether that be taking to social media to inflict brand damage or taking legal action. Most crowdfunding backers are also of the tech generation and know how to effectively utilize social media outlets to voice dis-taste for a company.
  4. Failure to qualify and diversify: In order to help ensure business continuity, attempt to source from multiple suppliers/manufacturers and diversify your supply chain when possible. Dependence on any single supplier/manufacturer can prove financially damaging if/when they encounter a loss. Losses can range from natural disasters to political unrest to bankruptcy. The inability to obtain your product is only the tip of the iceberg. It’s the inability to fulfill orders and deliver on your goods sold that can quickly escalate financial damages sustained. Developing and maintaining vendor qualification checklists also help ensure manufacturers, suppliers, vendors and outside parties meet certain risk criteria to ensure product quality and business continuity.
  5. Exposing your (unprotected) intellectual property: For companies planning on filing patents, it’s wise to discuss this with a qualified IP attorney as early in the process as possible and before beginning any campaign. Beginning a crowdfunding campaign also begins a one year “time to file” clock, as it is considered public disclosure. If any patents are planning to be filed, that have not been already, they must be filed within that one year clock. Once expired, the ability to file can be lost. In addition to working with an IP attorney to protect your own IP, it is equally important to do so early in the process to ensure that you are not infringing on others. Without thorough trademark searches, you are exposing your company to potential trademark infringement claims.
  6. Overlooking a proper insurance portfolio: When it comes to placing insurance, companies will often only place what is either being requested of them, or seek out the coverage that is believed to be “standard”, but may fail to listen to the advice of their actual broker. The most commonly requested insurance is general & product liability. While this is often a good place to begin, securing only the most basic insurance leaves many of your exposures still exposed. For companies without excess capital and an in house risk manager, this can be particularly problematic. Placing insurance protections for: cargo (during shipment), the directors & officers of the company, product recalls and cyber liability for data breaches is equally important. Considering that many of policies require careful review, coordination and negotiation further highlights the importance of working with a knowledgeable broker that can help you assess your risk and craft a proper portfolio.
  7. Compliance & accusations of fraud: With crowdfunding bypassing any meaningful reporting/oversight, the threats of fraud accusations are increased. A recent FTC Alert warns companies engaged in crowdfunding to: 1) ensure crowdfunding promises be kept, and 2) utilize crowdfunding funds only for the purposes advertised. The SEC has also issued a recent alert (among others) adressing acceptable donation limits. Understanding the compliance environment and implementing best practices & strong internal controls can help avoid accusations of fraud.
  8. Lack of sufficient R&D: It is important that sufficient R&D has been performed under varying conditions before bringing any product to market. Will this product cause electrical shocks? Is this product mixed or bottled in a factory that contains allergens? Is there any potential for injury? Is the product properly labeled? Is it in compliance with all US customs laws? Are the claims that we are asserting, properly supported? Purchasing product liability insurance does offer protection, but it’s no substitute for sufficient R&D, internal controls and legal counsel. For higher risk products a product liability audit may also be recommended.
  9. Implementing outside ideas: It’s important to read the platform’s user agreements and understand exactly what implications they have. There has been much talk about the concern of companies implementing product feedback from users/backers. Whether it be in the form of comments on the platform or elsewhere, implementing ideas provided by users/backers can create a potential legal issue.
  10. Overlooking tax liability & implications: Complete tax compliance can be deceivingly difficult. Crowdfunding poses many tax questions and areas of concern including applicable securities laws, differing state laws, and requirements of 1099’s to name a few. Before launching any campaigns be sure to contact an accountant or financial advisor that understands the crowdfunding sector.  Source @ http://www.gbainsurance.com/